<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 2000
REGISTRATION NO. 333-96119
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its (Exact name of Registrant as specified in its
charter) charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
2731 2721
(Primary Standard Industrial Classification (Primary Standard Industrial Classification
Number) Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
<S> <C>
WRC MEDIA INC. COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its (Exact name of Registrant as specified in its
charter) charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
2731 7372
(Primary Standard Industrial Classification (Primary Standard Industrial Classification
Number) Number)
13-4066536 13-4066535
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
</TABLE>
----------------------------------
<TABLE>
<S> <C>
WRC MEDIA INC. WEEKLY READER CORPORATION
1 ROCKEFELLER PLAZA, 32ND FLOOR 1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020 NEW YORK, NY 10020
(212) 582-6700 (212) 582-6700
<S> <C>
WRC MEDIA INC. COMPASSLEARNING, INC.
1 ROCKEFELLER PLAZA, 32ND FLOOR 1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020 NEW YORK, NY 10020
(212) 582-6700 (212) 582-6700
</TABLE>
(Address, including zip code, and telephone number, including area code, of each
Registrant's principal executive offices)
----------------------------------
MARTIN E. KENNEY, JR.
CHIEF EXECUTIVE OFFICER, WRC MEDIA INC.
DIRECTOR, WRC MEDIA INC., WEEKLY READER
CORPORATION AND COMPASSLEARNING, INC.
1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020
(212) 582-6700
(Address, including zip code, and telephone number, including area code, of each
Registrant's agent for service)
----------------------------------
COPIES TO:
JULIE T. SPELLMAN, ESQ.
CRAVATH, SWAINE & MOORE
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019
----------------------------------
<TABLE>
<S> <C>
NAMES OF ADDITIONAL REGISTRANTS STATE OR OTHER JURISDICTION OF
AS SPECIFIED IN THEIR CHARTERS INCORPORATION OR ORGANIZATION
- --------------------------------------------- ---------------------------------------------
Lifetime Learning Systems, Inc. Delaware
American Guidance Service, Inc. Minnesota
AGS International Sales, Inc. Minnesota
World Almanac Education Group, Inc. Delaware
Funk & Wagnalls Yearbook Corp. Delaware
Gareth Stevens, Inc. Wisconsin
<S> <C>
NAMES OF ADDITIONAL REGISTRANTS I.R.S. EMPLOYER
AS SPECIFIED IN THEIR CHARTERS IDENTIFICATION NO.
- --------------------------------------------- ---------------------------------------------
Lifetime Learning Systems, Inc. 13-3783276
American Guidance Service, Inc. 41-0802162
AGS International Sales, Inc. 41-0982023
World Almanac Education Group, Inc. 13-3603781
Funk & Wagnalls Yearbook Corp. 13-3603787
Gareth Stevens, Inc. 39-1462742
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
----------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(2) PRICE(2)(3) REGISTRATION FEE(4)
<S> <C> <C> <C> <C>
12 3/4% Senior Subordinated Notes due 2009(1) $152,000,000 100% $152,000,000 $40,128.00
15% Senior Preferred Stock due 2011 $75,000,000 100% $75,000,000 $19,800.00
</TABLE>
(1) The note guarantees of Lifetime Learning Systems, Inc., American Guidance
Service, Inc., AGS International Sales, Inc., World Almanac Education
Group, Inc., Funk & Wagnalls Yearbook Corp. and Gareth Stevens, Inc. of the
payment of principal, premium, if any, and interest on the new notes being
registered by this registration statement are also being registered.
Pursuant to Rule 457(n), no registration fee is required with respect to
these note guarantees.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(3) Exclusive of accrued interest, if any.
(4) Calculated pursuant to Rule 457.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 26, 2000
<TABLE>
<S> <C> <C>
PROSPECTUS WRC MEDIA INC.,
WEEKLY READER CORPORATION [LOGO]
AND COMPASSLEARNING, INC.
$152,000,000
EXCHANGE OFFER FOR
12 3/4% SENIOR SUBORDINATED NOTES
DUE 2009
WRC MEDIA INC.
$75,000,000
EXCHANGE OFFER FOR
15% SENIOR PREFERRED STOCK
DUE 2011
</TABLE>
- --------------------------------------------------------------------------------
TERMS OF EXCHANGE OFFER
- Offers to exchange (1) the outstanding, unregistered, unsecured 12 3/4%
senior subordinated notes due 2009 for substantially identical unsecured
12 3/4% senior subordinated notes due 2009 that will be free of the
transfer restrictions that apply to the old notes and (2) the outstanding,
unregistered 15% senior preferred stock due 2011 for substantially
identical registered 15% Series B senior preferred stock due 2011 that
will be free of the transfer restrictions that apply to the old senior
preferred stock.
- Expires 5:00 p.m., New York City time, on , 2000 unless we extend
it.
- All outstanding notes and senior preferred stock that are validly tendered
and not validly withdrawn will be exchanged.
- Tenders of outstanding notes and senior preferred stock may generally be
withdrawn any time prior to the expiration of the exchange offer.
- The exchange of the notes and the senior preferred stock will not result
in any income, gain or loss for U.S. Federal income tax purposes.
- We will receive no cash proceeds from the exchange offer.
NEITHER THE NOTES NOR THE SENIOR PREFERRED STOCK ARE LISTED ON A NATIONAL
SECURITIES EXCHANGE OR INTERDEALER QUOTATION SYSTEM.
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF IMPORTANT FACTORS
THAT HOLDERS OF OLD NOTES AND OLD SENIOR PREFERRED STOCK SHOULD CONSIDER IN
CONNECTION WITH THE EXCHANGE OFFER AND INVESTING IN THE NEW NOTES AND THE NEW
SENIOR PREFERRED STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR THE NEW SENIOR
PREFERRED STOCK OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WE ARE NOT MAKING AN OFFER TO EXCHANGE NOTES OR SENIOR PREFERRED STOCK IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED.
- --------------------------------------------------------------------------------
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Where You Can Find More Information.. i
Prospectus Summary................... 1
Risk Factors......................... 16
Forward-Looking Statements........... 28
Failure to Exchange Your Old Notes or
Old Senior Preferred Stock......... 29
The Exchange Offer................... 30
The Acquisition and
Recapitalization................... 43
Use of Proceeds...................... 45
Dividend Policy...................... 45
Unaudited Pro Forma Consolidated
Financial Information.............. 46
Selected Historical Financial
Information for WRC Media and its
Subsidiaries....................... 50
Selected Historical Consolidated
Financial Information for Weekly
Reader............................. 52
Selected Historical Financial
Information CompassLearning........ 54
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 56
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Industry............................. 89
Business............................. 99
Management........................... 129
Material Relationships and Related
Transactions....................... 146
Ownership of Stock................... 150
Description of Senior Credit
Facilities......................... 160
Description of Capital Stock......... 162
Equity Sponsors...................... 164
Description of New Notes............. 165
Description of New Senior Preferred
Stock.............................. 209
Book-Entry, Delivery and Form........ 217
Registration Rights.................. 220
Material U.S. Federal Tax
Considerations..................... 226
Plan of Distribution................. 232
Legal Matters........................ 232
Independent Public Accountants....... 233
Index to Financial Statements........ F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933 relating to the exchange
offer that incorporates important business and financial information about us
that is not included in or delivered with this prospectus. This prospectus does
not contain all of the information included in the registration statement. This
information is available from us without charge to holders of the notes or
senior preferred stock as specified below. Any statement made in this prospectus
concerning the contents of any contract, agreement or other document is
qualified in its entirety by reference to the contract, agreement or document.
If we have filed any of those contracts, agreements or other documents as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the document or matter involved. Following the
exchange offer, we will be required to file periodic reports and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. In the notes indenture and the senior preferred
stockholders agreement, we have agreed that, whether or not we are required to
do so by the rules and regulations of the Securities and Exchange Commission,
for so long as any of the notes and the senior preferred stock remain
outstanding, we will furnish to the holders of the notes and the senior
preferred stock and file with the Securities and Exchange Commission unless the
Securities and Exchange Commission will not accept the filing:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if we were required to file these forms, including a
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" and a report, with respect to the annual information
only, by our certified independent public accountants; and
i
<PAGE>
(2) all reports that would be required to be filed with the Securities and
Exchange Commission on Form 8-K if we were required to file these
reports.
In addition, for so long as any of the notes and the senior preferred stock
remain outstanding, we have agreed to make available to any prospective
purchaser of the notes and the senior preferred stock or beneficial owner of the
notes and the senior preferred stock in connection with their sale, the
information required by Rule 144A(d)(4) under the Securities Act of 1933. We
will also furnish other reports as we may determine or as the law requires.
Information that we file with the Securities and Exchange Commission after
the date of this prospectus will automatically supersede the information in this
prospectus and any earlier filed incorporated information. We are also
incorporating any future filings made with the Securities and Exchange
Commission under sections 13(a), 13(e), 14, or 15(d) of the Securities Exchange
Act of 1934 until the termination of the exchange offer.
You may read and copy the registration statement, including the attached
exhibits, and any reports, statements or other information that we file, at the
Securities and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference room. Our Securities and Exchange
Commission filings will also be available to the public from commercial document
retrieval services and at the Securities and Exchange Commission's Internet site
(http:// www.sec.gov).
You may request a copy of any of our filings with the Securities and
Exchange Commission, or any of the agreements or other documents that constitute
exhibits to those filings, at no cost, by writing or telephoning us at the
following address or phone number:
WRC Media Inc.
1 Rockefeller Plaza, 32nd Floor
New York, NY 10020
(212) 582-6700
Attention: Charles L. Laurey
TO OBTAIN TIMELY DELIVERY OF ANY OF OUR FILINGS, AGREEMENTS OR OTHER
DOCUMENTS, YOU MUST MAKE YOUR REQUEST TO US NO LATER THAN FIVE BUSINESS DAYS
BEFORE THE EXPIRATION DATE OF THE EXCHANGE OFFER. THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME ON , 2000, WHICH IS 30 DAYS
FOLLOWING THE COMMENCEMENT OF THE EXCHANGE OFFER. THE EXCHANGE OFFER CAN BE
EXTENDED BY US IN OUR SOLE DISCRETION. SEE "THE EXCHANGE OFFER."
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information. The
information in this prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this prospectus is
accurate as of any other date.
INTERNET WEB SITES
This prospectus includes references to Internet web sites that we maintain.
None of these web sites, or their content, are incorporated by reference in this
prospectus.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information described in greater detail
in other parts of this prospectus and may not contain all of the information
that is important to you. Before making an investment decision, you should read
this entire prospectus, including "Risk Factors" and the financial statements,
including the related notes to the financial statements, that we have included.
Unless the context otherwise requires, the terms "we," "our" and "us" refer
to WRC Media Inc. and its subsidiaries and their predecessor companies after
giving effect to the transactions described under "The Acquisition and
Recapitalization." As of January 20, 2000, we changed the name of JLC Learning
Corporation, one of WRC Media's subsidiaries and a registrant, to
CompassLearning, Inc. On December 23, 1999, we changed the name of PRIMEDIA
Reference Inc., one of WRC Media's subsidiaries and a guarantor of the notes, to
World Almanac Education Group, Inc. When we refer to Weekly Reader Corporation,
American Guidance Service, Inc., CompassLearning, Inc. and World Almanac
Education Group, Inc., each of their predecessor companies are included. When we
refer to the financial information of Weekly Reader, unless otherwise specified,
we include the results of operations of Weekly Reader and its subsidiaries,
including American Guidance and World Almanac. When we refer to "pro forma"
financial results, we mean the financial results of WRC Media and its
subsidiaries on a consolidated basis as if the transactions described under "The
Acquisition and Recapitalization" had occurred at the beginning of the relevant
time period. See "Summary Unaudited Pro Forma Consolidated Financial
Information."
Unless the context otherwise requires, the term "notes" refers to the old
notes and the new notes collectively and the term "senior preferred stock"
refers to the old senior preferred stock and the new senior preferred stock
collectively.
WRC MEDIA
We are a leading publisher of supplemental education materials for the
pre-kindergarten to twelfth grade 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 we believe our customers recognize these brand
names for their effectiveness and consistent, high quality educational content.
Our strong brand names, several of which have been published for over 40 years,
include:
- WEEKLY READER;
- TEEN NEWSWEEK;
- the PEABODY PICTURE VOCABULARY TEST;
- TOMORROW'S PROMISE;
- THE WORLD ALMANAC AND BOOK OF FACTS; and
- FACTS ON FILE WORLD NEWS DIGEST.
Utilizing sophisticated sales and marketing methods, which include the use
of proprietary databases, we have established long standing customer
relationships and an extensive network with direct distribution channels. Our
targeted customers are:
- teachers;
- school and school district-level administrators;
- librarians;
- other educational professionals; and
- parents.
1
<PAGE>
Over 90% of the school districts and over 80,000, or approximately 75%, of the
elementary, middle and secondary schools in the United States use one or more of
our products. WRC Media and its subsidiaries' pro forma revenue and net loss for
the twelve months ended December 31, 1999 were $214.1 million and
$21.7 million, respectively. Additionally, WRC Media and its subsidiaries' pro
forma earnings for the twelve months ended December 31, 1999 were insufficient
to cover WRC Media and its subsidiaries' pro forma fixed charges for the twelve
months ended December 31, 1999 by $21.7 million.
We sell our products and services in the rapidly growing supplemental
education materials segment of the education materials market. We estimate this
segment had approximately $3.6 billion in sales in 1998, representing 58% of the
overall Pre K-12 education materials market. The supplemental education
materials segment consists of:
- print and electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
Together, Simba Information Inc.'s Print Publishing for the School Market,
1999-2000 and Simba Information Inc.'s Print Publishing for the School Market,
1997-1998 show that the supplemental education materials segment, excluding the
materials described immediately below, has grown at a compound annual growth
rate of 10.7% during the five-year period ending December 31, 1998. Simba
Information Inc. does not report statistics for some supplemental education
materials included in this segment, consisting primarily of some testing and
assessment products and library materials, which we estimate accounted for
approximately $1.3 billion in sales during 1998.
We conduct our operations primarily through the four operating subsidiaries
listed below, each of which is a market leader in its product categories:
- Weekly Reader;
- American Guidance;
- CompassLearning; and
- World Almanac.
------------------------
The principal executive offices of each of WRC Media, Weekly Reader,
CompassLearning and the note guarantors are located at 1 Rockefeller Plaza, 32nd
Floor, New York, New York 10020. The telephone number for that location is
(212) 582-6700.
2
<PAGE>
CORPORATE STRUCTURE
The following chart shows our corporate structure and ownership of the
common stock of WRC Media's subsidiaries as of the date of this prospectus. The
chart assumes the warrants to purchase common stock of Weekly Reader and
CompassLearning issued to the senior preferred stockholders have not been
exercised.
[LOGO]
3
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer........................ With this exchange offer, we are offering to exchange an
aggregate principal amount of up to $152,000,000 of the
new notes for a like principal amount of the old notes.
We are also offering to exchange under the exchange
offer up to 3,000,000 shares of new senior preferred
stock for a like number of old senior preferred stock.
We intend to satisfy our obligations to complete an
exchange offer under the registration rights agreement
and the senior preferred stockholders agreement with the
issuance of the new notes and the new senior preferred
stock on or promptly after the exchange date. The new
notes will have terms substantially identical to the
terms of the old notes. The new notes will not contain
terms with respect to transfer restrictions and will not
require us to consummate a registered exchange offer.
The new senior preferred stock will have terms
substantially identical to the terms of the old senior
preferred stock. The new senior preferred stock will not
contain terms with respect to transfer restrictions and
will not require us to consummate a registered exchange
offer. See "The Exchange Offer."
Expiration Date........................... The exchange offer will expire at 5:00 p.m., New York
City time on , 2000 unless we, in our sole
discretion, extend it. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Exchange Date............................. We will exchange the old notes and the old senior
preferred stock on the first business day following the
expiration date. See "The Exchange Offer--Terms of the
Exchange--Tender and Acceptance."
Procedures for Tendering Old Notes and Old
Senior Preferred Stock.................... For information on procedures for tendering old notes
and old senior preferred stock, the action required to
make a formal offering of your old notes and old senior
preferred stock, see "The Exchange Offer--Procedures for
Tendering."
Taxation.................................. The exchange of the old notes for the new notes and the
exchange of the old senior preferred stock for the new
senior preferred stock in the exchange offer will not
result in any income, gain or loss to holders who
participate in the exchange offer or to us for U.S.
Federal income tax purposes. See "Material U.S. Federal
Tax Considerations."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Resale.................................... Based upon the position of the staff of the Securities
and Exchange Commission as described in previous
no-action letters, we believe that a holder who
exchanges the old notes for the new notes or the old
senior preferred stock for the new senior preferred
stock in the exchange offer and satisfies certain other
conditions generally may offer for resale, sell and
otherwise transfer the new notes or the new senior
preferred stock without further registration under the
Securities Act of 1933 and without delivery of a
prospectus that satisfies the requirements of section 10
of the Securities Act of 1933.
Any holder of the old notes or the old senior preferred
stock using the exchange offer to participate in a
distribution of the new notes or the new senior
preferred stock cannot rely on the no-action letters
referred to above. See "The Exchange Offer--Purpose of
the Exchange Offer."
Remaining Old Notes and Old Senior If you do not tender your old notes or old senior
Preferred Stock........................... preferred stock in the exchange offer or if we do not
accept your old notes or old senior preferred stock for
exchange as described under "The Exchange Offer--Terms
of Exchange--Tender and Acceptance" you will continue to
hold these old notes and old senior preferred stock, and
they will continue to bear legends restricting their
transfer. For more information on remaining old notes
and remaining old senior preferred stock, see
"Registration Rights."
Exchange Agent............................ The Bankers Trust Company will act as exchange agent for
the exchange offer. See "The Exchange Offer--Exchange
Agent" for the exchange agent's address and telephone
number.
Use of Proceeds........................... We will receive no proceeds from the exchange offer. See
"Use of Proceeds."
</TABLE>
5
<PAGE>
DESCRIPTION OF NEW NOTES
Other than the obligation to conduct an exchange offer, the new notes will
have the same financial terms and covenants as the old notes, which are as
follows:
<TABLE>
<S> <C>
Issuers................................... WRC Media, Weekly Reader and CompassLearning.
Securities Offered........................ $152.0 million in aggregate principal amount of 12 3/4%
senior subordinated notes due 2009, which we refer to as
the new notes.
Maturity Date............................. November 15, 2009.
Interest and Payment Dates................ We will pay interest on the notes semi-annually at the
rate of 12 3/4% per annum in cash in arrears on November
15 and May 15 of each year, commencing May 15, 2000 for
the old notes and, if the exchange offer is consummated
prior to November 1, 2000, November 15, 2000 for the new
notes.
Optional Redemption....................... On or after November 15, 2004, we may redeem some or all
of the notes at any time at the redemption prices listed
under "Description of New Notes--Optional Redemption."
Prior to that date, we may not redeem the notes, except
as described in the following sentence.
Prior to November 15, 2002, we may redeem up to 35% of
the notes with the net cash proceeds of certain sales of
our equity at a redemption price equal to 112.75% of the
principal amount of the notes, plus accrued and unpaid
interest and liquidated damages on the notes, if any, to
the redemption date. See "Description of New
Notes--Optional Redemption" for a description of these
certain sales of our equity.
Change of Control......................... If a change of control occurs, you will have the right
to require us to repurchase all or a portion of your
notes at a purchase price in cash equal to 101% of the
principal amount of the notes, plus accrued and unpaid
interest and liquidated damages, if any, to the date of
repurchase; PROVIDED, HOWEVER, that notwithstanding a
change of control, you may not require us to make a
change of control offer to repurchase notes if we have
exercised our right to redeem all the notes, as
described under "Optional Redemption" above.
Note Guarantees........................... Our existing subsidiaries, excluding Weekly Reader and
CompassLearning, and some future restricted
subsidiaries, jointly and severally, will fully and
unconditionally guarantee the notes on a senior
subordinated basis. Each of the note guarantees also is
being registered by the guarantors under the
registration statement of which this prospectus is a
part. For more details, see "Description of New
Notes--Note Guarantees."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Ranking................................... The new notes are equal in right of payment with the old
notes. The notes and the note guarantees are senior
subordinated debt. They are subordinated to all of the
issuers' and the note guarantors' current and future
senior debt. See "Description of New
Notes--Definitions--Senior Debt" for a definition of
senior debt. We and the note guarantors may incur
unlimited additional senior debt and unlimited
additional indebtedness that is PARI PASSU with the
notes, if the then applicable ratio set forth under
"Description of New Notes--Material
Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" is satisfied. Even if the ratios
described in the previous sentence are not satisfied, we
may still incur additional senior debt or PARI PASSU
indebtedness under the circumstances described under
"Description of Notes--Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" as
"Permitted Debt."
For more information on the ranking of the notes and the
note guarantees see "Description of New Notes--
Subordination."
As of March 31, 2000, the old notes were and the new
notes will be subordinated to $129.7 million in senior
secured term loans and $2.0 million in senior secured
revolving loans under our senior credit facilities,
excluding unused commitments under the revolving credit
facility. As of the date of this prospectus, neither we
nor the note guarantors have any PARI PASSU indebtedness
outstanding. Indebtedness that is PARI PASSU with the
notes refers to indebtedness that is ranked equally with
the notes.
Registration Rights....................... We agreed to exchange the old notes within 210 days
after the issuance of the old notes for a new issue of
substantially identical debt securities registered under
the Securities Act of 1933 as evidence of the same
underlying obligation. This exchange offer is in
satisfaction of that agreement.
We have also agreed to provide a shelf registration
statement to cover resales of the notes if:
- applicable law or rules, regulations or policies of
the Securities and Exchange Commission do not permit
this exchange offer; or
- any holder of the old notes notifies us, prior to the
20th day following the completion of the exchange offer,
that it cannot participate in the exchange offer due
to law, securities law policy or prospectus delivery
requirements or because it is a broker-dealer who
acquired the old notes from us or an affiliate of
ours.
If we fail to satisfy our obligations relating to
registration, we have agreed to pay liquidated damages
to you. See "Registration Rights--The Notes."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Original Issue Discount................... The notes are considered to be issued with original
issue discount for U.S. Federal income tax purposes.
Original issue discount is the difference between (1)
the sum of all principal and interest payable on the old
notes other than "qualified stated interest" and (2) the
"issue price" of the old notes. You generally will be
required to include original issue discount in your
gross income for U.S. Federal income tax purposes as it
accrues, in advance of the receipt of cash attributable
to income from original issue discount. See "Material
U.S. Federal Tax Considerations."
</TABLE>
8
<PAGE>
DESCRIPTION OF NEW SENIOR PREFERRED STOCK
Other than the obligation to conduct an exchange offer, the new senior
preferred stock will have the same financial terms and covenants as the old
senior preferred stock, which are as follows:
<TABLE>
<S> <C>
Securities Offered........................ 3,000,000 shares of 15% Series B senior preferred stock
due 2011 with a liquidation preference of $25.00 per
share.
Dividends................................. WRC Media will pay dividends on the new senior preferred
stock out of funds legally available for the payment of
dividends at an annual fixed rate of (1) 15% or (2)
15.5% if WRC Media fails to comply with its registration
obligations with respect to the old senior preferred
stock. In addition, if WRC Media fails to redeem all
outstanding shares of the senior preferred stock in
connection with a mandatory redemption of the senior
preferred stock on November 17, 2011 or if there is a
change of control, WRC Media must increase this dividend
rate by 0.50% each quarter or portion of the quarter
following the date of its failure to redeem until the
default is cured to a maximum aggregate increase in such
dividend rate of 10%. See "Risk Factors--Dividends."
WRC Media will declare and pay dividends on March 31,
June 30, September 30 and December 31 of each year,
beginning on December 31, 1999 for the old senior
preferred stock and, if the exchange offer is
consummated prior to the related record date,
September 30, 2000 for the new senior preferred stock.
Prior to December 31, 2004, or an earlier dividend
payment date as WRC Media may elect in its sole
discretion, WRC Media will not pay dividends in cash.
Instead, dividends will accrete to the liquidation
preference of the shares of the new senior preferred
stock except as described in the next sentence. Prior to
December 31, 2004, at the request of a majority of the
holders of the new senior preferred stock, in lieu of
dividends accreting to the liquidation preference during
this period, WRC Media will pay dividends in fully paid
and nonassessable shares of senior preferred stock with
an aggregate liquidation preference equal to the amount
of the accrued and unpaid cash dividends. After December
31, 2004, WRC Media will pay dividends only in cash on
the liquidation preference per share of the new senior
preferred stock.
Optional Redemption....................... From November 17, 1999 until November 17, 2002 and after
November 17, 2004, to the extent WRC Media has legally
available funds for the payment, WRC Media may, at its
option, redeem, in whole but not in part, the shares of
the senior preferred stock at the applicable redemption
prices listed under "Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock--Optional."
</TABLE>
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<TABLE>
<S> <C>
Mandatory Redemption...................... WRC Media must redeem all shares of the new senior
preferred stock outstanding on November 17, 2011, to the
extent it has legally available funds for the payment,
at a redemption price equal to the aggregate liquidation
preference of the shares of senior preferred stock, in
cash, plus accrued and unpaid cash dividends, if any, to
the date of redemption, without interest on the
redemption price.
Change of Control......................... If a change of control occurs, to the extent WRC Media
has legally available funds for the payment and to the
extent permitted by the notes indenture, WRC Media must
offer to redeem all shares of the senior preferred stock
then outstanding in cash at the redemption prices listed
under "Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock--Change of
Control."
If WRC Media fails to satisfy any of its redemption
obligations upon a change of control then holders of the
senior preferred stock would be entitled to:
- additional voting rights; and
- an increase in the dividend rate;
and WRC Media would be prevented from:
- purchasing or redeeming securities that are on a
parity with the senior preferred stock; and
- making any distribution to securities that rank junior
to senior preferred stock.
Material Covenants........................ The certificate of designations governing the new senior
preferred stock contains covenants for your benefit
which, among other things, limit WRC Media's ability to:
- authorize, create or issue any class of securities
that rank senior to or equally with the senior preferred
stock; and
- declare or pay dividends on, or redeem, purchase or
acquire, any class of our capital stock that ranks
junior to or equally with the senior preferred stock.
These covenants are subject to important exceptions and
qualifications which are described in "Description of
New Senior Preferred Stock--Covenants."
Voting Rights............................. Holders of the new senior preferred stock will not have
any voting rights other than:
- as required by law, and
- to elect one additional member of WRC Media's board of
directors, upon WRC Media's failure to:
-- pay in full four consecutive or six quarterly cash
dividends;
</TABLE>
10
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<TABLE>
<S> <C>
-- discharge a mandatory or change of control redemption
of senior preferred stock;
-- give the mandatory redemption notice required by the
certificate of designations; or
-- comply with the covenants described in the
certificate of designations.
For more details on voting rights, see "Description of
New Senior Preferred Stock--Voting Rights."
Exchange Feature.......................... In connection with a reorganization transaction relating
to an initial public offering, WRC Media may redeem all
but not less than all of the outstanding shares of the
senior preferred stock in exchange for an equivalent
number of shares of preferred stock of Weekly Reader.
These Weekly Reader shares will be of identical type and
liquidation preference and will have the same terms and
conditions as the new senior preferred stock and equal
amounts of accrued and unpaid cash dividends.
DLJ Merchant Banking Partners II, L.P. and its
affiliates and their permitted transferees who invested
in the old senior preferred stock as part of the
transactions described under "The Acquisition and
Recapitalization," may, at their option, cause WRC Media
to exchange all, but not less than all, outstanding
shares of the senior preferred stock for an equal number
of shares of preferred stock of Weekly Reader and/or
CompassLearning of identical type and liquidation
preference, with identical terms and conditions as the
new senior preferred stock and equal amounts of accrued
and unpaid cash dividends.
For more details on the exchange feature of the new
senior preferred stock, see "Description of New Senior
Preferred Stock--Exchange."
Registration Rights....................... WRC Media agreed to exchange the old senior preferred
stock within 210 days after issuance of the old senior
preferred stock for a new issue of substantially
identical preferred stock registered under the
Securities Act of 1933 as evidence of the same
underlying obligation. This exchange offer is in
satisfaction of that agreement.
WRC Media also agreed to file and keep effective a shelf
registration statement to cover resales of the old
senior preferred stock if:
- applicable law or, rules, regulations or policies of
the Securities and Exchange Commission do not permit the
exchange offer for the old senior preferred stock; or
</TABLE>
11
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<TABLE>
<S> <C>
- any holder of the old senior preferred stock notifies
us, prior to the 20th day following the completion of
the exchange offer, that it cannot participate in the
exchange offer due to law, securities law policy or
prospectus delivery requirements or because it is a
broker-dealer who acquired the old senior preferred
stock from us or an affiliate of ours.
If WRC Media fails to satisfy its obligations relating
to registration, WRC Media will increase the dividend
rate applicable to the senior preferred stock. See
"Registration Rights--The Senior Preferred Stock." In
addition, the senior preferred stockholders will be
entitled to the demand registration rights and the
"piggy-back" registration rights under the senior
preferred stockholders agreement. See "Ownership of
Stock--Senior Preferred Stockholders Agreement."
Preferred Stockholders Agreement.......... For a summary of the terms of the agreement among WRC
Media and the initial senior preferred stockholders
concerning the relative rights and relationships of the
senior preferred stockholders with respect to the senior
preferred stock, governing, among other things:
- corporate governance;
- transfer rights and restrictions;
- tag-along and drag-along rights; and
- registration rights,
see "Ownership of Stock--Senior Preferred Stockholders
Agreement."
Constructive Distributions................ The new senior preferred stock will be considered to be
issued with redemption premium for U.S. Federal income
tax purposes. The redemption premium is the excess of
the redemption price of the new senior preferred stock
over its issue price. U.S. Federal income tax
authorities require you to include this excess in your
gross income over the life of the new senior preferred
stock notwithstanding that the cash attributable to this
excess will not be received until a subsequent period.
In addition, you must pay tax on any distributions on
the new senior preferred stock in the form of additional
shares of new senior preferred stock on the distribution
date in the same manner as a cash distribution on the
new senior preferred stock. The additional shares of new
senior preferred stock may be subject to the redemption
premium rules referred to above. For more details on the
constructive distributions, see "Material U.S. Federal
Tax Considerations."
</TABLE>
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF THE RISKS OF INVESTING IN THE NEW NOTES AND THE NEW SENIOR PREFERRED STOCK.
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
This table presents summary unaudited pro forma consolidated financial
information derived from our unaudited pro forma consolidated financial
statement for the year ended December 31, 1999, which is included in this
prospectus. The summary unaudited pro forma consolidated operating information
gives effect to the transactions described under "The Acquisition and
Recapitalization," as if they had occurred on January 1, 1999. The summary
unaudited pro forma consolidated financial information does not purport to
represent what our consolidated results of operations would have been had the
transactions described under "The Acquisition and Recapitalization" in fact
occurred on January 1, 1999 and does not project our consolidated financial
position or consolidated results of operations for the current year or any
future period.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1999
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
INCOME STATEMENT DATA:
Sales, net................................................ $214,088
Cost of goods sold........................................ 65,244
Gross profit.............................................. 148,844
Operating costs and expenses:
Sales and marketing..................................... 45,798
Research and development................................ 7,692
Distribution, circulation and fulfillment............... 13,172
Editorial............................................... 10,046
General, administrative and other....................... 27,936
Depreciation and amortization (a)....................... 31,643
Write-off of in-process research and development costs
(b)................................................... --
Net Income from operations................................ 12,557
Other expense............................................. (149)
Interest expense (c)...................................... (34,126)
--------
Loss before income taxes.................................. (21,718)
Income tax benefit........................................ --
--------
Net loss.................................................. $(21,718)
========
BALANCE SHEET DATA (AT DECEMBER 31, 1999--ACTUAL):
Cash and cash equivalents................................. $ 15,521
Total assets.............................................. 572,229
Total debt................................................ 276,556
Senior preferred stock and preferred stockholder warrants
(d)..................................................... 76,518
Stockholders' equity...................................... $105,283
OTHER DATA:
Depreciation and amortization (e)......................... $ 36,049
Capital expenditures...................................... 6,386
Cash interest expense (f)................................. 32,883
EBITDA (g)................................................ $ 48,457
</TABLE>
(FOOTNOTES APPEAR ON THE FOLLOWING PAGE)
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<PAGE>
(FOOTNOTES FROM TABLE ON PRIOR PAGE)
(a) Some depreciation and amortization charges are reflected in other expense
line items.
(b) As part of the acquisition by WRC Media, CompassLearning wrote off various
costs, totaling $9,000, related to in-process research and development
activities.
(c) For more information regarding our calculation of pro forma interest
expense, see note (f) to the Unaudited Pro Forma Consolidated Statements of
Operations included in this prospectus.
(d) Represents $75.0 million in initial liquidation value of the old senior
preferred stock issued in connection with the transactions described under
"The Acquisition and Recapitalization," which includes approximately
$11.8 million attributable to the value of the warrants to acquire 13.0% of
the common stock of Weekly Reader and 13.0% of the common stock of
CompassLearning. These warrants were issued in connection with the old
senior preferred stock mentioned above. In addition, $1.5 million represents
accrued in-kind preferred dividends payable and the accretion of the warrant
value.
(e) Represents pro forma depreciation and amortization including depreciation
and amortization reflected in other cost line items, other than amortization
of deferred financing costs, which is included in interest expense.
(f) Cash interest expense excludes amortization of deferred financing costs and
original issue discount.
(g) EBITDA is calculated as income before income taxes, interest expense,
depreciation and amortization. EBITDA includes a non-recurring gain by
CompassLearning on the sale of stock of $396 and non-recurring expenses, net
of non-recurring revenues of WRC Media and its subsidiaries of $1,495. For
more information regarding our calculations, see note (h) to the Unaudited
Pro Forma Consolidated Statement of Operations included in this prospectus.
EBITDA data is included because we understand that this information is
considered by various investors as an additional basis on which to evaluate
WRC Media and its subsidiaries' ability to pay interest, repay debt and make
capital expenditures. Because all companies do not calculate EBITDA
identically, the presentation of EBITDA in this financial information is not
necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful than,
or an alternative to, measures of operating performance as determined by
generally accepted accounting principles.
14
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
We present below (1) the ratio of our earnings to fixed charges, (2) the
ratio of our earnings to combined fixed charges and preferred stock dividends,
or (3) the deficiency of earnings to fixed charges, as applicable. Earnings
consist of net income (loss) plus fixed charges. Fixed charges consist of
interest expense, including amortization of debt issuance costs. The "pro forma"
information for the year ended December 31, 1999 and the year ended
December 31, 1998, reflects the original issuance of the 12 3/4% senior
subordinated notes due 2009 and the issuance of the 15% senior preferred stock
due 2011, as if these events had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
FROM MAY 14,
1999 (INCEPTION) THREE MONTHS
TO YEAR ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999 MARCH 31, 2000
------------------ ----------------- --------------
(PRO FORMA)
<S> <C> <C> <C>
WRC MEDIA AND ITS SUBSIDIARIES
Deficiency of earnings to fixed charges and
preferred stock dividends.................... $(15,995) $(21,718) $(11,171)
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
WEEKLY READER
Ratio of earnings to fixed charges...... 1.01x -- 1.52x 1.62x 1.52x 1.09x --
Deficiency of earnings to fixed
charges............................... -- $(2,863) -- -- -- -- $(2,716)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
PRE- ------------------------------------------------------ FOR THE THREE MONTHS
PREDECESSOR FOR THE YEARS ENDED DECEMBER 31, SUCCESSOR ENDED MARCH 31,
----------- ------------------------------------------------------ ---------- -----------------------
7/6/94- 6/30-12/31 1/1-7/13 7/14-12/31 PREDECESSOR SUCCESSOR
6/29/95 1995 1996 1997 1998 1999 1999 1999 2000
----------- ---------- -------- -------- -------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPASSLEARNING
Deficiency of
earnings to fixed
charges............ $(12,399) $(21,273) $(22,279) $(56,204) $(7,773) $(778) $(10,296) $(2,346) $(13,698)
</TABLE>
15
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RISK FACTORS
BEFORE YOU INVEST IN THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK, YOU
SHOULD BE AWARE THAT AN INVESTMENT IN THE NEW NOTES OR THE NEW SENIOR PREFERRED
STOCK INVOLVES VARIOUS RISKS, INCLUDING THOSE DESCRIBED IN THIS SECTION. YOU
SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE DECIDING TO EXCHANGE THE OLD NOTES OR THE
OLD SENIOR PREFERRED STOCK.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE--WE HAVE SUBSTANTIAL DEBT AND HAVE
SIGNIFICANT INTEREST PAYMENT REQUIREMENTS WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND THE SENIOR PREFERRED
STOCK AND TO OPERATE OUR BUSINESS.
We have a significant amount of indebtedness. See "Unaudited Pro Forma
Consolidated Financial Information" and "Description of New Notes--Brief
Description of the Notes and the Note Guarantees" for a discussion of the pro
forma amount of our indebtedness after giving effect to the transactions
described under "The Acquisition and Recapitalization." Our substantial
indebtedness could have important consequences to the holders of the notes and
the senior preferred stock including the risks that:
- we will be required to use a substantial portion of our cash flow from
operations to pay our indebtedness, thereby reducing the availability of
our cash flow to fund the implementation of our business strategy, working
capital, capital expenditures, product development efforts and other
general corporate purposes;
- our interest expense could increase if interest rates in general increase
because some of our debt will bear interest based on market rates;
- our level of indebtedness will increase our vulnerability to general
adverse economic and industry conditions;
- our debt service obligations could limit our flexibility in planning for,
or reacting to, changes in our business and the supplemental educational
materials industry;
- our level of indebtedness may place us at a competitive disadvantage
compared to our competitors that have less debt;
- our level of indebtedness may prevent us from raising the funds necessary
to repurchase all of the notes tendered to us upon the occurrence of those
changes of control described under "Description of New Notes--Repurchase
at the Option of Holders--Change of Control," which would constitute an
event of default under the notes;
- our level of indebtedness may prevent us from raising the funds necessary
to redeem all of the senior preferred stock upon the occurrence of a
change of control described under "Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock--Change of Control;" and
- our failure to comply with the financial and other restrictive covenants
in our indebtedness, which, among other things, may limit our ability to
borrow additional funds and could result in an event of default which, if
not cured or waived, could have a material adverse effect on us.
As of March 31, 2000, we owed $129.7 million in senior secured term loans
and $2.0 million in senior secured revolving loans under our senior credit
facilities described under "Description of Senior Credit Facilities." We will be
able to incur substantial additional indebtedness in the future, including the
remaining $28.0 million of additional debt available as of March 31, 2000 under
our $30.0 million revolving credit facility. Additional indebtedness will
intensify the risks described above. All borrowings under the senior credit
facilities, and WRC Media's and the note guarantors' guarantees of them, will be
secured and senior to the senior preferred stock, the notes and the note
guarantees.
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<PAGE>
We expect to pay our expenses and principal and interest on the notes and
other debt and interest and dividends on senior preferred stock with cash flow
from operations and future borrowings under the revolving credit facility. On a
pro forma basis after giving effect to the transactions described under "The
Acquisition and Recapitalization," our earnings would have been insufficient to
cover our fixed charges by $21.7 million for the twelve months ended
December 31, 1999. Our earnings were insufficient to cover our fixed charges by
$11.6 million for the three months ended March 31, 2000.
We cannot assure the holders of the notes and the senior preferred stock
that our business will generate sufficient cash flow from operations, or that
future borrowings will be available to us and our subsidiaries under the
revolving credit facility in an amount sufficient to enable us to pay our
indebtedness, including the notes and the senior preferred stock, or to fund our
other liquidity needs. If we cannot service our indebtedness, we will be forced
to take actions such as:
- delaying or reducing the implementation of our business strategy, capital
expenditures or product development efforts;
- selling assets;
- restructuring or refinancing our indebtedness which could include the
notes; or
- seeking additional equity capital or bankruptcy protection.
We cannot assure the holders of the notes and the senior preferred stock
that any of these remedies can be effected on commercially reasonable terms or
at all. In addition, the terms of existing or future debt agreements, including
the credit agreement relating to the senior credit facilities and the notes
indenture, may restrict us from adopting any of these alternatives.
For risks associated with the restrictive covenants in our debt instruments,
see "--Restrictive Covenants in Our Debt Instruments."
RANKING OF THE NOTES--IF ANY OF THE ISSUERS OR GUARANTORS DEFAULT ON ANY PAYMENT
OF SENIOR DEBT, THEY MAY NOT PAY ANY PRINCIPAL, PREMIUMS OR INTEREST ON YOUR
NOTES.
The notes and the note guarantees will rank behind all of the issuers' and
the note guarantors' existing and future senior debt. All of their existing
indebtedness is senior debt other than trade payables. In the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to any of the issuers or note guarantors, the assets of the issuer or
note guarantor will not be available to pay obligations on the notes or the note
guarantor's note guarantee until the issuer or note guarantor has paid the
senior debt in full. As a result, we cannot assure the holders of the notes that
sufficient assets will remain to pay amounts due on all or any of the notes or
any note guarantee. On March 31, 2000, the notes and the note guarantees were
subordinated to $129.7 million in senior secured term loans and $2.0 million in
senior secured revolving loans under our senior credit facilities, excluding the
remaining $28.0 million of available borrowings under the revolving credit
facility. We will be permitted to borrow substantial additional indebtedness,
including senior debt, in the future under the notes indenture.
None of the issuers or the note guarantors may pay principal, premium,
interest or other amounts on account of the notes or any note guarantee if they
default on a payment on any senior debt or if they default on any obligation
that has resulted in the acceleration of designated senior debt, including the
senior credit facilities, unless this senior debt has been paid in full or the
default has been cured or waived. In the event of certain other defaults with
respect to designated senior debt, neither the issuers nor the note guarantors
may be permitted to pay any amount on account of the notes or any note guarantee
for up to 179 of 360 consecutive days. See "Description of New
Notes--Subordination" for a description of the possible consequences of
defaults.
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<PAGE>
In addition, Weekly Reader's and CompassLearning's indebtedness under the
senior credit facilities and WRC Media's and the note guarantors' guarantees
relating to such senior credit facilities are secured by liens on substantially
all of the issuers' and the note guarantors' assets. If any of the issuers, the
note guarantors or their subsidiaries are declared bankrupt or insolvent or if
any of them default under the senior credit facilities, the lenders could
declare all of the funds borrowed under the senior credit facilities, together
with accrued and unpaid interest, immediately due and payable. If
CompassLearning or Weekly Reader were unable to repay this senior indebtedness
or if WRC Media or any of the other guarantors of the senior credit facilities
were unable to satisfy their guarantees under the senior credit facilities, the
lenders could foreclose on the pledged stock and on the assets in which they
have been granted a security interest, in each case to the exclusion of the
holders of the notes, even if an event of default exists under the notes
indenture at that time. Furthermore, under the note guarantees, if all shares of
any note guarantor are sold to persons pursuant to an enforcement of the pledge
of shares of the note guarantor for the benefit of the lenders under the senior
credit facilities, then the applicable note guarantor will be released from its
note guarantee automatically and immediately upon the sale. For more information
on the security interest held by the Lenders, see "Description of Senior Credit
Facilities."
HOLDING COMPANY STRUCTURE--THE NOTE GUARANTORS AND ANY OTHER SUBSIDIARIES OF THE
ISSUERS MAY BE RESTRICTED FROM PAYING DIVIDENDS TO THE ISSUERS, WHICH MAY HURT
THE ABILITY OF THE ISSUERS TO SATISFY THEIR PAYMENT OBLIGATIONS UNDER THE NOTES
AND THE SENIOR PREFERRED STOCK.
WRC Media conducts all of its operations through its subsidiaries, while
Weekly Reader conducts some of its operations through its subsidiaries.
The ability of the note guarantors and any other subsidiaries of the issuers
to pay dividends and make other payments may be restricted by, among other
things, applicable corporate and other laws and regulations and agreements of
these subsidiaries. If the note guarantors and other subsidiaries are restricted
in any of these ways, the issuers may not be able to satisfy their payment
obligations under the notes and the senior preferred stock. Although the notes
indenture will limit the ability of these subsidiaries to enter into consensual
restrictions on their ability to pay dividends and make other payments, these
limitations are subject to a number of significant qualifications and
exceptions. See "Description of New Notes--Material Covenants--Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries."
RANKING OF THE SENIOR PREFERRED STOCK--UPON ANY DISTRIBUTION TO OUR CREDITORS IN
A BANKRUPTCY, LIQUIDATION OR REORGANIZATION OR SIMILAR PROCEEDING RELATING TO US
OR OUR PROPERTY, THE HOLDERS OF OUR DEBT WILL BE ENTITLED TO BE PAID IN CASH
BEFORE ANY PAYMENT MAY BE MADE WITH RESPECT TO THE SENIOR PREFERRED STOCK.
Our obligations with respect to the senior preferred stock are subordinate
and junior in right of payment to all our present and future indebtedness,
including the senior credit facilities and the old and new notes, but will rank
senior to our existing equity securities. The old and new senior preferred stock
will have an equal rank. In the event of our bankruptcy, liquidation or
reorganization, our assets will be available to pay obligations on the senior
preferred stock only after all holders of our indebtedness and all our other
creditors have been paid, and there may not be sufficient assets remaining to
pay amounts due on any or all of the senior preferred stock then outstanding.
See "Description of New Senior Preferred Stock--Ranking."
While any shares of the senior preferred stock are outstanding, without the
written consent of a majority of the outstanding shares of the senior preferred
stock, we may not create, authorize, issue or reclassify:
- any class of stock ranking prior to, or on parity with, the senior
preferred stock with respect to dividends or upon liquidation,
dissolution, winding up or otherwise; or
18
<PAGE>
- any security that is convertible or exchangeable into such stock.
However, without such approval, we may create, authorize, issue or
reclassify shares of securities that rank equally in right of payment with the
senior preferred stock if we use the proceeds from the issuance of such
securities for the redemption of all outstanding shares of the senior preferred
stock in accordance with the terms of the certificate of designations relating
to the senior preferred stock.
DIVIDENDS--OUR ABILITY TO PAY ANY DIVIDENDS ON THE SENIOR PREFERRED STOCK MAY BE
LIMITED.
We cannot assure the holders of the senior preferred stock that we will be
able to pay dividends on the senior preferred stock. Our ability to pay any cash
or noncash dividends on the senior preferred stock is subject to applicable
provisions of state law and to the terms of the notes indenture, the senior
credit facilities and any other outstanding indebtedness. We are not required to
pay cash dividends on the senior preferred stock until December 31, 2004. The
terms of the notes indenture permit us to pay any cash dividend on the senior
preferred stock only if the amount of the cash dividend is permitted under the
covenant for restricted payments described under "Description of New
Notes--Material Covenants" and in the absence of any default under the notes
indenture.
Moreover, under Delaware law, we are permitted to pay cash or noncash
dividends on our capital stock, including the senior preferred stock, only out
of surplus, or if there is no surplus, out of our net profits for the fiscal
year in which a dividend is declared or for the immediately preceding fiscal
year. Surplus is defined as the excess of a company's total assets over the sum
of its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends, we must have surplus or net profits equal to the full
amount of the dividends at the time such dividend is declared. In determining
our ability to pay dividends, Delaware law permits our board of directors to
revalue our assets and liabilities from time to time to their fair market values
in order to establish the amount of surplus. We cannot predict what the value of
our assets or the amount of our liabilities will be in the future and,
accordingly, we cannot assure the holders of the senior preferred stock that we
will be able to pay dividends on the senior preferred stock.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS--RESTRICTIONS IMPOSED BY OUR
SENIOR CREDIT FACILITIES, THE NOTES INDENTURE AND FUTURE DEBT AGREEMENTS MAY
LIMIT OUR ABILITY TO MAKE PAYMENTS ON THE NOTES AND THE SENIOR PREFERRED STOCK,
FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS OR ENGAGE IN OTHER BUSINESS
ACTIVITIES THAT MAY BE IN OUR INTEREST.
The credit agreement relating to the senior credit facilities and the notes
indenture will, and future debt agreements may, restrict our and our
subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends and make other distributions;
- prepay subordinated debt;
- make restricted payments;
- create liens;
- sell and otherwise dispose of assets; and
- enter into transactions with affiliates.
These terms may impose restrictions on our ability to finance future
operations, implement our business strategy, fund our capital needs or engage in
other business activities that may be in our interest. In addition, the credit
agreement relating to the senior credit facilities will, and future indebtedness
may, require us to maintain compliance with specified financial ratios. Although
we are currently in compliance with the financial ratios and do not plan on
engaging in transactions that may
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cause us to not be in compliance with the ratios, our ability to comply with
these ratios may be affected by events beyond our control, including the risks
described in the other risk factors.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the senior
credit facilities. In the event of a default under the senior credit facilities,
the lenders under the senior credit facilities may elect to:
- declare all borrowings outstanding, together with accrued and unpaid
interest and other fees, to be immediately due and payable;
- require us to apply all of our available cash to repay these borrowings;
- prevent us from making debt service payments on the notes which would
result in an event of default under the terms of the notes; or
- prevent us from making dividend payments on the senior preferred stock.
The lenders will also have the right in these circumstances to terminate any
commitments they have to provide further financing, including under the
revolving credit facility.
If we are unable to repay these borrowings when due, the lenders under the
senior credit facilities also will have the right to proceed against the
collateral, which will consist of substantially all of the assets of WRC Media
and each of its direct and indirect domestic subsidiaries, including:
- Weekly Reader;
- American Guidance;
- CompassLearning; and
- World Almanac.
The lenders under the senior credit facilities will also have the right to
proceed against up to 65% of the capital stock of any future direct and indirect
foreign subsidiary of WRC Media. If the indebtedness under the senior credit
facilities and the notes were to be accelerated, we cannot assure the holders of
the notes and the senior preferred stock that our assets would be sufficient to
repay this indebtedness in full. Any future credit agreements or other agreement
relating to our indebtedness to which we or any of our subsidiaries may become a
party or under which we are or any one of our subsidiaries is a guarantor may
include the covenants described above and other restrictive covenants.
See "Description of New Notes--Material Covenants" and "Description of
Senior Credit Facilities."
HISTORY OF NET LOSSES--WE HAVE A HISTORY OF NET LOSSES SINCE 1996 AT
COMPASSLEARNING, AND WE MAY CONTINUE TO INCUR NET LOSSES, WHICH COULD ADVERSELY
AFFECT OUR ABILITY TO SERVICE OUR INDEBTEDNESS.
We cannot assure the holders of the notes and the senior preferred stock
that CompassLearning will be able to achieve net income in the future on a
sustained basis or at all. If CompassLearning continues to incur net losses, our
ability to pay principal and interest on our indebtedness, including the notes,
could be adversely affected. CompassLearning reported net losses of:
- $22.3 million for the year ended December 31, 1996;
- $56.2 million for the year ended December 31, 1997;
- $7.8 million for the year ended December 31, 1998;
- $0.8 million for the period January 1 through July 13, 1999;
- $15.4 million for the period July 14 through December 31, 1999; and
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- $13.7 million for the three months ended March 31, 2000.
These net losses resulted principally from two factors: product introduction
issues and a disruption in its sales force. For further discussion on the
analysis of our financial results, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--WRC Media
and its Subsidiaries."
NO PRIOR OPERATIONS AS AN INDEPENDENT COMPANY--DUE TO OUR LACK OF INDEPENDENT
OPERATING HISTORY, WE MAY NOT ACHIEVE THE ANTICIPATED COST SAVINGS OF OPERATING
INDEPENDENTLY.
We do not have a history of operating as an independent entity. Therefore,
we may not achieve the anticipated cost savings of operating independently.
These cost savings are based on analyses completed by members of our management.
Our business plan anticipates that we will have the ability to operate our
subsidiaries with lower costs than the management overhead allocated by PRIMEDIA
prior to the consummation of the transactions described under "The Acquisition
and Recapitalization." These potential annualized cash cost savings are
reflected as adjustments in the unaudited pro forma consolidated financial
information in this prospectus. Actual cost savings, to the extent realized, may
vary considerably, or be considerably delayed, compared to the estimates
described in this prospectus. These estimates involve assumptions as to future
events, including:
- general business and industry conditions;
- competitive factors;
- local labor markets; and
- labor productivity.
Many of these factors are beyond our control and may not materialize. While we
believe these analyses and underlying assumptions to be reasonable, there could
be unforseen factors that may offset the estimated cost savings or other
components of our business plan in whole or in part.
INCREASES IN PAPER PRICES OR POSTAGE COSTS--OUR OPERATING INCOME MAY BE REDUCED
BY INCREASES IN PAPER PRICES OR IN POSTAGE COSTS.
Because the price of paper and postage are the largest expenses relating to
our print products and direct mail solicitations, our operating income may be
reduced by increases in either paper or postage prices if we are unable to pass
such increased expenses on to our customers. Our cost of paper and postage is
approximately $13.0 million per annum which accounts for 7.0% of our operating
expenses. The price of paper rose dramatically in 1995 and significantly
affected our operating income and continues to experience moderate increases. We
generally use the United States Postal Service or the United Parcel Service.
Postage costs increase periodically and can be expected to increase in the
future. We cannot assure the holders of the notes and the senior preferred stock
that we can pass such paper or postage cost increases through to our customers.
CUSTOMER PURCHASING POWER--MANY OF OUR CUSTOMERS DEPEND ON VARIOUS SOURCES OF
GOVERNMENT FUNDING AND A REDUCTION IN THIS FUNDING COULD AFFECT OUR SALES.
Most of our customers make purchases of our products with monies received
from various sources of governmental funding, including Federal, state and local
governments. Although we believe most of our customers are not dependent on a
single source of funding, many of our customers use the same sources of funding.
Accordingly, any substantial reduction in governmental funding earmarked for
educational materials could have a material adverse effect on the amount of our
sales. For example, if the Federal government were to modify regulations
concerning special education and the need for school administrations to provide
equivalent learning materials for students with special education requirements,
sales at American Guidance and CompassLearning would be adversely affected.
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COMPETITION--WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY, AND IF WE DO NOT, OUR
SALES WILL DECLINE.
The supplemental education materials market is highly competitive and
because each of our operating companies faces significant competition within its
particular field of product offerings. Competition from our competitors has
increased over the last several years, and we expect it to continue to increase.
It is unclear whether we will be able to compete successfully, and if we do not,
our sales will decline. In the case of each of our operating companies, several
of our competitors are larger, with greater financial and other resources, and
have more prominent brand names. Competition from each of our competitors has
increased over the past several years, and we expect it to continue to increase.
In addition, our strategy to capitalize on any growth in the supplemental
education materials market may be limited to the extent that growth occurs in
segments that are not currently the focus of our product portfolio,
necessitating the expansion of our existing product lines or the development of
new products. In this respect, we may be at a competitive disadvantage with
entities that already offer these products, are able to develop new products
faster or have superior products.
In addition, the environment in which we conduct our business is rapidly
evolving. There is a trend towards offering supplemental education materials in
an electronic format and in particular over the Internet. We are likely to see
new competitors emerge, increasing competition for customers and increasing
price pressure for our products, particularly from Internet-based products. Our
experience in the electronic delivery of courseware is primarily in networked
environments and not over the Internet. Our failure to adapt to new technology
or delivery methods, or our choice of one technological innovation over another,
may have an adverse impact on our ability to compete for new customers or meet
demands of our existing customers. Therefore, should one or more of our
competitors formulate a business plan to offer supplemental educational
materials to students through the Internet or other media and we fail to
effectively respond, our sales could decline.
For additional information concerning our competitors, including
CompassLearning's, American Guidance's and World Almanac's competitors, see
"Business--Competition."
SEASONALITY--OUR BUSINESS IS SEASONAL AND SEASONAL FLUCTUATIONS MAY ADVERSELY
AFFECT OUR FINANCIAL CONDITION.
Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader's and
CompassLearning's sales are significantly affected by the school year. For more
information on the fluctuation of CompassLearning's and Weekly Reader's sales
during different quarters see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality." We cannot assure the holders
of the notes and the senior preferred stock that seasonal fluctuations will not
have a material adverse effect on our financial condition, which may make it
more difficult to service our indebtedness.
DEPENDENCE ON INTELLECTUAL PROPERTY--WE DEPEND UPON BEING ABLE TO USE OUR
LICENSED INTELLECTUAL PROPERTY AND PROTECT OUR OWNED INTELLECTUAL PROPERTY.
DISRUPTIONS OF THE USE OF THIS INTELLECTUAL PROPERTY AND THE CONTRACTUAL
REQUIREMENTS THAT WE TERMINATE THE USE OF THIS INTELLECTUAL PROPERTY COULD
ADVERSELY AFFECT OUR BUSINESS.
We rely on copyrights and, in some cases, trademarks to protect our
products. We cannot assure you that we will be able to maintain or obtain the
necessary copyrights or trademarks to protect our products, and if we do not,
our business could suffer from others introducing similar products. Effective
trademark and copyright protection may be unavailable or limited, or may not be
applied for, in the United States. In addition, we have been, and may in the
future be, notified of claims that our products may be infringing on trademarks,
copyrights or other intellectual property rights of others. Those claims,
including any litigation with respect to those claims, could result in
significant expense to us and adversely affect our sales of the relevant
products, whether or not the litigation is resolved in our favor.
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Our decision to change the name to CompassLearning, Inc. and inability to
use trademarks owned by Jostens, Inc., the former parent company of
CompassLearning, including "Jostens Learning" and "Jostens Learning Corporation"
after December 31, 2000, may adversely affect our business because "Jostens" is
a recognized brand name and CompassLearning is not. For more information on the
decision to change the name to CompassLearning, Inc. and our inability to use
trademarks owned by Jostens, Inc., see "Business--Intellectual Property".
The businesses of each of Weekly Reader, World Almanac and American Guidance
also could be materially adversely affected by ceasing to be a part of
PRIMEDIA's operations and being prohibited from using PRIMEDIA's name in their
promotional materials or otherwise because "PRIMEDIA" is a recognized brand
name. For more information on the prohibition of the use of PRIMEDIA's name in
connection with Weekly Reader's World Almanac's and American Guidance's ongoing
operations, see "Business--Intellectual Property."
DEPENDENCE ON KEY MANAGEMENT AND HIGHLY-SKILLED PERSONNEL--WE DEPEND ON OUR
ABILITY TO RETAIN OUR SENIOR MANAGEMENT AND TO RECRUIT AND RETAIN KEY PERSONNEL,
AND ANY FAILURE TO RETAIN SUCCESSFULLY AND RECRUIT KEY MANAGEMENT OR PERSONNEL
COULD ADVERSELY AFFECT OUR ABILITY TO EFFECTIVELY MANAGE OUR OVERALL OPERATIONS
OR SUCCESSFULLY EXECUTE CURRENT OR FUTURE BUSINESS STRATEGIES.
We believe that our success depends on our ability to retain our senior
management team, including, in particular, Martin E. Kenney, Jr., our Chief
Executive Officer. The loss of services of Mr. Kenney or one or more of these
senior executives could adversely affect our ability to effectively manage our
overall operations or successfully execute current or future business
strategies. We have entered into employment agreements with several of our top
executives, including Mr. Kenney. Nonetheless, Mr. Kenney may terminate his
employment agreement upon 90 days written notice. Similarly, all other key
executives may terminate their employment agreements upon 30 days written
notice. See "Management--Employment Agreements."
Mr. Kenney is critical to us for a number of reasons. He:
- is our most senior and experienced executive in the education industry
with over 20 years of relevant experience;
- heads a small corporate staff at WRC Media and in that capacity, he is
responsible for both strategy development and execution, as well as
executive oversight of each of the business units which used to be
independent operating entities; and
- played, and continues to play, a pivotal role in recruiting and retaining
the operating management teams, as well as maintaining respective
financing sources.
Our success depends on our continued ability to recruit and retain highly
skilled, knowledgeable and sophisticated technical, managerial, sales and
professional personnel. Competition for highly skilled personnel to create our
supplemental instructional materials and assessment products, and, in
particular, our electronically delivered and Internet-based supplemental
education materials, is intense. Accordingly, we cannot assure the holders of
the notes and the senior preferred stock of our ongoing ability to attract and
retain qualified employees.
OWNERSHIP OF WRC MEDIA AND ITS SUBSIDIARIES--THE INTERESTS OF OUR CONTROLLING
STOCKHOLDER MAY CONFLICT WITH THE INTERESTS OF THE HOLDERS OF THE NOTES AND THE
SENIOR PREFERRED STOCK.
After consummation of the transactions described under "The Acquisition and
Recapitalization," Ripplewood Holdings L.L.C., through its beneficial ownership
of our common stock and the rights granted to it under management shareholder
agreements, employment agreements and the limited liability company agreement of
EAC III L.L.C., owns approximately 73.3% of our voting equity. Ripplewood
Holdings L.L.C. has effective control of us by virtue of its ability to elect
the majority of our directors and the directors of our subsidiaries, to approve
any action requiring the approval of our
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stockholders, including amendments to our charter documents, and to effect
fundamental corporate transactions such as mergers and asset sales. The
interests of Ripplewood Holdings L.L.C. as a stockholder may differ from the
interests of the holders of the senior preferred stock and the notes. See
"Ownership of Stock."
In addition, Ripplewood Holdings L.L.C. may in the future make significant
investments in other education-based companies. Some of these companies may be
our competitors. Ripplewood Holdings L.L.C. and its affiliates are not obligated
to advise us of any investment or business opportunities of which they are
aware.
INABILITY TO REPURCHASE THE NOTES PRIOR TO OR AT MATURITY OR TO REDEEM THE
SENIOR PREFERRED STOCK PRIOR TO OR AT MATURITY--WE MAY NOT HAVE SUFFICIENT FUNDS
TO MAKE A CHANGE OF CONTROL OFFER OR AN ASSET SALE OFFER WHEN REQUIRED BY THE
CERTIFICATE OF DESIGNATIONS RELATING TO THE SENIOR PREFERRED STOCK OR THE NOTES
INDENTURE BECAUSE OF PROHIBITIONS IN THE SENIOR CREDIT FACILITIES AND THE NOTES
INDENTURE.
In the event that we experience changes of control or make asset sales, we
cannot assure the holders of the notes and the senior preferred stock that we
would have sufficient funds to satisfy all of our obligations under the senior
credit facilities, the notes and the senior preferred stock.
If we experience changes of control:
- holders of the notes will have the right to require us to repurchase the
notes at a purchase price equal to 101% of the principal amount of the
notes plus accrued and unpaid interest and liquidated damages; or
- to the extent WRC Media has legally available funds for the payment and to
the extent permitted by the notes indenture, WRC Media must offer to
redeem any and all shares of senior preferred stock then outstanding in
cash.
In addition, if we make asset sales, we may be required to repurchase some
or all of the notes at a purchase price in cash equal to 100% of the principal
amount of the notes plus accrued and unpaid interest and liquidated damages.
However, we are prohibited by the senior credit facilities from repurchasing any
notes or redeeming any shares of senior preferred stock. The senior credit
facilities also provide that change of control events and asset sales with
respect to us constitute a default under the senior credit facilities. See
"Description of Senior Credit Facilities." We may also become a party to, or
guarantor under, future credit agreements or other agreements relating to senior
indebtedness that contain similar restrictions or provisions.
If we experience changes of control or make asset sales when we are
prohibited from repurchasing notes or redeeming senior preferred stock, we could
seek the consent of the lenders under the senior credit facilities to purchase
the notes or redeem the senior preferred stock or could attempt to refinance the
borrowings that contain the prohibition. If we do not obtain the consent and do
not refinance the borrowings, we would remain prohibited from purchasing the
notes or redeeming the senior preferred stock. In this case, our failure to
purchase tendered notes would constitute a default under the notes indenture.
This in turn, could result in amounts outstanding under the senior credit
facilities and other senior indebtedness being declared due and payable. This
type of declaration could have adverse consequences to both the holders of the
notes and the senior preferred stock as well as us. If a default occurs with
respect to any senior indebtedness, the subordination provisions of the notes
would likely restrict payments to the holders of the notes and the senior
preferred stock. The provisions relating to a change of control included in the
notes indenture or the certificate of designations relating to the senior
preferred stock may increase the difficulty of a potential acquiror obtaining
control of us. For more details on the consequences of a change of control, see
"Description of New Notes--Repurchase at the Option of Holders--Change of
Control" and "Description of New Senior Preferred Stock--Redemption of Senior
Preferred Stock--Change of Control."
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FRAUDULENT CONVEYANCE MATTERS--UNDER FEDERAL AND STATE STATUTES, UNDER SPECIFIC
CIRCUMSTANCES, A COURT MAY VOID OUR OBLIGATIONS AND A NOTE GUARANTOR'S
OBLIGATIONS TO THE HOLDERS OF THE NOTES WITH RESPECT TO THE NOTES AND REQUIRE
THE RETURN OF PAYMENTS RECEIVED FROM US OR THE NOTE GUARANTORS BY THE HOLDERS OF
THE NOTES.
If a fraudulent conveyance is effectuated under Federal bankruptcy law or
comparable provisions of state fraudulent transfer laws, a note or note
guarantee could be voided, or claims in respect of a note or note guarantee
could be subordinated to all other debts of any of the issuers of the notes or
the applicable note guarantor. On the basis of historical financial information,
recent operating history and other factors, we believe that each issuer and each
note guarantor, after giving effect to the indebtedness incurred in connection
with the transactions described under "The Acquisition and Recapitalization,"
will:
- not be insolvent;
- not have unreasonably small capital for the business in which it is
engaged; and
- not have incurred debts beyond its ability to pay these debts as they
mature.
We cannot assure the holders of the notes, however, as to what standard a
court would apply in making these determinations or that a court would agree
with our conclusions in this regard.
A fraudulent conveyance arises, if, among other things, any of the issuers
or note guarantors, at the time the indebtedness represented by the old notes or
the applicable note guarantee was incurred:
- incurred the indebtedness with the intent to hinder, delay or defraud
creditors; or
- received less than reasonably equivalent value or fair consideration for
the incurrence of the indebtedness; and
- was insolvent or rendered insolvent because of the incurrence; or
- was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay its debts as they mature.
In addition, any payment by any of the issuers of the notes under the terms
of the notes or by a note guarantor under its note guarantee could be voided and
required to be returned to the issuer or note guarantor, or to a fund for the
benefit of the issuer's or note guarantor's creditors.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a person would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
- if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
In addition, although the note guarantees provide the holders of the notes
with a direct claim against the assets of the note guarantors, enforcement of
the note guarantees against any note guarantor may be subject to a legal
challenge in a bankruptcy or reorganization case or a lawsuit by or on behalf of
creditors of the note guarantor and would be subject to the defenses available
to
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guarantors generally. Although the notes indenture contains waivers of most
guarantor defenses, some of those waivers may not be enforced by a court in a
particular case. To the extent that the note guarantees are not enforceable, the
notes would be effectively subordinated to all liabilities of the note
guarantors, including trade payables, whether or not these liabilities
constitute senior debt under the notes indenture.
THERE IS NO PRIOR MARKET FOR THE SECURITIES--HOLDERS OF THE NEW NOTES AND THE
NEW SENIOR PREFERRED STOCK CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL
DEVELOP FOR THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK. IF AN ACTIVE
TRADING MARKET FOR THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK DOES NOT
DEVELOP, THE LIQUIDITY AND VALUE OF THE SECURITIES COULD BE HARMED.
The securities are new securities for which there is currently no trading
market. If an active trading market for the new notes or the new senior
preferred stock does not develop, the liquidity and value of the securities
could be harmed. This exchange offer is not conditioned on any minimum or
maximum aggregate principal amount of old notes and the number of old senior
preferred stock being tendered for exchange. Although Donaldson, Lufkin &
Jenrette Securities Corporation and Banc of America Securities LLC have advised
us that they currently intend to make a market in the new notes, they are not
obligated to do so and they may cease any market-making at any time without
notice. In addition, this market making activity may be limited during the
pendency of the exchange offer for the notes or the effectiveness of a shelf
registration statement in lieu thereof. We do not intend to apply for listing of
the new notes or the new senior preferred stock on any securities exchange or
interdealer quotation system.
ORIGINAL ISSUE DISCOUNT--THE NOTES WILL BE CONSIDERED TO BE ISSUED WITH ORIGINAL
ISSUE DISCOUNT, WHICH MAY RESULT IN THE CREATION OF TAXABLE INTEREST INCOME FOR
THE HOLDERS AND MAY LIMIT THE HOLDERS' CLAIMS IN THE EVENT OF A BANKRUPTCY.
The notes will be considered to be issued with original issue discount for
U.S. Federal income tax purposes. Original issue discount is the difference
between the stated redemption price at maturity of the notes and the issue price
of the notes. Original issue discount will accrue from the issue date of the
notes and generally will be includable as interest income in the holder's gross
income for U.S. Federal income tax purposes in advance of the cash payments to
which the income is attributable. For a more detailed discussion of the U.S.
Federal income tax consequences to the holders of the notes of the exchange,
ownership and disposition of these notes, see "Material U.S. Federal Tax
Considerations."
If a bankruptcy case is commenced by or against us under Federal bankruptcy
law after the issuance of the notes, the claim of a holder of any of the notes
with respect to the principal amount of the notes may be limited to an amount
equal to the sum of:
(1) the initial offering price allocable to the notes; and
(2) the portion of original issue discount which is not deemed to constitute
"unmatured interest" for purposes of Federal bankruptcy law.
Any original issue discount that was not amortized as of a bankruptcy filing
would constitute "unmatured interest." Consequently, a holder would not have a
claim for such amounts in any bankruptcy.
MATERIAL TAX CONSIDERATIONS FOR THE SENIOR PREFERRED STOCK--HOLDERS OF THE
SENIOR PREFERRED STOCK WILL HAVE TO RECOGNIZE INCOME IN ADVANCE OF THEIR RECEIPT
OF THE CASH ATTRIBUTABLE TO THIS INCOME.
Because the redemption price of the senior preferred stock exceeds its issue
price by more than a DE MINIMIS amount, a holder of the senior preferred stock
will be required to treat this excess as a series of constructive distributions
over the period of time the share of senior preferred stock is outstanding,
notwithstanding that the cash attributable to the excess will not be received by
the holder until a subsequent period.
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In the case of a distribution on the senior preferred stock that is paid in
the form of additional shares of the senior preferred stock ("additional
preferred shares," each, individually, an "additional preferred share"), the
fair market value of the additional preferred shares on the distribution date
will be taxable for U.S. Federal income tax purposes in the same manner as a
cash distribution on the distribution date notwithstanding that the cash
attributable to the distribution will not be received by the holder until a
subsequent period. In addition, if the redemption price of an additional
preferred share exceeds the issue price of the share by more than a DE MINIMIS
amount, then a holder of that share would be required to treat this excess as a
series of constructive distributions over the period of time the additional
preferred share is outstanding, as described under the rules above. For a more
detailed discussion of the U.S. Federal income tax consequences to the holders
of the senior preferred stock of the exchange, ownership and disposition of the
senior preferred stock, see "Material U.S. Federal Tax Considerations."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. In particular, the
statements about our plans, strategies and prospects under the headings
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and in the unaudited pro
forma consolidated financial statements included in this prospectus and its
related notes are 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.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are described in this
prospectus, including under the headings:
- "Risk Factors;"
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations;" and
- "Business."
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
and risk factors contained throughout this prospectus.
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FAILURE TO EXCHANGE YOUR OLD NOTES OR OLD SENIOR PREFERRED STOCK
The old notes and the old senior preferred stock which you do not tender or
we do not accept will, following the exchange offer, continue to be restricted
securities. Therefore, you may only transfer or resell them in a transaction
registered under or exempt from the Securities Act of 1933 and applicable state
securities laws. We will issue the new notes in exchange for the old notes and
the new senior preferred stock in exchange for the old senior preferred stock
under the exchange offer only following the satisfaction of the procedures and
conditions described in "The Exchange Offer." Following the exchange offer, if
you did not tender your old notes, or we did not accept your tender, you
generally will not have any further registration rights unless you qualify for
the shelf registration rights described under "Registration Rights." Following
the exchange offer, if you did not tender your old senior preferred stock, or we
did not accept your tender, you may have the demand and incidental registration
rights described under "Registration Rights--The Senior Preferred Stock."
We do not currently anticipate that we will register the remaining old notes
under the Securities Act of 1933 or that we will register the remaining old
senior preferred stock under the Securities Act of 1933 unless required to do so
under the senior preferred stockholders agreement.
Because we anticipate that most holders of the old notes and old senior
preferred stock will elect to exchange their old notes or their old senior
preferred stock, we expect that the liquidity of the markets, if any, for any
old notes and old senior preferred stock remaining after the completion of the
exchange offer may be substantially limited. Any old notes tendered and
exchanged in the exchange offer will reduce the aggregate principal amount of
the old notes outstanding. Any old senior preferred stock tendered and exchanged
in the exchange offer will reduce the aggregate liquidation value of the old
senior preferred stock outstanding.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the old notes, we entered into a registration
rights agreement with Donaldson, Lufkin & Jenrette Securities Corporation and
Banc of America Securities LLC under which we agreed to file with the Securities
and Exchange Commission an exchange offer registration statement with respect to
the exchange of the old notes for a series of registered notes with
substantially identical terms as the old notes. The new notes, however, will not
contain terms with respect to transfer restrictions and will not require us to
complete a registered exchange offer. In the event the exchange offer for the
old notes is completed, we will not be required to register the remaining old
notes unless holders are entitled to shelf registration rights under the
circumstances described under "Registration Rights--The Notes."
In connection with the sale of the old senior preferred stock, we entered
into a senior preferred stockholders agreement with DLJ Merchant Banking
Partners II, L.P. and other signatory parties to that agreement under which we
agreed to file with the Securities and Exchange Commission an exchange offer
registration statement with respect to the exchange of the old senior preferred
stock for registered senior preferred stock with substantially identical terms
as the old senior preferred stock, except that the new senior preferred stock
will not contain terms with respect to transfer restrictions and will not
require us to complete a registered exchange offer. Even if the exchange offer
for the old senior preferred stock is completed, holders of old senior preferred
stock may, under the circumstances described under "Registration Rights," be
entitled to demand registration of the senior preferred stock on two occasions
and to request registration incident to any planned registration of WRC Media
capital stock. In the event the exchange offer for the old senior preferred
stock is completed, except as described in the previous sentence, we will not be
required to register the remaining old senior preferred stock.
We are making the exchange offer in reliance on the position of the
Securities and Exchange Commission as stated in previous no-action letters
including:
- Exxon Capital Holding Corporation, No-Action Letter (May 13, 1988);
- Morgan Stanley & Co. Incorporated, No-Action Letter (June 5, 1991);
- K-III Communications Corporation, No-Action Letter (May 14, 1993); and
- Shearman & Sterling, No-Action Letter (July 2, 1993).
However, we have not sought our own no-action letter. Based upon this
position, we believe that a holder who exchanges the old notes for the new notes
or the old senior preferred stock for the new senior preferred stock in the
exchange offer generally may offer for resale, sell and otherwise transfer the
new notes or the new senior preferred stock without further registration under
the Securities Act of 1933 and without delivery of a prospectus that satisfies
the requirements of section 10 of the Securities Act of 1933 if the conditions
listed in the next sentence are satisfied. A holder who wishes to participate in
the exchange offer must:
- not be our "affiliate" as that term is defined in Rule 405 of the
Securities Act of 1933;
- acquire the new notes or the new senior preferred stock in the ordinary
course of business; and
- not participate, not intend to participate and have no arrangement or
understanding with any person to participate in a distribution of the new
notes or the new senior preferred stock.
Rule 405 of the Securities Act of 1933 defines an "affiliate" to be a person
that controls or is controlled by, or is under common control with, the person
specified.
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Any holder of the old notes or the old senior preferred stock using the
exchange offer to participate in a distribution of the new notes or the new
senior preferred stock cannot rely on the no-action letters referred to above.
This includes a broker-dealer that acquired the old notes or the old senior
preferred stock directly from us, but not as a result of market-making
activities or other trading activities. Consequently, these holders must comply
with the registration and prospectus delivery requirements of the Securities Act
of 1933 and the applicable state securities laws in the absence of an exemption
from these requirements. Section 3(a)(4) of the Securities Exchange Act of 1934
defines a "broker" to be any person, other than a bank, engaged in the business
of effecting transactions for the account of others. Section 3(a)(5) of the
Securities Exchange Act of 1934 defines a "dealer" to be any person, other than
a bank or person trading for their own account if not part of a regular
business, engaged in the business of buying and selling securities for his own
account, through a broker or otherwise.
Each broker-dealer that receives new notes or new senior preferred stock for
its own account in exchange for old notes or old senior preferred stock, as a
result of market-making activities or other trading activities, must represent
and acknowledge under the applicable letter of transmittal that it will deliver
a prospectus in connection with any resale of these new notes or new senior
preferred stock. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of new notes
or new senior preferred stock received in exchange for old notes or old senior
preferred stock where the old notes or old senior preferred stock were acquired
by the broker-dealer as a result of market-making activities or other trading
activities. The applicable letter of transmittal states that by acknowledging
that it will deliver and delivering a prospectus in connection with any resale
of new notes or new senior preferred stock, a broker-dealer will not be
considered to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933. We have agreed that for a period of one year after the
expiration date, we will make this prospectus available to broker-dealers for
use in connection with any such resale mentioned above. For more details, see
"Plan of Distribution."
Except as described above, this prospectus may not be used for an offer to
resell, resale or other retransfer of new notes or new senior preferred stock.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes or old senior preferred stock in any
jurisdiction in which the exchange offer or the acceptance of it would not be in
compliance with the securities or blue sky laws of the jurisdiction.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions of the exchange offer, we will,
unless the old notes or old senior preferred stock are withdrawn in accordance
with the withdrawal right specified in "Withdrawal of Tenders" below, accept any
and all old notes and old senior preferred stock validly tendered prior to
5:00 p.m., New York City time, on , 2000. The date of acceptance for
exchange of the old notes and the old senior preferred stock, and completion of
the exchange offer, is the exchange date, which will be the first business day
following the expiration date unless we extend the date as described in this
document. We will issue, on, or promptly after, the exchange date:
- an aggregate principal amount of up to $152,000,000 of new notes in
exchange for an equal principal amount of outstanding old notes tendered
and accepted in connection with the exchange offer; and
- an aggregate of up to 3,000,000 shares of new senior preferred stock for
an equal number of outstanding shares of old senior preferred stock
tendered and accepted in connection with the exchange offer.
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The new notes and the new senior preferred stock issued in connection with the
exchange offer will be delivered on the earliest practicable date following the
exchange date. Holders may tender some or all of their old notes or old senior
preferred stock in connection with the exchange offer. However, old notes may be
tendered only in integral multiples of $1,000 and the old senior preferred stock
may not be tendered in fractional shares.
Holders of old notes and old senior preferred stock do not have any
appraisal or dissenters' rights in connection with the exchange offer.
TERMS OF NEW NOTES AND NEW SENIOR PREFERRED STOCK
The new notes will have terms substantially identical to the terms of the
old notes. The new notes will not contain terms with respect to transfer
restrictions and will not require us to complete a registered exchange offer.
Except as described in the previous sentence, the new notes will evidence the
same debt as the old notes and will be entitled to the same benefits under the
notes indenture as the old notes. As of the date of this prospectus,
$152,000,000 aggregate principal amount of the old notes is outstanding. For
more details on the terms of the new notes, see "Description of New Notes."
The new senior preferred stock will have terms substantially identical to
the terms of the old senior preferred stock. The new senior preferred stock will
not contain terms with respect to transfer restrictions and will not require us
to complete a registered exchange offer. Except as described in the previous
sentence, the new senior preferred stock will evidence the same rights and
obligations as the old senior preferred stock and will be entitled to the same
benefits under the preferred stockholders agreement and the certificate of
designations relating to the senior preferred stock as the old senior preferred
stock. As of the date of this prospectus, 3,000,000 shares of old senior
preferred stock are outstanding. For more details on the terms of the new senior
preferred stock, see "Description of New Senior Preferred Stock."
METHOD OF EXCHANGE
In connection with the issuance of the old notes, we have arranged for the
old notes originally purchased by qualified institutional buyers to be issued in
the form of global notes and transferable in book-entry form through the
facilities of The Depository Trust Company (the "DTC"), acting as depositary.
Except as described under "Book-Entry, Delivery and Form," the new notes will be
issued in the form of a global note registered in the name of DTC or its nominee
and each holder's interest in it will be transferable in book-entry form through
DTC.
In connection with the issuance of the new senior preferred stock, we have
arranged for the new senior preferred stock to be issued in certificated form
and transferable through physical delivery.
TENDER AND ACCEPTANCE
We shall be considered to have accepted validly tendered old notes and old
senior preferred stock if and when we have given oral or written notice to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purposes of receiving the new notes and the new senior preferred stock
from us. The exchange agent will make the exchange promptly on the date of
acceptance for exchange of the old notes and the old senior preferred stock.
This exchange date will be the first business day following the expiration date
unless it is extended as described in this document. The exchange shall be
deemed to be effected immediately after the close of business on this exchange
date and, as a result, the holders in whose names the new notes and the new
senior preferred stock shall be issuable upon exchange shall be deemed to be the
holders of record of the new notes and the new senior preferred stock.
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If we do not accept any tendered old notes and old senior preferred stock
for exchange because:
- the notes or the senior preferred stock were not validly tendered under
the procedures for tendering; see "--Procedures for Tendering;"
- we determine, in our reasonable discretion, that any of the conditions to
the exchange offer have not been satisfied; see "--Conditions to the
Exchange Offer;"
- a holder has validly withdrawn a tender of old notes or old senior
preferred stock as described under "--Withdrawal of Tenders;" or
- we have, in our reasonable judgment, delayed or terminated the exchange
offer; see "--Expiration Date; Extensions; Amendments;"
as quickly as possible after the expiration date, we will:
- return certificates for unaccepted old senior preferred stock and any old
notes held in certificated form, without expense, to the tendering holder;
and
- cause a financial institution that participates in DTC's book-entry
transfer facility system to make a book-entry delivery of the old notes
which have been tendered in book-entry form into the account from which
the notes were originally transferred, without expense to the tendering
holders.
Pursuant to the delivery, DTC will credit the old notes back into the account
from which the notes were originally transferred. See "--Procedures for
Tendering" for a more complete description of how to tender your old notes and
old senior preferred stock.
Old notes which are not tendered for exchange or are tendered but not
accepted in connection with the exchange offer will remain outstanding and be
entitled to the benefits of the notes indenture, but will not be entitled to any
future registered exchange offer under the registration rights agreement.
Holders of any old notes after expiration of the exchange offer may be entitled
to shelf registration rights under the circumstances described under
"Registration Rights." Old senior preferred stock which is not tendered for
exchange or is tendered but not accepted in connection with the exchange offer
will remain outstanding and be entitled to the benefits of the senior preferred
stockholders agreement and the certificate of designations relating to the
senior preferred stock, but will not be entitled to any future registered
exchange offer. Holders of old senior preferred stock may, under the
circumstances described under "Registration Rights," be entitled to demand
registration of the old senior preferred stock on two occasions and to request
registration incidental to any planned registration of WRC Media capital stock.
In the event the exchange offer for the old senior preferred stock is completed,
except as described in the previous sentence, we will not be required to
register the remaining old senior preferred stock.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date for the exchange offer is , 2000, which is
30 days following the commencement of the exchange offer. The exchange offer can
be extended by us in our sole discretion, in which case the term "expiration
date" shall mean the latest date and time to which the exchange offer is
extended.
We reserve the right, in our sole discretion:
- to delay, to extend or to terminate the exchange offer if, in our
reasonable judgment, any of the conditions described below shall not have
been satisfied, by giving oral or written notice of the delay, extension
or termination to the exchange agent; or
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- to amend the terms of the exchange offer in any manner deemed by us to be
advantageous to the holders of the old notes or the old senior preferred
stock.
If we amend the exchange offer in a manner that we consider material, we
will:
- disclose the amendment by means of a prospectus supplement; and
- extend the exchange offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the exchange offer would
otherwise expire during the five to ten business day period.
If we determine to make a public announcement of any delay, extension,
amendment or termination of the exchange offer, we will do so by making a timely
release through an appropriate news agency.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes or old senior preferred stock and may
terminate or amend the exchange offer before the acceptance of the old notes or
the old senior preferred stock, if:
- the exchange offer is not permitted by applicable law or rules,
regulations or policies of the Securities and Exchange Commission; or
- the exchange offer would impair or interfere with, in any material
respect, any contemplated financing, acquisition, disposition, corporate
reorganization or other similar material corporate transaction involving
WRC Media or any subsidiary.
The conditions listed above are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any of these conditions. We
may waive these conditions in our sole discretion in whole or in part at any
time and from time to time. The failure by us at any time to exercise any of the
above rights shall not be considered a waiver of the right and the right shall
be considered an ongoing right which may be asserted at any time and from time
to time.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of old notes or old senior preferred stock:
- from our affiliates within the meaning of Rule 405 under the Securities
Act of 1933;
- from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the
Securities and Exchange Commission; or
- if the new notes or the new senior preferred stock to be received by the
holder or holders of old notes or old senior preferred stock in the
exchange offer, upon receipt, will not be tradable by the holder without
restriction under the Securities Act of 1933 and the Securities Exchange
Act of 1934 and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United States.
If we determine in our reasonable discretion that any of these conditions
are not satisfied, we may:
- refuse to accept any old notes or old senior preferred stock and return
all tendered old notes or old senior preferred stock to the tendering
holders;
- extend the exchange offer and retain all old notes or old senior preferred
stock tendered before the expiration of the exchange offer, subject,
however, to the rights of holders to withdraw these old notes or old
senior preferred stock (See "--Withdrawal of Tenders" below); or
- waive unsatisfied conditions relating to the exchange offer and accept all
properly tendered old notes or old senior preferred stock which have not
been withdrawn.
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PROCEDURES FOR TENDERING
VALID TENDER:
To tender old notes held in DTC global form, a holder of old notes must
cause a financial institution that participates in DTC's book entry transfer
facility system to make a book-entry delivery of the old notes. DTC then will
credit the old notes into the exchange agent's account. Unless the transferring
financial institution causes delivery to the exchange agent, and the exchange
agent receives, timely confirmation of the book-entry transfer of the old notes
into the exchange agent's account at DTC prior to 5:00 p.m., New York City time,
on the expiration date, the transfer will not constitute delivery to the
exchange agent. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES
WITHOUT TIMELY CONFIRMATION TO THE EXCHANGE AGENT DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT. In addition, although delivery of old notes held in DTC
global form may be effected through book-entry transfer into the exchange
agent's account at DTC, a holder of old notes held in DTC global form must,
prior to 5:00 p.m., New York City time, on the expiration date:
- mail, fax or otherwise deliver a completed, signed and dated letter of
transmittal applicable to the old notes, with the required signature
guarantees and any other required documents, to the exchange agent at its
addresses listed under the caption "--Exchange Agent;" or
- cause DTC to transmit to the exchange agent a message stating that the
tendering holder has expressly acknowledged receipt of, and agreement to
be bound by and held accountable under, the applicable letter of
transmittal.
To receive confirmation of book-entry delivery, a holder should contact the
financial institution that made the book-entry delivery of the old notes. In
addition, to receive confirmation of valid tender of the old notes, a holder
should contact the exchange agent at the telephone number listed under the
caption "--Exchange Agent."
A holder of old notes held in DTC global form may also tender under the
"Guaranteed Delivery Procedures" described below.
To tender old senior preferred stock and any old notes held in certificated
form, a holder must mail or otherwise deliver to the exchange agent at its
addresses listed under the caption "Exchange Agent" prior to 5:00 p.m., New York
City time, on the expiration date:
- a completed, signed and dated letter of transmittal or faxed copy on the
form applicable to the securities tendered, with the required signature
guarantees; and
- certificates representing the old senior preferred stock and the old notes
held in certificated form and any other required documents.
A holder of old senior preferred stock and any old notes held in
certificated form may also tender under the "--Guaranteed Delivery Procedures"
described below.
To receive confirmation of valid tender of old senior preferred stock and
any old notes held in certificated form, a holder should contact the exchange
agent at the telephone number listed under the caption "--Exchange Agent."
Holders should receive copies of the applicable letter of transmittal with
this prospectus. A holder may obtain additional copies of the applicable letter
of transmittal for the old notes and the old senior preferred stock from the
exchange agent at its offices listed under the caption "--Exchange Agent." By
executing and delivering the applicable letter of transmittal, each holder of
old notes or old senior preferred stock will represent to us that, among other
things:
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- any new notes or new senior preferred stock acquired in connection with
the exchange offer will be obtained in the ordinary course of business of
the person receiving the new notes or the new senior preferred stock,
whether or not the person is the holder;
- neither the holder nor any other person receiving the new notes or the new
senior preferred stock has an arrangement or understanding with any person
to participate in the distribution, within the meaning of the Securities
Act of 1933, of the new notes or new senior preferred stock; and
- neither the holder nor any other person receiving the new notes or the new
senior preferred stock is our "affiliate" as defined in Rule 405 under the
Securities Act of 1933.
If a holder of old notes or old senior preferred stock is our "affiliate,"
as defined in Rule 405 under the Securities Act of 1933, or has an arrangement
or understanding with respect to the distribution of the new notes or the new
senior preferred stock to be acquired under the exchange offer, the holder
cannot rely on the applicable interpretations of the staff of the Securities and
Exchange Commission and must comply with the registration and prospectus
delivery requirement of the Securities Act of 1933 in connection with any
secondary resale transaction. If the holder is a broker-dealer which will
receive new notes or new senior preferred stock for its own account in exchange
of old notes or old senior preferred stock, it will acknowledge that it acquired
the old notes or old senior preferred stock as the result of market making
activities or other trading activities and it will deliver a prospectus in
connection with any resale of the old notes or old senior preferred stock. For
more details on the duties of broker-dealer, see "Plan of Distribution."
The tender by a holder of old notes and old senior preferred stock will
constitute an agreement between us and the holder in accordance with the terms
and subject to the conditions set forth in this prospectus and in the applicable
letter of transmittal. If a holder tenders less than all the old notes or the
old senior preferred stock held by this holder, this tendering holder should
fill in the applicable box of the applicable letter of transmittal. The amount
of old notes and the number of old senior preferred stock delivered to the
exchange agent, whether by book-entry or physical delivery, will be deemed to
have been tendered unless otherwise indicated.
Any beneficial owner whose old notes or old senior preferred stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct the registered holder to tender on behalf of the
beneficial owner. If the beneficial owner wishes to tender on that owner's own
behalf, the owner must, prior to completing and executing the applicable letter
of transmittal and delivery of the owner's old notes or old senior preferred
stock, either make appropriate arrangements to register ownership of the old
notes or the old senior preferred stock in the owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
If the applicable letter of transmittal or any old notes or old senior
preferred stock or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, these persons should so
indicate when signing, and unless waived by us, submit to the exchange agent
evidence satisfactory to us of their authority to act in that capacity with the
letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND OLD SENIOR PREFERRED STOCK AND THE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, WE
RECOMMEND THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
HOLDERS SHOULD ALLOW SUFFICIENT TIME TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OF OLD NOTES OR OLD SENIOR
PREFERRED STOCK SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
TENDERS FOR THE HOLDERS.
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SIGNATURES, SIGNATURE GUARANTEES, ENDORSEMENTS:
If the applicable letter of transmittal is signed by the record holder(s) of
the old notes and the old senior preferred stock tendered, the signature must
correspond with the name(s) written on the face of the old note and the old
senior preferred stock without alteration, enlargement or any change whatsoever.
If the applicable letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the old notes.
A signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution. Rule 17Ad-15 under the
Securities Exchange Act of 1934 describes eligible guarantor institutions as
banks, brokers, dealers, municipal securities brokers, government securities
dealers, government securities brokers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. The signature need not be guaranteed by an eligible guarantor
institution if the old notes or the old senior preferred stock are tendered:
- by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the applicable
letter of transmittal; or
- for the account of an eligible guarantor institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantee must be by:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent in
the United States; or
- an "eligible guarantor institution."
If the letter of transmittal is signed by a person other than the registered
holder of any old notes or old senior preferred stock, the old notes and the old
senior preferred stock must be endorsed by the registered holder or accompanied
by a properly completed bond power, in each case signed or endorsed in blank by
the registered holder.
DETERMINATION OF VALIDITY, RECEIPT, ACCEPTANCE:
We will determine all questions as to the validity, form, eligibility, which
includes the time of receipt and acceptance, and withdrawal of tendered old
notes or old senior preferred stock in our sole discretion. We reserve the
absolute right to reject any and all old notes or old senior preferred stock not
properly tendered or any old notes or old senior preferred stock whose
acceptance by us would, in the opinion of our U.S. counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to any particular old notes or old senior preferred stock either before or
after the expiration date. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the applicable letter of
transmittal, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
old notes or old senior preferred stock must be cured within a time period we
will determine. Although we intend to request the exchange agent to notify
holders of defects or irregularities relating to tenders of old notes or old
senior preferred stock, neither we, the exchange agent nor any other person will
have any duty or incur any liability for failure to give the notification.
Tenders of old notes or old senior preferred stock will not be considered to
have been made until the defects or irregularities have been cured or waived.
Any old notes or old senior preferred stock received by the exchange agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the
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exchange agent to the tendering holders, unless otherwise provided in the letter
of transmittal, as soon as practicable following the expiration date.
In addition, we reserve the right, as described above under the caption
"--Conditions to the Exchange Offer," to terminate the exchange offer.
A tender will be deemed to have been received as of the date when the
exchange agent receives:
- the tendering holder's duly signed letter of transmittal accompanied by
old notes and old senior preferred stock;
- a timely confirmation of book-entry transfer of old notes into the
exchange agent's account at DTC with a message from DTC stating that the
tendering holder has expressly acknowledged receipt of, and agreement to
be bound by and held accountable under, the applicable letter of
transmittal; or
- a notice of guaranteed delivery from an eligible institution.
If less than all of the old senior preferred stock or the old notes held in
certificated form evidenced by a submitted certificate are to be tendered, the
tendering holder(s) should fill in the aggregate liquidation preference of the
old senior preferred stock or aggregate principal amount of the old notes to be
tendered in the applicable "Letter of Transmittal." A newly reissued certificate
for the old senior preferred stock or the old notes held in certificated form
submitted but not tendered will be sent to its holder as soon as practicable
after the expiration date. All of the old senior preferred stock or the old
notes held in certificated form delivered to the exchange agent will be deemed
to have been tendered unless otherwise clearly indicated.
Issuances of new notes and new senior preferred stock in exchange for old
notes and old senior preferred stock tendered pursuant to a notice of guaranteed
delivery by an eligible institution will be made only against:
- delivery of the applicable letter of transmittal and any other required
documents; and
- the tendered old notes or old senior preferred stock or a timely
confirmation received of a book-entry transfer of old notes into the
exchange agent's account at DTC with the exchange agent.
We will not accept for exchange old notes or old senior preferred stock
which have been tendered if:
- the old notes or the old senior preferred stock were not validly tendered
under the procedures for tendering;
- we determine in our reasonable discretion, that any of the conditions to
the exchange offer have not been satisfied; see "--Conditions to the
Exchange Offer;"
- a holder has validly withdrawn a tender of old notes or old senior
preferred stock as described under "--Withdrawal of Tenders;" or
- we have, in our reasonable judgment, delayed or terminated the exchange
offer; see "--Expiration Date; Extensions; Amendments."
GUARANTEED DELIVERY PROCEDURES
A holder who wishes to tender its old notes or old senior preferred stock
and:
- whose old notes or old senior preferred stock are not immediately
available;
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- who cannot deliver the holder's old notes or old senior preferred stock,
the applicable letter of transmittal or any other required documents to
the exchange agent prior to the expiration date; or
- who cannot complete, with respect to the old notes, the procedures for
book-entry transfer, before the expiration date,
may effect a tender if:
- the holder makes the tender through an eligible guarantor institution
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934;
- before the expiration date, the exchange agent receives from the eligible
guarantor institution a properly completed and duly executed notice of
guaranteed delivery substantially in the form accompanying the applicable
letter of transmittal, by facsimile transmission, mail or hand delivery
including:
-- the name and address of the holder,
-- the certificate number(s) of the old notes held in certificated form
and the certificate number(s) of the old senior preferred stock,
-- the principal amount of old notes and the number of shares of old
senior preferred stock tendered,
-- a statement that the tender is being made, and
-- a guarantee that the eligible guarantor institution will deliver to the
exchange agent, within five New York Stock Exchange trading days after
the expiration date, a properly completed and duly executed letter of
transmittal, or facsimile of the letter of transmittal, a confirmation
of book-entry transfer of the old notes and the certificate(s)
representing the old notes held in certificated form and the old senior
preferred stock in proper form for transfer, and any other documents
required by the applicable letter of transmittal; and
- the eligible guarantor institution mails or otherwise delivers to the
exchange agent within five New York Stock Exchange trading days after the
expiration date, a properly completed and executed letter of transmittal,
or facsimile of the letter of transmittal, as well as a confirmation of
book-entry transfer of the old notes and the certificate(s) representing
all tendered old notes held in certificated form or old senior preferred
stock in proper form for transfer, and all other documents required by the
applicable letter of transmittal.
A holder or eligible guarantor institution may obtain additional forms for
the notice of guaranteed delivery from the exchange agent at its offices listed
under "--Exchange Agent."
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders may withdraw their
tenders of old notes and old senior preferred stock at any time prior to
5:00 p.m., New York City time, on the expiration date.
To withdraw a tender of old notes and old senior preferred stock in
connection with the exchange offer, a holder must mail or otherwise deliver to
the exchange agent at its offices listed under "--Exchange Agent" a written
notice of withdrawal by mail or by facsimile transmission prior to 5:00 p.m.,
New York City time, on the expiration date of the exchange offer. This notice of
withdrawal must:
- specify the name of the person who deposited the old notes or the old
senior preferred stock to be withdrawn;
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- identify the old notes or the old senior preferred stock to be withdrawn
including the principal amount of these old notes or the aggregate
liquidation preference of old senior preferred stock and the certificate
number or numbers of the old senior preferred stock or the old notes
tendered in certificated form;
- be signed by the holder in the same manner as the original signature on
the applicable letter of transmittal by which these old notes or old
senior preferred stock were tendered, with any required signature
guarantees, or be accompanied by documents of transfer sufficient to have
the trustee register the transfer of these old notes or old senior
preferred stock into the name of the person withdrawing the tender; and
- specify the name in which any of these old notes or old senior preferred
stock are to be registered, if different from that of the depositor.
If old notes have been tendered under the procedures of book-entry transfer
described above under "--Procedures for Tendering," any notice of withdrawal
must specify the name and number of the account at DTC's book-entry transfer
facility to be credited with the withdrawn old notes and otherwise comply with
the procedures of the facility.
A holder may obtain a form of the notice of withdrawal from the exchange
agent at its offices listed under "--Exchange Agent."
We will determine all questions as to the validity, form and eligibility,
which includes the time of receipt of the withdrawal notices. Any old notes and
old senior preferred stock so withdrawn will be considered not to have been
validly tendered for purposes of the exchange offer and no new notes and new
senior preferred stock will be issued unless the old notes and the old senior
preferred stock withdrawn are validly re-tendered. Any old notes and old senior
preferred stock which have been tendered but which are not accepted for exchange
or which are withdrawn will be returned to the holder without cost to the
holder. In the case of the old notes tendered by book-entry transfer into the
exchange agent's account at DTC's book-entry transfer facility pursuant to the
book-entry transfer procedures described above under "--Procedures for
Tendering," the old notes will be credited to an account maintained with the
book-entry transfer facility for the old notes as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn old notes and old senior preferred stock may be retendered by
following one of the procedures described above under the caption "--Procedures
for Tendering" at any time prior to the expiration date.
EXCHANGE AGENT
Bankers Trust Company has been appointed as exchange agent in connection
with the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the applicable letter of transmittal,
the form of notice guaranteed delivery and the form of notice of withdrawal
should be directed to the exchange agent, by one of the following methods:
- if by mail, to BT Services Tennessee, Inc. Reorganization Unit, P.O. Box
292737 Nashville, TN 37229-2737;
- if by overnight mail or courier, to BT Services Tennessee, Inc., Corporate
Trust & Agency Services, Reorganization Unit, 648 Grassmere Park Road,
Nashville, TN 37211 (to confirm by telephone, call (615) 835-3572);
- if by hand, to Bankers Trust Company, Corporate Trust & Agency Services,
Attn: Reorganization Department, Receipt & Delivery Window, 123 Washington
Street, 1st Floor, New York, NY 10006;
- if by fax, to BT Services Tennessee, Inc., Corporate Trust & Agency
Service, Reorganization Unit at facsimile number (615) 835-7301; or
40
<PAGE>
- if by phone, to Bankers Trust Company at phone number 1-800-735-7777.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders under the exchange offer. We
will not make any payment to brokers, dealers or others soliciting acceptances
of the exchange offer. We will pay other expenses to be incurred in connection
with the exchange offer, including the fees and expenses of the exchange agent,
accounting and the reasonable legal fees of the holders of old notes and old
senior preferred stock as defined in the registration rights agreement and the
senior preferred stockholders agreement. Holders who tender old notes or old
senior preferred stock in connection with the exchange offer will not be
required to pay brokerage commissions or fees.
Holders who tender their old notes or old senior preferred stock for
exchange will not be obligated to pay any transfer taxes. A tendering holder,
however, will be required to pay any transfer taxes incurred, whether imposed on
the registered holder or any other person, if:
- new notes or new senior preferred stock are to be delivered to, or issued
in the name of, any person other than the registered holder of the old
notes or the old senior preferred stock tendered; or
- tendered old notes or the shares of old senior preferred stock are
registered in the name of any person other than the person signing the
applicable letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes or old senior preferred stock in connection with the exchange offer.
If satisfactory evidence of payment of these taxes or exemption from them is
not submitted with the applicable letter of transmittal, the amount of these
transfer taxes will be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The new notes and the new senior preferred stock will be recorded in our
accounting records at the same carrying value as the old notes and the old
senior preferred stock, respectively, as reflected in our accounting records on
the date of the exchange. Accordingly, we will not recognize any gain or loss
for accounting purposes upon the completion of the exchange offer. Any expenses
of the exchange offer that we pay will be charged against our earnings in
accordance with generally accepted accounting principles.
CONSEQUENCES OF FAILURES TO PROPERLY TENDER OLD NOTES AND OLD SENIOR PREFERRED
STOCK IN THE EXCHANGE
Issuance of the new notes in exchange for the old notes and issuance of the
new senior preferred stock in exchange for the old senior preferred stock under
the exchange offer will be made only after timely receipt by the exchange agent
of the old notes and old senior preferred stock, a properly completed and duly
executed letter of transmittal and all other required documents. Therefore,
holders desiring to tender old notes and old senior preferred stock in exchange
for new notes and new senior preferred stock should allow sufficient time to
ensure timely delivery. We are under no duty to give notification of defects or
irregularities of tenders of old notes and old senior preferred stock for
exchange. Old notes and old senior preferred stock that are not tendered or that
are tendered but we do not accept, will, following completion of the exchange
offer, continue to be subject to the existing restrictions upon their transfer
under the Securities Act of 1933.
Upon completion of the exchange offer, we will no longer be required to
consummate a registered exchange offer, as described in the registration rights
agreement and the senior preferred stockholders
41
<PAGE>
agreement, for the old notes and the old senior preferred stock which remain
outstanding. In addition, in the event the exchange offer for the old notes is
completed, we will not be required to register the remaining old notes unless
holders are entitled to shelf registration rights under the circumstances
described under "Registration Rights." Even if the exchange offer for the old
senior preferred stock is completed, holders of old senior preferred stock may,
under the circumstances described under "Registration Rights," be entitled under
the senior preferred stockholders agreement, to demand registration of the old
senior preferred stock on two occasions and to request registration incident to
any planned registration of WRC Media capital stock. In the event the exchange
offer for the old senior preferred stock is completed, except as described in
the previous sentence, we will not be required to register the remaining old
senior preferred stock.
Remaining old notes and old senior preferred stock will continue to be
subject to the following restrictions on transfer:
- the remaining old notes and old senior preferred stock may be resold only
if registered under the Securities Act of 1933, if any exemption from
registration is available, or if neither the registration nor the
exemption is required by law; and
- the remaining old notes and old senior preferred stock will bear a legend
restricting transfer in the absence of registration or an exemption.
We do not currently anticipate that we will register the remaining old notes
under the Securities Act of 1933 or that we will register the remaining old
senior preferred stock unless required to do so under the senior preferred
stockholders agreement. To the extent that old notes and old senior preferred
stock are tendered and accepted in connection with the exchange offer, any
trading markets for the remaining old notes and the remaining old senior
preferred stock could be adversely affected. For more details on the
consequences of failures to properly tender old notes and old senior preferred
stock in the exchange, see "Failure to Exchange Your Old Notes or Old Senior
Preferred Stock."
42
<PAGE>
THE ACQUISITION AND RECAPITALIZATION
The exchange offer is related to a series of acquisition and
recapitalization transactions that were completed on November 17, 1999. Prior to
the acquisition and recapitalization transactions, American Guidance, Weekly
Reader and World Almanac were subsidiaries of PRIMEDIA. Prior to the acquisition
and recapitalization transactions, there was no relationship between PRIMEDIA
and WRC Media. On July 14, 1999, WRC Media, a holding company formed by
Ripplewood Holdings L.L.C., acquired 100% of the capital stock of
CompassLearning through a wholly owned subsidiary for aggregate consideration in
the amount of $55.2 million, including the assumption and repayment of
$38.5 million of indebtedness and the redemption of preferred stock. In
connection with the financing of the acquisition of CompassLearning:
- Ripplewood Partners, L.P., its affiliates and co-investors made a cash
equity contribution of $28.7 million to WRC Media; and
- CompassLearning entered into, and made initial borrowings under, old
senior credit facilities in an amount of $12.0 million and issued
$19.0 million of senior subordinated notes.
A portion of the net proceeds from the financings described below has been used
to refinance the indebtedness entered into in connection with the acquisition of
CompassLearning.
On November 17, 1999, we completed the recapitalization of the Supplemental
Education Group of PRIMEDIA, consisting of the businesses of Weekly Reader,
American Guidance and World Almanac and their respective subsidiaries, and other
related transactions. In connection with the recapitalization:
- PRIMEDIA contributed 100% of the outstanding capital stock of American
Guidance and World Almanac to Weekly Reader;
- WRC Media, Weekly Reader, and CompassLearning made cash payments of
$395 million to PRIMEDIA; and
- Weekly Reader issued 3 million shares of 15% senior exchangeable preferred
stock due 2011 to WRC Media in exchange for $75.0 million in
consideration, which was funded by WRC Media out of the proceeds of its
issuance of the old senior preferred stock, and Weekly Reader used these
funds to effectuate the recapitalization.
As a result of the recapitalization:
- WRC Media owns 94.9% and PRIMEDIA owns 5.1% of the voting stock of Weekly
Reader;
- Ripplewood Partners, L.P., EAC III, L.L.C. ("EAC III"), EAC IV, L.L.C.,
those co-investors and members of our management listed under "Ownership
of Stock--Beneficial Ownership of WRC Media," own 100% of the voting stock
of WRC Media; and
- WRC Media, Weekly Reader, American Guidance and World Almanac have no
outstanding indebtedness other than the indebtedness described below.
See Note 1 to the Weekly Reader financial statements included elsewhere in
this prospectus for further discussion of the recapitalization.
To finance the repayment of the indebtedness entered into in connection with
the acquisition of CompassLearning and the recapitalization:
- WRC Media, Weekly Reader and CompassLearning issued units consisting of
the old notes and shares of WRC Media common stock;
- CompassLearning and Weekly Reader entered into, and made initial
borrowings under, the senior credit facilities, providing for credit
facilities of up to $161.0 million. The senior credit
43
<PAGE>
facilities initially consisted of a $30.0 million revolving credit
facility, a $31.0 million term loan A facility, and a $100.0 million term
loan B facility;
- WRC Media issued to the senior preferred stockholders $75.0 million of the
old senior preferred stock which we are offering to exchange for new
senior preferred stock in the exchange offer. As of the date of this
prospectus, the senior preferred stockholders include DLJ Merchant Banking
Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore
Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium
Partners-A, L.P., DLJMB Funding II, Inc., DLJ First ESC, L.P., DLJ EAB
Partners, L.P., DLJ ESC II L.P., DLJ Investment Funding II, Inc., DLJ
Investment Partners, L.P., DLJ Investment Partners II, L.P. and DLJ ESC II
L.P. (collectively, the "DLJMB Investors"), The Northwestern Mutual Life
Insurance Company, ARES Leveraged Investment Fund, L.P., ARES Leveraged
Investment Fund II, L.P., TCW/Crescent Mezzanine Partners II, L.P., TCW/
Crescent Mezzanine Trust II, Shared Opportunity Fund IIB, L.L.C., TCW
Shared Opportunity Fund III, L.P., TCW Leveraged Income Trust II, L.P.,
and TCW Leveraged Income Trust, L.P.
- Weekly Reader and CompassLearning issued to the senior preferred
stockholders preferred stockholder warrants to acquire 13.0% of the common
stock of Weekly Reader and 13.0% of the common stock of CompassLearning;
and
- WRC Media issued common stock in exchange for the cash equity contribution
of $95.0 million by Ripplewood Partners, L.P., its affiliates and
co-investors and their designees.
The Northwestern Mutual Life Insurance Company and Bank of America, N.A.,
through its affiliate Blue Ridge Investments, L.L.C., who provided the financing
for the acquisition of CompassLearning, also received warrants to acquire WRC
Media common stock. In connection with the recapitalization, these warrants were
exercised and the common stock received was contributed to EAC III in exchange
for membership interests in EAC III. EAC III is the investment vehicle owned by
Ripplewood Partners, L.P., its affiliates, Co-Investment Partners, L.P., The
Northwestern Mutual Life Insurance Company, Jackson National Life Insurance
Company and Blue Ridge Investments, L.L.C., that owns approximately 73.3% of the
WRC Media common stock. Weekly Reader acquired Facts On File News Services in
1996, Gareth Stevens, Inc. in 1997 and American Guidance in 1998. These
acquisitions were financed through borrowings from PRIMEDIA.
In 1996, American Guidance acquired assets of Lake Publishing Company.
Subsequently, in 1997, American Guidance acquired assets of Craig-Hart
Publishing Company, International Thomas Publishing Inc.
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<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes and
the new senior preferred stock under the exchange offer. In consideration for
issuing the new notes and the new senior preferred stock as contemplated in this
prospectus, we will receive old notes in like principal amount and old senior
preferred stock of like liquidation preference, the terms of which are identical
in all material respects to the new notes and the new senior preferred stock.
The old notes and the old senior preferred stock surrendered in exchange for the
new notes and the new senior preferred stock will be retired and canceled and
cannot be reissued. Accordingly, the issuance of the new notes and the new
senior preferred stock will not result in any increase in our indebtedness or
capital stock. The proceeds received from the sale of the old notes and the old
senior preferred stock were used to help finance the transactions described
under "The Acquisition and Recapitalization." In particular, these proceeds
helped fund the following:
- the cash payments to PRIMEDIA to effect the purchase of 94.9% of Weekly
Reader's outstanding common stock;
- the refinancing of the indebtedness incurred in connection with the
acquisition of CompassLearning on July 14, 1999; and
- the expenses, including legal and accounting fees, and underwriters'
discount in connection with the offering of the old notes and old senior
preferred stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do
not expect to pay cash dividends on our capital stock in the foreseeable future,
except that we are required to, by the terms of our outstanding senior preferred
stock, pay dividends on our senior preferred stock only in cash after
December 31, 2004. For more details on dividend policy of the new senior
preferred stock, see "Description of New Senior Preferred Stock--Dividends." It
is the current intention of our boards of directors to retain future earnings,
if any, to finance the expansion of our businesses. Future declaration and
payment of dividends, if any, will be determined in light of the then-current
conditions, including our earnings, operations, capital requirements, financial
condition and other factors deemed relevant by our boards of directors. The
notes indenture and the senior credit facilities restrict our ability to pay
dividends. Any future indebtedness incurred by us may also restrict our ability
to pay dividends. For more details on restrictions on our ability to pay
dividends, see "Description of Senior Credit Facilities" and "Description of New
Notes."
45
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
We are presenting below our unaudited consolidated pro forma financial
statements to show how our financial statements might have looked if we had been
an independent company for the entire period presented.
The historical financial information for Weekly Reader reflects the
recapitalization of Weekly Reader, American Guidance and World Almanac on
November 17, 1999 and the prior contribution by PRIMEDIA of 100% of the capital
stock of American Guidance and World Almanac to Weekly Reader. For accounting
purposes, that contribution has been reflected as a reorganization of entities
under common control. Accordingly, all prior periods have been restated to
reflect that reorganization using the historical carrying value of the stock of
American Guidance and World Almanac. WRC Media acquired 94.9% of Weekly Reader's
capital stock as a result of the transactions described under "The Acquisition
and Recapitalization."
The unaudited pro forma consolidated statement of operations data give
effect to the transactions described under "The Acquisition and
Recapitalization" as if they had occurred on January 1, 1999.
In the following unaudited consolidated pro forma financial statements of
WRC Media and its subsidiaries, we accounted for the acquisition of 94.9% of
Weekly Reader's capital stock and the acquisition of 100% of CompassLearning's
capital stock as a purchase. Under purchase accounting, the total purchase cost
and fair values of liabilities assumed are allocated to tangible and intangible
assets of the companies acquired based upon the respective fair values as of the
closing dates of the purchases based upon valuation and studies. A preliminary
allocation of the purchase cost has been made to major categories of assets and
liabilities in the accompanying unaudited pro forma consolidated financial
information based on estimates. The actual allocation of purchase cost and the
resulting effect on income from operations may differ from the pro forma amounts
included in this prospectus.
The unaudited pro forma consolidated financial information is for
informational purposes only and does not purport to be indicative of our
financial position or the results of our operations that would have actually
been obtained had the transactions described under "The Acquisition and
Recapitalization" and PRIMEDIA's acquisition of American Guidance in fact
occurred, as of the transaction dates or for the periods presented, nor are they
indicative of, or projections for, our results of operations or financial
position for any future period or date. The pro forma adjustments are
preliminary estimates of purchase price allocation, available information and
assumptions that we deem appropriate. You should read the following unaudited
pro forma consolidated financial information in conjunction with "Management
Discussion and Analysis of Financial Condition and Results of Operations," the
selected historical financial information and the financial statements and the
related notes included in this prospectus.
46
<PAGE>
WRC MEDIA AND ITS SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL (A) PRO FORMA
----------------------------------------- --------------------------
COMPASS- WEEKLY WRC TRANSACTION WRC MEDIA
LEARNING READER MEDIA TOTAL ADJUSTMENTS CONSOLIDATED
-------- -------- -------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales, net.................... $34,023 $129,495 $ 50,570 $214,088 $ -- $214,088
Cost of Goods Sold............ 13,374 35,768 16,102 65,244 -- 65,244
------- -------- -------- -------- -------- --------
Gross profit.................. 20,649 93,727 34,468 148,844 -- 148,844
Operating Costs and Expenses:
Sales and marketing......... 11,038 20,730 14,030 45,798 -- 45,798
Research and Development.... 3,831 -- 3,861 7,692 -- 7,692
Distribution, circulation
and fulfillment........... -- 11,213 1,959 13,172 -- 13,172
Editorial................... -- 8,672 1,374 10,046 -- 10,046
General and administrative
(b)....................... 3,978 21,793 5,571 31,342 (3,406) 27,936
Write-off of in-process
research and development
costs (c)................. -- -- 9,000 9,000 (9,000) --
Depreciation and
amortization(d)........... 131 12,111 6,243 18,485 13,158 31,643
------- -------- -------- -------- -------- --------
Total operating costs and
expenses.................... 18,978 74,519 42,038 135,535 752 136,287
Income (loss) from
operations.................. 1,671 19,208 (7,570) 13,309 (752) 12,557
Interest expense, including
amortization of deferred
financing costs............. (2,854) (10,317) (8,457) (21,628) (12,498)(e) (34,126)
Other, net.................... 405 (586) 32 (149) -- (149)
------- -------- -------- -------- -------- --------
Loss before income tax and
extraordinary item.......... (778) 8,305 (15,995) (8,468) (13,250) (21,718)
Income tax expense (f)........ -- (2,183) -- (2,183) 2,183 --
------- -------- -------- -------- -------- --------
Loss before extraordinary
item........................ (778) 6,122 (15,995) (10,651) (11,067) (21,718)
Extraordinary item (g)........ -- -- (3,336) (3,336) 3,336 --
------- -------- -------- -------- -------- --------
Net loss...................... $ (778) $ 6,122 $(19,331) $(13,987) $ (7,731) $(21,718)
======= ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and
amortization(c)(d)........ $ 1,713 $ 12,111 $ 18,067 $ 31,891 $ 4,158 $ 36,049
Capital expenditures........ 142 5,544 700 6,386 -- 6,386
EBITDA (h).................. 3,789 30,733 10,529 45,051 $ 3,406 48,457
</TABLE>
See notes to the unaudited pro forma consolidated statement of operations.
47
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Weekly Reader's financial information is presented on a stand-alone basis
prior to its recapitalization by WRC Media on November 17, 1999. After
November 17, 1999, Weekly Reader's balances are included in WRC Media and
its subsidiaries' operations. CompassLearning's financial information is
presented on a stand-alone basis for periods prior to its acquisition by WRC
Media, on July 14, 1999. After July 14, 1999, CompassLearning's balances are
included in WRC Media and its subsidiaries' operations.
(b) The pro forma transaction adjustment to general and administrative expenses
reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Elimination of historical allocated corporate overhead
charges................................................... $(4,965)
Estimated new salaries and fees for outside services........ 1,730
Elimination of Ripplewood Holdings L.L.C.'s management
fee....................................................... (171)
-------
Total..................................................... $ 3,406
=======
</TABLE>
(c) As part of CompassLearning's acquisition by WRC Media, $9,000 of in-process
purchased research and development was written-off. This non-cash charge was
included in depreciation and amortization for purposes of calculating
EBITDA.
(d) Various depreciation and amortization charges are reflected in other cost
line items. The pro forma depreciation and amortization adjustment related
to the increase in goodwill and other intangibles is $13,158. Goodwill is
amortized over 7 to 40 years and other intangibles are amortized over 1 to
40 years.
(e) Pro forma adjustment to interest expense is based on the borrowing to
finance the recapitalization and acquisition by WRC Media as presented
below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Term loan A facility (estimated at 10.75%).................. $ 3,333
Term loan B facility (estimated at 10.020%)................. 10,020
12.75% senior subordinated notes due 2009................... 19,380
Commitment fee on unutilized revolving credit facility
commitments (0.5%)........................................ 150
Accretion of discount....................................... 298
Amortization of deferred financing costs related to:
Senior credit facilities.................................. 490
Senior subordinated notes due 2009........................ 455
Elimination of historical interest expense and amortization
and write-off of deferred financing costs................. (21,628)
--------
Net increase in interest expense........................ $ 12,498
========
</TABLE>
The effect of a 0.125% change in the interest rate on the senior credit
facilities would increase or decrease pro forma interest expense by $164 on
an annual basis.
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
(f) The pro forma adjustment to income taxes reflects the tax effect as a result
of the pro forma loss from operations.
(g) The extraordinary item consists of a write-off of deferred financing costs
of $3,336 related to the November 17, 1999 refinancing of CompassLearning's
indebtedness, which was originally entered into in connection with its
acquisition by WRC Media.
(h) EBITDA is calculated as net income before income taxes, interest expense,
depreciation and amortization. EBITDA includes a non-recurring gain by
CompassLearning on the sale of stock of $396 and non-recurring expenses, net
of non-recurring revenues, of WRC Media and its subsidiaries of $1,495. Pro
forma EBITDA, includes pro forma adjustments related to charges
(1) allocated by PRIMEDIA to Weekly Reader in 1999, adjusted for incremental
costs expected to be incurred by Weekly Reader, of $3,235 and (2) allocated
to CompassLearning by Ripplewood Holdings L.L.C. of $171. EBITDA data is
included because we understand that such information is considered by some
investors as an additional basis on which to evaluate WRC Media and its
subsidiaries' ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this prospectus is not necessarily comparable to
similarly titled measures of other companies. EBITDA does not represent and
should not be considered more meaningful than, or an alternative to,
measures of operating performance determined in accordance with generally
accepted accounting principles.
Pro forma EBITDA is reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Pro forma net loss before income taxes...................... $(21,718)
Pro forma interest expense.................................. 34,126
Pro forma depreciation and amortization..................... 36,049
--------
Pro forma EBITDA............................................ 48,457
========
</TABLE>
49
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
WRC MEDIA AND ITS SUBSIDIARIES
The following table presents selected historical financial information for
WRC Media and its subsidiaries from the date of inception (May 14, 1999) to
December 31, 1999 and unaudited selected historical financial information for
WRC Media and its subsidiaries for the three months ended March 31, 2000. The
selected historical financial information presented in the table below is based
on the audited historical financial statements of WRC Media and its subsidiaries
for the period May 14, 1999 through December 31, 1999 and the unaudited
historical financial statements of WRC Media and its subsidiaries for the three
months ended March 31, 2000, which are included elsewhere in this prospectus.
The selected historical 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 Conditions and Results of Operations--Results of
Operations--WRC Media and its Subsidiaries," and the financial statements of WRC
Media and its subsidiaries and the notes to them, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM FOR THE THREE
MAY 14, 1999- MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Income Statement Data:
Sales, net (a).............................................. $ 50,570 $ 48,439
Cost of goods sold (c)...................................... 16,102 15,639
-------- --------
Gross profit................................................ 34,468 32,800
Selling and administrative expenses:
Sales and marketing....................................... 14,030 11,876
Research and development.................................. 3,861 2,103
Distribution, circulation and fulfillment................. 1,959 3,173
Editorial................................................. 1,374 2,487
General and administrative (b)............................ 5,571 7,324
Write-off of in-process research and development (e)...... 9,000 --
Depreciation and Amortization (f)......................... 6,243 8,665
-------- --------
Income (loss) from operations............................... (7,570) (2,828)
Interest expense, net....................................... (8,457) (8,399)
Other income................................................ 32 56
-------- --------
Loss before extraordinary item.............................. (15,995) (11,171)
Extraordinary item.......................................... (3,336) --
-------- --------
Loss Before Income Tax Expense.............................. (19,331) (11,171)
Income Tax Provision........................................ -- 450
-------- --------
Net Loss.................................................... $(19,331) $(11,621)
======== ========
Balance Sheet Data (at end of period):
Total assets................................................ $572,229 $548,600
Total debt.................................................. 276,556 278,025
Total stockholder's equity (deficit)........................ 105,283 90,567
Other Data:
Depreciation and amortization............................... 18,067 9,292
Capital expenditures........................................ 700 1,383
Ratio of earnings to fixed charges (c)...................... -- --
EBITDA (d).................................................. $ 10,529 $ 6,520
======== ========
</TABLE>
- --------------------------
(a) For the period from May 14 to December 31, 1999, $52 of revenue was recorded
to account for non-recurring sales related to a discontinued contract.
(b) For the period from May 14 to December 31, 1999, $445 of general and
administrative expenses were recorded to account for non-recurring
transition bonuses.
(c) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as
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<PAGE>
interest expended and capitalized, amortized premiums, discounts and
capitalized expenses related to indebtedness and estimated interest included
in rental expense. Earnings were insufficient to cover fixed charges by
$15,995 for the period May 14, 1999 through December 31, 1999 and $11,171
for the three months ended March 31, 2000.
(d) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA includes $52 of non-recurring sales
related to a discontinued contract for the period from May 14, 1999 to
December 31, 1999 and $445 of general and administrative expense related to
non-recurring transition bonuses for the period from May 14, 1999 to
December 31, 1999. EBITDA data is included because we understand that this
information may be considered by investors as an additional basis on which
to evaluate WRC Media and its subsidiaries ability to pay interest, repay
debt and make capital expenditures. Because all companies do not calculate
EBITDA identically, the presentation of EBITDA in this prospectus is not
necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful than,
or an alternative to, measures of operating performance determined in
accordance with generally accepted accounting principles.
(e) WRC Media and its subsidiaries wrote off purchased in-process research and
development on July 14, 1999 after its purchase of CompassLearning.
(f) Various depreciation and amortization charges are reflected in other cost
line items.
51
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries for each of the five fiscal
years in the period ended December 31, 1999 and for the three months ended
March 31, 1999 and 2000. The financial statements of Weekly Reader included in
this prospectus, including the selected historical consolidated financial
information presented below, include a retroactive adjustment to reflect the
contribution of 100% of the capital stock of American Guidance and World Almanac
by PRIMEDIA to Weekly Reader in 1999 using the historical carrying value of the
stock. The selected historical consolidated financial information presented
below is based on the unaudited and audited historical consolidated financial
statements of Weekly Reader for the fiscal years ended December 31, 1995 and
1996, respectively, which are not included in this prospectus, as well as the
audited historical consolidated financial statements of Weekly Reader for the
fiscal years ended December 31, 1997, 1998 and 1999 and the unaudited historical
consolidated financial statements for the three months ended March 31, 1999 and
2000 which are included elsewhere in this prospectus. The selected historical
consolidated financial information for the fiscal year ended December 31, 1995,
is unaudited, and in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, that are necessary to present fairly
the financial results for this period. 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 the financial statements
and related notes to them included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, (A) MARCH 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales, net (b)................ $101,061 $ 89,733 $ 92,904 $118,236 $148,287 $ 33,099 $ 35,708
Cost of goods sold (c)........ 21,167 25,503 23,825 30,646 40,211 8,287 9,703
-------- -------- -------- -------- -------- -------- ---------
Gross profit.................. 79,894 64,230 69,079 87,590 108,076 24,812 26,005
Operating costs and expenses:
Marketing and selling....... 11,830 13,067 11,745 17,636 24,316 5,908 5,916
Distribution, circulation
and fulfillment........... 10,510 10,836 11,593 10,881 13,172 3,050 3,173
Editorial................... 8,354 8,889 9,030 10,596 10,046 2,462 2,487
General and administrative
(d)....................... 10,450 11,598 12,736 15,281 15,947 3,577 4,382
Corporate and group overhead
(e)....................... 2,044 2,728 2,456 5,577 6,211 1,606 867
Depreciation and
amortization.............. 30,266 13,168 11,428 12,212 15,345 3,991 3,713
-------- -------- -------- -------- -------- -------- ---------
Operating income.............. 6,440 3,944 10,091 15,407 23,039 4,218 5,467
Other income (expense):
Intercompany interest
expense..................... (6,134) (5,851) (6,968) (9,232) (10,133) (3,289) --
Interest expense.............. -- -- -- -- (4,504) -- (8,228)
Amortization of deferred
financing costs............. (268) (963) (663) (184) (184) (44) --
Other, net.................. 5 7 1,545 (184) (570) (571) 45
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before income
tax provision (benefit)..... 43 (2,863) 4,005 5,807 7,648 314 (2,716)
Income tax provision
(benefit)................... 7,207 (1,108) 5,772 3,942 4,459 -- 450
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)........... $ (7,164) $ (1,755) $ (1,767) $ 1,865 $ 3,189 $ 314 $ (3,166)
======== ======== ======== ======== ======== ======== =========
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, (A) MARCH 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of
period):
Total assets.................. $101,118 $107,573 $108,138 $237,276 $236,341 $233,946 $ 227,953
Total debt.................... -- -- -- -- 276,556 -- 278,025
-------- -------- -------- -------- -------- -------- ---------
Total shareholder's equity.... 64,507 68,906 73,071 167,392 (191,375) 175,068 (188,918)
Other Data:
Capital expenditures.......... 509 782 387 4,299 5,870 986 1,065
Ratio of earnings to fixed
charges (f)................. 1.01x -- 1.52x 1.62x 1.52x 1.09x --
EBITDA (g).................... $ 36,711 $ 17,119 $ 23,064 $ 27,435 $ 37,814 $ 7,638 $ 9,227
</TABLE>
- ------------------------
(a) The financial statements include the operations of American Guidance from
July 1, 1998, the effective date of PRIMEDIA's acquisition of all of the
capital stock of American Guidance. The financial statements of Weekly
Reader included in this prospectus, 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) 1995 sales, net includes revenue from a license agreement for the FUNK &
WAGNALLS ENCYCLOPEDIA database of $20.6 million. During 1995, the licensee
made a one time payment to acquire a perpetual, royalty-free license to use
the database. Following 1995, no subsequent cash payments were received.
Sales, net includes sales of Facts On File News Services, Gareth
Stevens, Inc. and American Guidance following Facts On File News Services'
acquisition in March 1996, Gareth Stevens, Inc.'s acquisition in
February 1997 and American Guidance's acquisition in July 1998. For the year
ended December 31, 1999, $440 of sales was recorded to account for
non-recurring income related to a discontinued contract.
(c) For the year ended December 31, 1999, $886 of cost of goods sold were
recorded to account for a non-recurring charge to inventory.
(d) For the year ended December 31, 1999, $600 of general and administrative
expenses were recorded to account for non-recurring litigation.
(e) Includes cost for: (1) amounts allocated as corporate overhead to Weekly
Reader by PRIMEDIA for services and administrative functions shared with
PRIMEDIA and its other operating companies, such as, executive management
costs, salaries and fringe benefits for legal, financial, information
technology and human resources personnel, information technology expenses,
real estate expenses and third party costs; and (2) direct group overhead
costs such as the salaries, fringe benefits and expenses for PRIMEDIA staff
directly involved in Weekly Reader's operations.
(f) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expensed and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $2,863 in 1996
and $2,716 for the three months ended March 31, 2000.
(g) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA for the year ended December 31, 1999
includes $440 of non-recurring sales related to a discontinued contract,
$886 of cost of goods sold related to a non-recurring charge to inventory
and $600 of general and administrative expenses related to non-recurring
litigation. EBITDA data is included because we understand that this
information may be considered by investors as an additional basis on which
to evaluate Weekly Reader's ability to pay interest, repay debt and make
capital expenditures. Because all companies do not calculate EBITDA
identically, the presentation of EBITDA in this prospectus is not
necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful than,
or an alternative to, measures of operating performance determined in
accordance with generally accepted accounting principles.
53
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
COMPASSLEARNING
The following table presents selected historical financial information for
CompassLearning on a predecessor basis for the period July 6, 1994 through
June 29, 1995, the six months ended December 31, 1995, the fiscal years ended
December 31, 1996, 1997 and 1998, the period from January 1, 1999 through
July 13, 1999 and the three months ended March 31, 1999, and on a successor
basis for the period July 14, 1999 through December 31, 1999 and the three
months ended March 31, 2000. The selected historical financial information
presented in the table below is based on the audited historical financial
statements of CompassLearning for the period July 6, 1994 through June 29, 1995,
the six months ended December 31, 1995, and the fiscal year ended December 31,
1996 which are not included in this prospectus, as well as the audited
historical financial statements of CompassLearning for the fiscal years ended
December 31, 1997 and 1998, the period from January 1, 1999 through July 13,
1999 and the period July 14, 1999 through December 31, 1999 and the unaudited
historical financial statements of CompassLearning for the three months ended
March 31, 1999 (predecessor basis) and 2000 (successor basis), which are
included elsewhere in this prospectus. The selected historical 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 Conditions and Results
of Operations--Results of Operations--CompassLearning," and the financial
statements of CompassLearning and the notes to them, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PRE-PREDECESSOR PREDECESSOR
--------------- -----------------------------------------------
PERIOD FROM PERIOD FROM YEAR ENDED
JULY 6, 1994- JUNE 30, 1995- DECEMBER 31,
JUNE 29, DECEMBER 31, ------------------------------
1995(A) 1995(A) 1996 1997 1998
--------------- -------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue:
Software.......................... $ 43,720 $ 26,950 $40,423 $29,159 $30,949
Service........................... 46,699 19,783 35,385 36,029 33,935
Hardware.......................... 20,303 14,428 10,924 6,624 4,014
---------- -------- -------- -------- --------
110,722 61,161 86,732 71,812 68,898
Cost of products sold (b)......... 71,482 40,293 50,161 59,384 29,400
---------- -------- -------- -------- --------
Gross profit...................... 39,240 20,868 36,571 12,428 39,498
Selling and administrative
expenses:
Sales and marketing............. 28,826 15,994 28,019 31,357 24,034
Research and development........ 9,558 5,093 11,715 11,177 8,022
Write-off of in-process research
and development............... -- 11,772 -- -- --
General and administrative
(c)........................... 10,202 4,733 11,281 13,508 7,705
Corporate overhead.............. -- -- -- -- --
Amortization of intangibles..... -- 1,853 3,245 5,449 245
Restructuring (d)............... -- -- -- -- 3,012
---------- -------- -------- -------- --------
Income (loss) from operations..... (9,346) (18,577) (17,689) (49,063) (3,520)
Other (expense) income (e)........ (3,053) (789) -- (2,128) 33
Interest expense, net............. -- (1,907) (4,590) (5,013) (4,286)
---------- -------- -------- -------- --------
Loss before income taxes.......... (12,399) (21,273) (22,279) (56,204) (7,773)
Income tax (expense) benefit...... (175) (208) -- -- --
---------- -------- -------- -------- --------
Net Loss.......................... $ (12,574) $(21,481) $(22,279) $(56,204) $(7,773)
---------- -------- -------- -------- --------
Balance Sheet Data (at end of
period):........................ (unaudited)
Total assets...................... $ 85,756 $123,672 $95,063 $41,816 $31,753
Total debt........................ -- 26,450 16,020 25,500 28,989
Total stockholder's equity
(deficit)....................... 39,901 18,076 23,138 (33,066) (40,525)
Other Data:
Depreciation and
amortization(h)................. 13,908 20,121 15,746 33,733 4,025
Capital expenditures.............. 2,582 1,323 901 1,136 536
Ratio of earnings to fixed charges
(f)............................. -- -- -- -- --
EBITDA (g)........................ $ 1,509 $ 755 $(1,943) $(17,458) $ 538
<CAPTION>
PREDECESSOR SUCCESSOR
------------ -------------- THREE MONTHS
ENDED MARCH 31,
PERIOD FROM PERIOD FROM -----------------------
JANUARY 1, JULY 14, 1999-
1999-JULY 13 DECEMBER 31, PREDECESSOR SUCCESSOR
1999 1999 1999 2000
------------ -------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue:
Software.......................... $ 16,231 $ 16,521 $ 5,012 $ 4,887
Service........................... 16,123 13,502 7,332 6,950
Hardware.......................... 1,669 1,755 1,238 894
-------- --------- -------- ---------
34,023 31,778 13,582 12,731
Cost of products sold (b)......... 13,374 11,659 6,354 5,936
-------- --------- -------- ---------
Gross profit...................... 20,649 20,119 7,228 6,795
Selling and administrative
expenses:
Sales and marketing............. 11,038 10,444 4,934 5,960
Research and development........ 3,831 3,861 1,739 2,103
Write-off of in-process research
and development............... -- 9,000 -- --
General and administrative
(c)........................... 3,978 2,534 1,935 1,786
Corporate overhead.............. -- -- -- 289
Amortization of intangibles..... 131 4,014 61 2,139
Restructuring (d)............... -- -- -- --
-------- --------- -------- ---------
Income (loss) from operations..... 1,671 (9,734) (1,441) (5,482)
Other (expense) income (e)........ 405 16 404 11
Interest expense, net............. (2,854) (5,654) (1,309) (8,227)
-------- --------- -------- ---------
Loss before income taxes.......... (778) (15,372) (2,346) (13,698)
Income tax (expense) benefit...... -- -- -- --
-------- --------- -------- ---------
Net Loss.......................... $ (778) $ (15,372) $ (2,346) $ (13,698)
-------- --------- -------- ---------
Balance Sheet Data (at end of
period):........................
Total assets...................... $ 27,695 $ 79,102 $ 26,238 $ 73,066
Total debt........................ 31,642 276,556 35,295 278,025
Total stockholder's equity
(deficit)....................... (41,619) (238,078) (43,148) (240,979)
Other Data:
Depreciation and
amortization(h)................. 1,713 14,135 826 2,764
Capital expenditures.............. 142 374 52 313
Ratio of earnings to fixed charges
(f)............................. -- -- -- --
EBITDA (g)........................ $ 3,789 $ 4,417 $ (211) $ (2,707)
</TABLE>
54
<PAGE>
- ----------------------------------
(a) The financial position and results of operations on and prior to June 29,
1995 are shown on a pre-predecessor basis prior to the purchase accounting
related to the acquisition of CompassLearning by its prior owner. In
connection with a change in independent accountants, the five-day period
from July 1, 1994 through July 5, 1994 was not audited. Management believes
that there was no revenue and expense activity during this period. Following
the acquisition of CompassLearning by its previous owner on June 29, 1995,
CompassLearning's fiscal year end was changed from June 30 to December 31.
(b) During the year ended December 31, 1997 CompassLearning accelerated the
amortization charge on capitalized software development costs by $17,269, to
reflect the net realizable value of capitalized software development cost on
hand. Subsequent to January 1, 1998, all software development costs have
been expensed as incurred as none of these costs have been considered
eligible for capitalization.
(c) The balance for the period ended June 29, 1995, includes $2,013 of executive
bonuses paid in connection with the acquisition of CompassLearning by its
former owner that were previously included in intercompany charges. For the
period from July 14 to December 31, 1999, $445 of general and administrative
expenses were recorded to account for non-recurring transition bonuses and
is included in EBITDA.
(d) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The charge to earnings was $3,012,is considered non-recurring
and is included in EBITDA. The restructuring included a realignment of sale
and service functions, on-line training initiatives and headcount
reductions. For more details on CompassLearning's restructuring efforts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--CompassLearning Restructuring."
(e) For the year ended December 31, 1997 and for the period from January 1, 1999
to July 13, 1999, $2,157 of other expense and $396 of other income was
recorded to account for the non-recurring loss and gain associated with the
sale of stock, respectively, and is excluded from EBITDA.
(f) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expensed and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $12,399,
$21,273, $22,279, $56,204, $7,773, $778, $15,372, $2,346 and $13,698 for the
period from July 6, 1994 through June 29, 1995; the period from June 30,
1995 through December 31, 1995; the years ended December 31, 1996, 1997 and
1998; the period from January 1, 1999 through July 13, 1999; the period from
July 14, 1999 through December 31, 1999; and the three months ended
March 31, 1999 and 2000, respectively.
(g) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA includes $2,157 of other expense
related to the sale of investment for the year ended December 31, 1997,
$3,012 of restructuring expenses for the year ended December 31, 1998, $445
of general and administrative expenses related to transition bonuses for the
period from July 14 to December 31, 1999, and $396 of other income related
to the sale of investment for the period from January 1 to July 13, 1999.
EBITDA data is included because we understand that this information may be
considered by investors as an additional basis on which to evaluate
CompassLearning's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this prospectus is not necessarily comparable to
similarly titled measures of other companies. EBITDA does not represent and
should not be considered more meaningful than, or an alternative to,
measures of operating performance determined in accordance with generally
accepted accounting principles.
(h) Various depreciation and amortization charges are reflected in other cost
line items.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES OF WEEKLY READER, AMERICAN GUIDANCE, WRC MEDIA
AND ITS SUBSIDIARIES, AND COMPASSLEARNING AND THE UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION OF WRC MEDIA AND ITS SUBSIDIARIES, IN EACH
CASE THAT ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION
AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF WEEKLY
READER, AMERICAN GUIDANCE, WRC MEDIA AND ITS SUBSIDIARIES, AND COMPASSLEARNING
COVER SPECIFIED PERIODS PRIOR TO THE COMPLETION OF ALL THE TRANSACTIONS
DESCRIBED UNDER "THE ACQUISITION AND RECAPITALIZATION." THUS, THIS DISCUSSION
DOES NOT FULLY REFLECT THE IMPACT OF THESE EVENTS OR OF THE BUSINESS STRATEGY
IMPLEMENTED AFTER THE COMPLETION OF THE TRANSACTIONS DESCRIBED UNDER "THE
ACQUISITION AND RECAPITALIZATION." FOR MORE DETAILS ON THE IMPORTANT FACTORS
THAT MAY AFFECT THE IMPACT OF THESE EVENTS OR OF THE BUSINESS STRATEGY
IMPLEMENTED AFTER THE COMPLETION OF THE TRANSACTIONS DESCRIBED UNDER "THE
ACQUISITION AND RECAPITALIZATION," SEE "RISK FACTORS" AND "--LIQUIDITY AND
CAPITAL RESOURCES." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "WEEKLY
READER" IN THIS SECTION ARE TO WEEKLY READER AND ITS SUBSIDIARIES, INCLUDING
AMERICAN GUIDANCE, WORLD ALMANAC AND LIFETIME LEARNING SYSTEMS, INC.
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre
K-12 education market. Our portfolio of products includes a broad range of both
print and electronic supplemental instructional materials, testing and
assessment products and library materials, several of which have been published
for over 40 years.
Our revenues consist primarily of:
- subscription revenues for our periodicals;
- revenues from sales of printed products including nonfiction and fiction
books, workbooks, worktexts, reference materials and test preparation
materials;
- computer courseware and hardware;
- professional development services; and
- technical support services.
Our operations are conducted primarily through the following four operating
subsidiaries:
- Weekly Reader;
- American Guidance;
- World Almanac; and
- CompassLearning.
On July 14, 1999, WRC Media acquired 100% of the capital stock of
CompassLearning through a wholly owned subsidiary. On August 13, 1999, WRC Media
entered into the recapitalization agreement providing for the recapitalization
of PRIMEDIA's Supplemental Education Group. In connection with the
recapitalization, PRIMEDIA contributed 100% of the outstanding capital stock of
American Guidance and World Almanac to Weekly Reader, prior to WRC Media's
acquisition of 94.9% of the outstanding common stock of Weekly Reader, with the
remaining 5.1% being retained by PRIMEDIA.
The financial statements for Weekly Reader included in this prospectus and
used as a basis for the financial presentation and discussion of Weekly Reader's
results of operations below include a retroactive adjustment on Weekly Reader's
financial statements reflecting the contribution of 100% of the capital stock of
American Guidance and World Almanac by PRIMEDIA to Weekly Reader using
56
<PAGE>
the historical carrying value of the stock. These financial statements include
the operations of American Guidance since PRIMEDIA acquired all of its capital
stock, which was effective on July 1, 1998. Separate financial statements for
American Guidance presenting the financial position of American Guidance as of
June 30, 1998 and the results of its operations and cash flows for each of the
two years in the period ended June 30, 1998, the most recently reported
financial periods prior to its acquisition by PRIMEDIA, are also included in
this prospectus with a related separate results of operations discussion. Upon
acquisition by PRIMEDIA, the fiscal year of American Guidance was changed to end
on December 31 each year.
REVENUES.
For the three months ended March 31, 2000, Weekly Reader (excluding American
Guidance and World Almanac) had net revenue of $10.5 million, American Guidance
had net revenue of $11.9 million, World Almanac had net revenue of
$13.3 million and CompassLearning had net revenue of $12.7 million. For the
three months ended March 31, 2000, WRC Media and its subsidiaries had net
revenue of $48.4 million.
For the year ended December 31, 1999, Weekly Reader (excluding American
Guidance and World Almanac) had net revenue of $45.7 million, American Guidance
had net revenue of $49.6 million and World Almanac had net revenue of
$52.9 million. For the period from January 1, 1999 to July 13, 1999,
CompassLearning had net revenue of $34.0 million and, for the period from
July 14, 1999 to December 31, 1999, CompassLearning had net revenue of
$31.8 million. For the period from May 14, 1999 to December 31, 1999, WRC Media
and its subsidiaries had net revenue of $50.6 million, which includes the
results of CompassLearning from July 14, 1999 to December 31, 1999 and Weekly
Reader from November 17, 1999 to December 31, 1999.
WEEKLY READER. Weekly Reader's revenues are derived from its own
operations, including those of its subsidiary Lifetime Learning Systems, Inc.,
as well as from the operations of American Guidance and World Almanac. Weekly
Reader, not including American Guidance or World Almanac, derives revenues from
three primary sources:
- periodicals;
- skills books; and
- sponsored instructional materials published by Lifetime Learning
Systems, Inc.
Weekly Reader's periodicals are sold as subscriptions, all of which are for
periods of twelve months or less, with a significant amount of each year's
revenues coming from subscription renewals. Lifetime Learning Systems, Inc.'s
sponsored supplemental educational materials are paid for by corporate, trade
association or not-for-profit sponsors and are distributed for free primarily to
K-12 students.
American Guidance derives revenues from two product lines:
- testing and assessment products; and
- supplemental instructional materials.
Testing and assessment products are typically sold in kits containing the
test, test record forms, easels used to administer the test, scoring sheets and
a manual describing the proper use of the test. Each test uses a different test
record form, which typically come in packages of 25 and must be purchased from
American Guidance for as long as the school uses the test. Some tests are used
for over 15 years. Approximately 35% and 37% of American Guidance's revenues
from testing and assessment products for the three months ended March 31, 2000
and the twelve months ended December 31, 1999, respectively, were from
replenishment sales for these test record forms. American
57
<PAGE>
Guidance's supplemental instructional materials consist of curriculum-based
instructional materials and are sold primarily to middle and secondary schools.
World Almanac derives revenues primarily from the sale of its reference and
informational materials, including:
- printed products and electronic databases;
- nonfiction and fiction books; and
- the distribution of third-party products targeted for K-12 students.
Weekly Reader's subscriptions are recorded as deferred revenue when received
and recognized as income over the term of the subscription, whereas sales of its
other products, including sponsored instructional materials, skills books, tests
and other supplemental instructional materials, are recognized as revenue upon
shipment, generally net of an allowance for returns.
COMPASSLEARNING. CompassLearning's revenues are derived from its:
- software products;
- professional development services;
- technical support services; and
- hardware sales.
Sales of software products historically have been negatively impacted
primarily due to two factors:
- product introduction issues; and
- a disruption in CompassLearning's sales force.
Prior to 1995, CompassLearning's product development strategy focused on
providing product written in proprietary authoring language in order to support
features such as full-motion video to the desktop that were dependent on
emerging technological advances. These emerging technological advances typically
required proprietary hardware to function and were not compatible with
third-party products. Following the 1995 acquisition by its former owner,
CompassLearning changed its strategy to develop products based on known
technology platforms which included standard hardware configurations and were
more compatible with third-party products, thereby addressing a broader
marketplace and minimizing the risk of product obsolescence. The acquisition of
Ideal Learning, Inc. in December 1995, allowed CompassLearning to accelerate its
strategic direction to release a management system that functioned in an open
environment and co-existed with third-party products and to package its
curriculum products by subject and by grade. In order to decrease time to
market, the new product offerings of TOMORROW'S PROMISE and COMPASS were
released in stages throughout 1997. While market acceptance of the new products
was strong, customers were reluctant to migrate to the new product line until
some features were available, which occurred in early 1998. Therefore, the full
benefit of this new product line was not realized until 1998, when software
revenue grew by 6%.
In addition, during the nine months following the 1995 acquisition of
CompassLearning by its former owner, a significant portion of CompassLearning's
seasoned sales personnel left to join a start-up company. The departing sales
representatives collectively accounted for approximately $20 million of new
software sales in the twelve-month period prior to their respective departures.
This disruption in the sales force negatively impacted CompassLearning's sales
cycle and resulted in reduced sales in 1997.
CompassLearning typically sells its professional development services and
technical support services on an annual basis. Professional development services
generally consist of a specific number of days of training. Technical support
service contracts are typically for one-year periods and are provided
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at varying levels, from telephone help-line services to priority systems
engineer dispatching. CompassLearning's electronic courseware customers
purchase, on average, eight days of professional development services and a
one-year technical support contract for help-line and systems engineer services
in connection with their software purchases. These service contracts are
frequently renewed following the expiration of the initial service period, with
approximately 27% of professional development services revenue and approximately
55% of technical support services revenue for the year ended December 31, 1999
coming from renewal sales. CompassLearning's services revenues, particularly
those attributable to renewals of existing services contracts, have been
decreasing recently as a result of:
- the decrease in new software sales, which reduces the amount of new
service sales as well as subsequent renewal sales;
- the improved quality of our software products, which require less
technical support;
- more customers supplying their own training and support services through
in-house expertise; and
- the allocation by customers of a greater amount of limited resources to
upgrade their hardware and software systems for Year 2000 compliance.
Services revenues are recognized on a straight-line basis over the period of
the applicable service contract.
CompassLearning's hardware business revenues are generally derived from
reselling hardware to customers who request that CompassLearning provide a
package of software and hardware. Prior to 1995, CompassLearning offered
hardware to customers as a wholesaler of private label and other products.
However, because of the less profitable nature of the business compared to
CompassLearning's other businesses and to reduce the need for inventory and the
risk of technological change rendering inventory obsolete, CompassLearning began
discontinuing its wholesale hardware business in 1994. Currently,
CompassLearning is a reseller for Apple, IBM, Compaq and Dell computers in order
to accommodate requests by customers for complete hardware and software
solutions. Revenues from sales of hardware are typically recognized upon
shipment.
OPERATING COSTS AND EXPENSES.
WEEKLY READER. For Weekly Reader, operating costs and expenses are
comprised primarily of:
- cost of goods sold;
- marketing and selling;
- distribution;
- circulation and fulfillment;
- editorial;
- general and administrative expenses;
- corporate and group overhead costs; and
- depreciation and amortization.
Weekly Reader's cost of goods sold for its products consist primarily of
paper, printing and binding costs. Marketing and selling expenses are typically
for direct mail costs including:
- postage;
- paper;
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- printing;
- advertising;
- mailing list rental fees;
- telemarketing costs; and
- the costs of sales employees.
Distribution, circulation and fulfillment expenses are typically for
postage, third-party fulfillment, warehousing and shipping. Weekly Reader's
editorial costs consist of expenses incurred for its staff of writers as well as
third-party contractors, such as freelance writers. General and administrative
expenses consist primarily of:
- salaries and fringe benefits for executives as well as for finance,
information technology and human resources employees;
- information technology expenses, other than salaries; and
- real estate expenses.
Corporate and group overhead costs include costs for:
- amounts allocated as corporate overhead by PRIMEDIA for services and
administrative functions shared with PRIMEDIA and its other operating
companies, including, but not limited to:
- executive management costs;
- salaries and fringe benefits for legal, financial, information
technology and human resources personnel;
- information technology expenses;
- real estate expenses;
- third-party costs; and
- direct group overhead, such as salaries, fringe benefits and other
expenses for PRIMEDIA staff directly involved in operating Weekly Reader.
COMPASSLEARNING. CompassLearning's operating costs and expenses consist
primarily of:
- cost of products sold;
- sales and marketing;
- research and development; and
- general and administrative expenses.
Sales and marketing expenses are the largest component of operating costs
and expenses and consist primarily of direct sales force expenses as well as
expenses for promotional activities. Sales and marketing expenses increased
significantly in 1997 as a result of the introduction of TOMORROW'S PROMISE and
COMPASS in April 1997, including the development of new promotional materials
for the products, and the need to hire and train sales personnel to replace
those lost to a competitor following the prior owner's acquisition of
CompassLearning in 1995. Cost of products sold consist primarily of:
- production and packaging costs, royalty expenses and amortization of
purchased software and capitalized software development costs for software
products;
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- salaries and related costs of employees providing professional development
services and technical support services for CompassLearning's services
business; and
- the cost to CompassLearning to purchase the hardware for resale, as well
as the internal cost to support this line of business, for its hardware
business.
Research and development costs consist primarily of salaries and related
costs of employees, as well as temporary staff hired as needed, and are
typically expensed as incurred. Prior to 1996, CompassLearning had been
capitalizing approximately 50% or more of its software development costs. In
1997, CompassLearning's product focus changed with the introduction of
TOMORROW'S PROMISE, and amortization charges of approximately $17.3 million, in
connection with older capitalized software, were accelerated to reflect the
software's new net realizable values. This cost is included in cost of goods
sold. Since January 1, 1998, all new software development costs have been
expensed as incurred as none of these costs have been considered eligible for
capitalization.
We estimate that it will cost approximately $11.7 million to develop
incomplete in-process technology acquired as part of the acquisition of
CompassLearning by WRC Media on July 14, 1999 into a commercially viable
product. These costs related to design, coding, layout/artwork and testing and
should be completed during the last half of 2001.
COMPASSLEARNING RESTRUCTURING.
In July 1998, CompassLearning implemented an extensive re-engineering effort
to reduce operating costs through increased efficiencies. As part of this
effort, the following major steps were taken:
- sales and services were realigned geographically to reduce travel time and
expenses;
- on-line training was introduced and new productivity tools for the field
support staff were implemented to reduce costs and increase operational
leverage; and
- headcount was reduced from 695 to a targeted level of 545, primarily
through reductions in sales and administrative, service and training
areas.
CompassLearning recorded a $3.0 million charge for the year ended
December 31, 1998, in connection with these restructuring efforts. Primarily as
a result of these efforts, cost of goods sold for our services and selling and
administrative expenses at CompassLearning were reduced by at least
$20.0 million during the year ended December 31, 1998 compared to the year ended
December 31, 1997. The main areas of cost reductions were $4.9 million in
compensation, $5.0 million in outside services, $3.3 million in travel, supplies
and telephone, $1.9 million in depreciation, $1.3 million in rental expense,
$1.2 million in advertising and promotion, and $1.1 million in recruiting and
relocation.
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RESULTS OF OPERATIONS--WRC MEDIA AND ITS SUBSIDIARIES
The results of operations for WRC Media and its subsidiaries encompasses the
operations of CompassLearning and Weekly Reader and its subsidiaries, including
American Guidance and World Almanac. The results of operations for WRC Media and
its subsidiaries should be read together with the separate discussions of the
results of operations of Weekly Reader and CompassLearning and with the
financial statements of WRC Media and its subsidiaries, Weekly Reader and
CompassLearning.
WRC Media was founded on May 14, 1999. For purposes of the financial
presentation and discussion of WRC Media's results of operations comparing the
three months ended March 31, 2000 to the three months ended March 31, 1999, we
are comparing: (1) the unaudited 1999 historical income statements on a combined
basis for the period January 1, 1999 through March 31, 1999 of CompassLearning
and Weekly Reader to (2) the unaudited 2000 historical income statements for the
period January 1, 2000 through March 31, 2000 of WRC Media and its subsidiaries.
For purposes of the financial presentation and discussion of WRC Media and its
subsidiaries' results of operations comparing the year ended December 31, 1999
to the year ended December 31, 1998, we are comparing: (1) the 1998 historical
income statements on a combined basis of CompassLearning and Weekly Reader,
including the historical income statement of American Guidance from January 1,
1998, through July 1, 1998 (prior to its acquisition by PRIMEDIA as of July 1,
1998, after which time its operations are included in the results of Weekly
Reader) to (2) the 1999 historical income statements on a combined basis of:
(a) CompassLearning for the period of January 1, 1999 through July 13, 1999,
after which time its operations are included with WRC Media and its
subsidiaries; (b) Weekly Reader for the period of January 1, 1999 through
November 17, 1999, after which time its operations are included with WRC Media
and its subsidiaries; and (c) WRC Media and its subsidiaries presented from its
inception through December 31, 1999. The financial information for Weekly Reader
reflects the recapitalization of Weekly Reader as of November 17, 1999, and the
prior contribution by PRIMEDIA of 100% of the capital stock of American Guidance
and World Almanac to Weekly Reader. For accounting purposes, the contribution
has been reflected as a reorganization of entities under common control.
Accordingly, all prior periods have been restated to reflect that reorganization
using the historical carrying value of the stock of American Guidance and World
Almanac.
The following tables set forth, for the periods indicated, combined
statements of operations data for WRC Media and its subsidiaries, expressed in
millions of dollars and as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1999 2000
------------------------- -------------------------
AMOUNT % OF NET SALES AMOUNT % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales, net.................................................. $ 46.7 100.0% $ 48.4 100.0%
Costs of goods sold......................................... 14.7 31.4% 15.6 32.3%
------ ------ ------ ------
Gross profit.............................................. 32.0 68.6% 32.8 67.7%
Operating costs and expenses:
Sales and marketing....................................... 10.8 23.2% 11.9 24.5%
Research and development.................................. 1.7 3.8% 2.1 4.4%
Distribution, circulation and fulfillment................. 3.1 6.5% 3.2 6.6%
Editorial................................................. 2.5 5.3% 2.5 5.1%
General and administrative................................ 5.5 11.8% 7.3 15.1%
Corporate and group overhead.............................. 1.6 3.4% -- 0.0%
Depreciation and amortization............................. 4.0 8.7% 8.6 17.9%
------ ------ ------ ------
Total operating costs and expenses.......................... 29.2 62.7% 35.6 73.6%
Income (loss) from operations............................. 2.8 5.9% (2.8) (5.9%)
Interest expense, including amortization of deferred
financing costs........................................... (4.6) (9.9%) (8.4) (17.3%)
Other, net.................................................. (0.2) (0.4%) 0.1 0.1%
------ ------ ------ ------
Loss before income tax expense.............................. (2.0) (4.4%) (11.1) (23.1%)
Income tax provision........................................ -- 0.0% 0.5 0.9%
------ ------ ------ ------
Net loss.................................................... (2.0) (4.4%) $(11.6) (24.0%)
====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999
---------------------- ----------------------
% OF NET % OF NET
AMOUNT SALES AMOUNT SALES
-------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales, net.................................................. $206.7 100.0% $214.1 100.0%
Cost of Goods Sold.......................................... 64.2 31.1% 65.3 30.5%
------ ------ ------ ------
Gross profit.............................................. 142.5 68.9% 148.8 69.5%
Operating Costs and Expenses:
Marketing and sales....................................... 46.3 22.4% 45.8 21.4%
Research and development.................................. 8.0 3.9% 7.7 3.6%
Distribution, circulation and fulfillment................. 10.9 5.3% 13.2 6.2%
Editorial................................................. 13.3 6.4% 10.0 4.7%
General and administrative................................ 35.1 17.0% 31.3 14.6%
Write-off of in-process research and development costs
(a)..................................................... -- -- 9.0 4.2%
Depreciation and amortization............................. 12.9 6.2% 18.5 8.6%
Restructuring (b)......................................... 3.0 1.5% -- --
------ ------ ------ ------
Total operating costs and expenses.......................... 129.5 62.7% 135.5 63.3%
Income from operations...................................... 13.0 6.3% 13.3 6.2%
Interest expense, including amortization of deferred
financing costs........................................... (13.7) (6.6%) (21.6) (10.1%)
Other, net.................................................. (0.2) (0.1%) (0.2) (0.1%)
------ ------ ------ ------
Loss before income tax and extraordinary item............... (0.9) (0.4%) (8.5) (4.0%)
Income tax expense.......................................... (4.3) (2.1%) (2.2) (1.0%)
------ ------ ------ ------
Loss before extraordinary item.............................. (5.2) (2.5%) (10.7) (5.0%)
Extraordinary item (c)...................................... -- -- (3.3) (1.6%)
------ ------ ------ ------
Net loss.................................................... $ (5.2) (2.5%) $(14.0) (6.5%)
====== ====== ====== ======
</TABLE>
- --------------------------
(a) Immediately following the acquisition, CompassLearning recognized a
$9.0 million charge related to the write-off of purchased in-process
research and development cost acquired in connection with the acquisition.
(b) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The restructuring included a realignment of sales and service
functions, various on-line training and head count reductions.
(c) On November 17, 1999, CompassLearning wrote-off deferred financing fees
through an extraordinary charge as it refinanced all of its debt.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
SALES, NET. For the three months ended March 31, 2000, net sales increased
$1.7 million, or 3.8%, to $48.4 million from $46.7 million for the same period
in 1999. This increase was primarily due to an increase in sales at Weekly
Reader of $2.6 million, or 7.9%, to $35.7 million for the three months ended
March 31, 2000 from $33.1 million for the same period in 1999, offset by a
decrease in sales at CompassLearning of $0.9 million, or 6.6%, to $12.7 million
for the three months ended March 31, 2000 from $13.6 million for the same period
in 1999. The increase in sales at Weekly Reader was due to (1) an increase in
sales at World Almanac of $1.7 million, or 14.7%, to $13.3 million for the three
months ended March 31, 2000 from $11.6 million for the same period in 1999 as a
result of increased catalog and telemarketing sales at World Almanac's school
library sales segments and (2) an increase in sales at American Guidance of
$1.2 million, or 11.2%, to $11.9 million for the three months ended March 31,
2000 from $10.7 million for the same period in 1999 as a result of increases in
sales of assessment products and textbooks. These increases were offset by a
decrease in Weekly Reader's sales, not including World Almanac and American
Guidance, of $0.3 million, or 2.8%, to $10.5 million for the three months ended
March 31, 2000 from $10.8 million for the same period in 1999, primarily as a
result of lower periodical subscription sales due to the timing of the number of
issues shipped and lower licensing sales. The decrease in sales at
CompassLearning of $0.9 million was primarily due to a
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decrease in service contract renewal sales and a decrease in hardware sales
resulting from our strategy to exit the hardware business.
GROSS PROFIT. For the three months ended March 31, 2000, gross profit
increased by $0.8 million, or 2.4%, to $32.8 million from $32.0 million for the
same period in 1999. This increase was due to (1) an increase in gross profit at
Weekly Reader of $1.2 million, or 4.8%, to $26.0 million for the three months
ended March 31, 2000 from $24.8 million for the same period in 1999 and (2) a
decrease in gross profit at CompassLearning of $0.4 million, or 5.6%, to
$6.8 million for the three months ended March 31, 2000 from $7.2 million for the
same period in 1999. The increase in gross profit at Weekly Reader was a result
of (1) an increase in gross profit at World Almanac of $0.8 million, or 9.9%, to
$8.9 million for the three months ended March 31, 2000 from $8.1 million for the
same period in 1999 due to the increased sales described above partially offset
by an increase in obsolescence reserves at Gareth Stevens, Inc., (2) an increase
in gross profit at American Guidance of $0.7 million, or 9.0%, to $8.5 million
for the three months ended March 31, 2000 from $7.8 million for the same period
in 1999 due to the increased sales described above and (3) a decrease in gross
profit at Weekly Reader, not including World Almanac and American Guidance, of
$0.3 million, or 3.4%, to $8.6 million for the three months ended March 31, 2000
from $8.9 million for the same period in 1999 due to the decreased sales
described above. The decrease in gross profit at CompassLearning of
$0.4 million was primarily due to the sales decrease described above. Gross
profit as a percentage of sales decreased to 67.8% for the three months ended
March 31, 2000 from 68.5% for the same period in 1999. This decrease was
attributable to a decrease in the gross profit margin at Weekly Reader to 72.8%
for the three months ended March 31, 2000 from 74.9% for the same period in
1999, which was primarily a result of lower gross profit margin at World Almanac
due to product mix at World Almanac Books and Gareth Stevens, Inc., where lower
margin sales channels drove the sales increases, and the increase in
obsolescence reserves at Gareth Stevens, Inc.
OPERATING COSTS AND EXPENSES. For the three months ended March 31, 2000,
operating costs and expenses increased by $6.4 million, or 21.8%, to
$35.6 million from $29.2 million for the same period in 1999. Weekly Reader
operating costs and expenses decreased by $0.1 million, or 0.5%, to
$20.5 million for the three months ended March 31, 2000 from $20.6 million for
the same period in 1999 primarily due to (1) an increase in general and
administrative expenses of $0.8 million at Weekly Reader relating to increases
in reserves for accrued vacation and subscription cancellations, (2) a decrease
in allocated PRIMEDIA corporate and group overhead expenses of $1.6 million
offset by $0.8 million of WRC Media general and administrative expenses and
(3) lower depreciation and amortization expenses of $0.3 million due to
intangible assets with lower amortization schedules in the later part of their
lives and intangible assets that were fully amortized in 1999. CompassLearning
operating costs and expenses increased by $3.6 million, or 41.4%, to
$12.3 million for the three months ended March 31, 2000 from $8.7 million for
the same period in 1999 primarily due to (1) an increase in sales and marketing
expenses of $1.1 million due to higher compensation, travel and meeting
expenses, (2) an increase in research and development expenses of $0.4 million
due to increased compensation and outside services costs and (3) an increase in
amortization costs of $2.1 million relating to increased goodwill and intangible
assets resulting from the acquisition of CompassLearning by WRC Media in July of
1999. Additionally, WRC Media operating costs and expenses increased to
$2.8 million for the three months ended March 31, 2000 from $0 for the same
period in 1999 due to goodwill and intangible asset amortization resulting from
the transactions described under "The Acquisition and Recapitalization."
Operating costs and expenses as a percentage of sales increased to 73.6% for the
three months ended March 31, 2000 from 62.7% for the same period in 1999 due to
the increased costs at CompassLearning and the increased amortization at WRC
Media described above.
INCOME (LOSS) FROM OPERATIONS. For the three months ended March 31, 2000,
income from operations decreased by $5.6 million, or 201.8%, to a loss from
operations of $2.8 million from income
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from operations of $2.8 million for the same period in 1999 and income from
operations as a percentage of sales decreased to negative 5.8% from positive
5.9% for the same period in 1999. These decreases were primarily due to the
factors described above.
INTEREST EXPENSE, INCLUDING AMORTIZATION OF DEFERRED FINANCING COSTS. For
the three months ended March 31, 2000, interest expense increased by
$3.8 million, or 80.9%, to $8.4 million from $4.6 million for the same period in
1999 and interest expense as a percentage of sales increased to 17.3% from 9.9%
for the same period in 1999. Interest expense for the three months ended
March 31, 2000 relates to debt and amortization of deferred financing costs
associated with the transactions described under "The Acquisition and
Recapitalization." Interest expense for the three months ended March 31, 1999
relates to (1) for Weekly Reader, interest charged by PRIMEDIA to Weekly Reader
on outstanding intercompany debt and (2) for CompassLearning, borrowings from
its previous ownership prior to its acquisition by WRC Media in July of 1999.
OTHER, NET. For the three months ended March 31, 2000, other expense
decreased by $0.3 million, to $0.1 million from negative $0.2 million for the
same period in 1999. This decrease was primarily a result of a decrease in
miscellaneous taxes at Weekly Reader, not including World Almanac.
NET INCOME (LOSS). For the three months ended March 31, 2000, net loss
increased by $9.6 million, or negative 471.9%, to $11.6 million from
$2.0 million for the same period in 1999 primarily as a result of increased
amortization expenses for intangible assets and increased interest expense. Net
loss as a percentage of net sales decreased to negative 24.0% for the three
months ended March 31, 2000 from negative 4.4% for the same period in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
SALES, NET. For the year ended December 31, 1999, net sales increased by
$7.4 million, or 3.6%, to $214.1 million from $206.7 million in 1998. This
increase was primarily due to higher sales at Weekly Reader of $10.5 million, or
7.5%, offset by a decrease in sales at CompassLearning of $3.1 million, or 4.5%.
The increase in sales at Weekly Reader was due to: (1) American Guidance's net
sales increased by $3.4 million, or 7.4%, to $49.6 million in 1999 from
$46.2 million for the full year in 1998, primarily as a result of strong sales
of supplemental testing materials; (2) Weekly Reader's sales, not including
American Guidance and World Almanac, increased by $2.0 million, or 4.6%, to
$45.7 million in 1999 from $43.7 million in 1998, primarily due to an increase
in Weekly Reader's subscription sales to schools resulting from a price
increase, increased sales of sponsored instructional materials by Lifetime
Learning Systems, Inc., and increased sales of Weekly Reader's skill books; and
(3) World Almanac's net sales increased by $5.0 million, or 10.4%, to
$52.9 million in 1999 from $47.9 million in 1998, primarily due to increases in
sales of the Millennium Almanac and licensing revenues and increased sales by
World Almanac's school library segments, World Almanac Education Library
Services and Gareth Stevens, Inc. The reduction in sales at CompassLearning was
primarily due to: (1) an anticipated erosion of service-related revenue streams
supporting older software versions that declined $4.3 million, or 12.7%, to
$29.6 million in 1999 from $33.9 million in 1998; and (2) hardware revenue
decreasing $0.6 million, or 15.0%, to $3.4 million in 1999 from $4.0 in 1998,
consistent with CompassLearning's strategy to exit the hardware business. These
decreases were partially offset by the growth of new software sales of
$1.8 million, or 5.8%, to $32.8 million in 1999 from $31.0 million in 1998,
primarily due to higher sales volume from customers migrating to COMPASS and
TOMORROW'S PROMISE products.
GROSS PROFIT. For the year ended December 31, 1999, gross profit increased
by $6.3 million, or 4.4%, to $148.8 million from $142.5 million for the same
period in 1998. The increase resulted from: (1) Weekly Reader's gross profit,
not including American Guidance and World Almanac, increased by $1.0 million, or
2.7%, to $37.6 million in 1999 from $36.6 million in 1998, primarily due to the
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increased sales at Lifetime Learning Systems, Inc. and increased Weekly Reader's
subscription sales; (2) World Almanac's gross profit increased by $2.0 million,
or 6.2%, to $34.1 million in 1999 from $32.1 million in 1998 as a result of
increased sales, partially offset by a charge of $1.2 million related to excess
inventory at World Almanac's Gareth Stevens, Inc. division; (3) American
Guidance's gross profit increased by $2.0 million, or 5.8%, to $36.4 million in
1999 from $34.4 million in 1998 as a result of increased sales; and
(4) although CompassLearning had lower sales, for the year ended December 31,
1999, gross profit increased $1.3 million, or 3.3%, to $40.8 million from
$39.5 million in 1998. Gross profit as a percentage of net revenue increased to
62.0% in 1999 from 57.3% in 1998. This increase was primarily due to the
increase in software revenue described above, which has a higher gross profit
percentage and a decrease in service revenue, which has a lower gross profit
percentage. For the year ended December 31, 1999, software-related sales which
have a higher margin, comprised 66.4% of total gross profit compared to 60.8% in
1998, while service-related sales which have a lower margin comprised 31.1% of
total gross profit compared to 37.0% in 1998.
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1999,
operating costs and expenses increased by $6.0 million, or 4.6%, to
$135.5 million from $129.5 million for the same period in 1998. The increase
resulted from the following:
(1) CompassLearning's operating costs and expenses increased for the
year ended December 31, 1999, by $5.8 million, or 13.5%, to $48.8 million
from $43.0 million in 1998. Operating expenses as a percentage of net
revenue increased to 74.2% in 1999 from 62.4% in 1998. This increase was
primarily due to a $9.0 million write-off of in-process research and
development and a $3.8 million increase in amortization of intangibles
assets related to the July 14, 1999 acquisition of CompassLearning by WRC
Media. The increases were partially offset by a $3.0 million reduction in
restructuring expenses in 1998 compared to 1999 and $4.1 million in
associated effects of the restructuring and other general cost reductions
including: a $3.9 million reduction in compensation and outside services
expenses; a $0.4 million reduction in travel expenses; and a $0.3 million
reduction in advertising expenses, which is offset by a $0.3 million
increase in commission expenses.
(2) WRC Media's depreciation and amortization expense increased by
$0.7 million as a result of the increase in goodwill associated with the
recapitalization of Weekly Reader. Additionally, WRC Media's general and
administrative expenses increased by $1.0 million due to increased head
count at the corporate office and other administrative expenses.
(3) These increases were offset by a reduction in operating costs and
expenses at Weekly Reader of $1.5 million, or 1.7%, to $85.1 million in 1999
from $86.6 million in 1998. The $1.5 million reduction in operating costs
and expenses was due to the following: a $6.0 million reduction in general
and administrative expenses primarily due to the elimination of various cost
categories at American Guidance upon its acquisition by Weekly Reader and a
$3.2 million reduction in editorial expenses. These reductions were offset
by: an increase in distribution, circulation, fulfillment, sales and
marketing expenses of $4.2 million which primarily resulted from increased
selling costs associated with the increased sales, and increases in
telemarketing sales due to new sales initiatives; an increase of
$0.7 million in PRIMEDIA's corporate and group overhead allocations to
Weekly Reader, which were discontinued as of November 17, 1999; and a
$2.8 million increase in depreciation and amortization relating to the
amortization of goodwill generated by the American Guidance acquisition.
INCOME FROM OPERATIONS. For the year ended December 31, 1999, income from
operations increased by $0.3 million, or 2.3%, to $13.3 million from
$13.0 million in 1998, and income from operations as a percentage of sales
decreased slightly to 6.2%, in 1999 from 6.3% for the same period in 1998. This
was a result of increased sales and the increased selling expenses described
above.
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INTEREST EXPENSE, INCLUDING AMORTIZATION OF DEFERRED FINANCING COSTS. For
the year ended December 31, 1999, interest expense, including amortization of
deferred financing costs, increased by $7.9 million, or 57.7%, to $21.6 million
from $13.7 million in 1998. This increase in interest expense was due to an
increase of $2.6 million at Weekly Reader which was primarily related to the
acquisition of American Guidance on July 1, 1998; an increase at CompassLearning
of $0.2 million due to its acquisition by WRC Media on July 14, 1999; and an
increase of $5.1 million at WRC Media related to the recapitalization of Weekly
Reader on November 17, 1999.
OTHER, NET. For the year ended December 31, 1999, other income did not
change. Other expenses increased due to a $0.4 million increase in miscellaneous
taxes at Weekly Reader that was offset by a $0.4 million increase of other
income at CompassLearning related to the sale of an investment.
INCOME TAX EXPENSE. For the year ended December 31, 1999, the income tax
provision decreased by $2.1 million, or 48.8%, to $2.2 million from
$4.3 million in 1998. The decrease was primarily related to the increase in the
loss before income taxes and extraordinary item. Additionally, due to the
recapitalization of Weekly Reader by WRC Media, Weekly Reader files its income
taxes as part of a consolidated return for which income in one consolidated
entity can be offset by losses in others, thus lowering the income tax expense.
LOSS BEFORE EXTRAORDINARY ITEM. For the year ended December 31, 1999, the
net loss increased by $5.5 million, or 105.8%, to a $10.7 million, from
$5.2 million in 1998. The loss before extraordinary items as a percentage of net
sales increased to a negative 5.0% from a negative 2.5% in 1998. This increase
was due to the factors described above.
EXTRAORDINARY ITEM. For the year ended December 31, 1999, CompassLearning
wrote off deferred financing fees of $3.3 million relating to the refinancing of
its debt on November 17, 1999.
NET LOSS. For the year ended December 31, 1999, the net loss increased by
$8.8 million, or 169.2%, to $14.0 million from $5.2 million in 1998. The net
loss as a percentage of net sales increased to a negative 6.5% from a negative
2.5% in 1998. This increase was due to the factors described above.
67
<PAGE>
RESULTS OF OPERATIONS--WEEKLY READER
The financial information for Weekly Reader through November 17, 1999,
included in this prospectus and used as a basis for the financial presentation
and discussion of Weekly Reader's results of operations in this section reflects
the recapitalization of Weekly Reader as of November 17, 1999, and the prior
contribution by PRIMEDIA of 100% of the capital stock of American Guidance and
World Almanac to Weekly Reader. For accounting purposes, the contribution by
PRIMEDIA has been reflected as a reorganization of entities under common
control. Accordingly, all prior periods have been restated to reflect that
reorganization using the historical carrying value of the stock of American
Guidance and World Almanac. The financial statements of Weekly Reader include
the operations of American Guidance since PRIMEDIA acquired its capital stock,
which was effective on July 1, 1998. For a discussion of the results of
operations of American Guidance prior to July 1, 1998, see "--Results of
Operations--American Guidance."
The following tables set forth, for the periods indicated, consolidated
statements of operations data for Weekly Reader expressed in millions of dollars
and as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1999 2000
AMOUNT % OF NET SALES AMOUNT % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales, net........................................ $33.1 100.0% $35.7 100.0%
----- ----- ----- -----
Costs of goods sold............................... 8.3 25.0% 9.7 27.2%
----- ----- ----- -----
Gross profit...................................... 24.8 75.0% 26.0 72.8%
Operating costs and expenses:
Marketing and selling............................. 5.9 17.8% 5.9 16.6%
Distribution, circulation and fulfillment......... 3.0 9.3% 3.2 8.8%
Editorial......................................... 2.5 7.4% 2.5 7.0%
General and administrative........................ 3.6 10.8% 4.4 12.3%
Corporate and group overhead (a).................. 1.6 4.9% 0.8 2.4%
Depreciation and amortization..................... 4.0 12.1% 3.7 10.4%
----- ----- ----- -----
Operating income.................................. 4.2 12.7% 5.5 15.3%
Other income (expenses):
Interest expense (b).............................. (3.3) (10.1%) (8.2) (23.0%)
----- ----- ----- -----
Amortization of deferred financing costs.......... -- 0.0% -- 0.0%
Other, net........................................ (0.6) (1.7%) -- 0.1%
----- ----- ----- -----
Income (loss) before income tax expense........... 0.3 0.9% (2.7) (7.6%)
Income tax provision.............................. -- 0.0% 0.5 1.3%
----- ----- ----- -----
Net income (loss)................................. $ 0.3 0.9% $(3.2) (8.9%)
===== ===== ===== =====
</TABLE>
- ------------------------
(a) Prior to the recapitalization on November 17, 1999, Weekly Reader was
allocated a corporate and group overhead charge which included costs for:
(1) amounts allocated as corporate overhead to Weekly Reader by PRIMEDIA
for services and administrative functions shared with PRIMEDIA and its
other operating companies including, but not limited to, executive
management costs, salaries and fringe benefits for various legal,
financial, information technology and human resources personnel,
information technology expenses, real estate expenses, and third-party
costs; and (2) direct group overhead costs, such as salaries, fringe
benefits and expenses for PRIMEDIA staff directly involved in Weekly
Reader (not including World Almanac and American Guidance). As of
November 17, 1999 these charges were eliminated.
(b) Includes the allocation of interest expense prior to November 17, 1999,
arising from borrowings at the PRIMEDIA corporate level.
68
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
% OF NET % OF NET % OF NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Sales, net............................... $ 92.9 100.0% $ 118.2 100.0% $ 148.3 100.0%
Cost of goods sold....................... 23.8 25.6% 30.6 25.9% 40.2 27.1%
------ ----- ------- ----- ------- -----
Gross profit............................. 69.1 74.4% 87.6 74.1% 108.1 72.9%
Operating costs and expenses:
Marketing and selling.................... 11.8 12.7% 17.6 14.9% 24.3 16.4%
Distribution, circulation and
fulfillment............................ 11.6 12.5% 10.9 9.2% 13.2 8.9%
Editorial................................ 9.0 9.7% 10.6 9.0% 10.0 6.8%
General and administrative............... 12.7 13.7% 15.3 12.9% 15.9 10.8%
Corporate and group overhead (a)......... 2.5 2.6% 5.6 4.7% 6.2 4.2%
Depreciation and amortization............ 11.4 12.3% 12.2 10.3% 15.4 10.3%
------ ----- ------- ----- ------- -----
Operating income......................... 10.1 10.9% 15.4 13.0% 23.1 15.5%
Other income (expense):
Intercompany interest expense (b)........ (7.0) (7.5%) (9.2) (7.7%) (10.1) (6.8%)
Interest expense......................... -- -- -- -- (4.5) (3.0%)
Amortization of deferred financing
costs.................................. (0.6) (0.7%) (0.2) (0.2%) (0.2) (0.1%)
Other, net............................... 1.5 1.6% (0.2) (0.2%) (0.6) (0.4%)
------ ----- ------- ----- ------- -----
Income before income tax provision....... 4.0 4.3% 5.8 4.9% 7.7 5.2%
Income tax provision..................... 5.8 6.2% 3.9 3.3% 4.5 3.0%
------ ----- ------- ----- ------- -----
Net income (loss)........................ $ (1.8) (1.9%) $ 1.9 1.6% $ 3.2 2.2%
====== ===== ======= ===== ======= =====
</TABLE>
- ------------------------
(a) Prior to the recapitalization on November 17, 1999, Weekly Reader was
allocated a corporate and group overhead charge which included costs for:
(1) amounts allocated as corporate overhead to Weekly Reader by PRIMEDIA
for services and administrative functions shared with PRIMEDIA and its
other operating companies including, but not limited to, executive
management costs, salaries and fringe benefits for various legal,
financial, information technology and human resources personnel,
information technology expenses, real estate expenses, and third-party
costs; and (2) direct group overhead costs, such as salaries, fringe
benefits and expenses for PRIMEDIA staff directly involved in Weekly
Reader (not including World Almanac and American Guidance). As of
November 17, 1999 these charges were eliminated.
(b) Represents the allocation of interest expense prior to November 17,
1999, arising from borrowings at the PRIMEDIA corporate level.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
SALES, NET. For the three months ended March 31, 2000, net sales increased
$2.6 million, or 7.9%, to $35.7 million from $33.1 million for the same period
in 1999. This increase was due to (1) an increase in sales at World Almanac of
$1.7 million, or 14.7%, to $13.3 million for the three months ended March 31,
2000 from $11.6 million for the same period in 1999, primarily as a result of
increases in catalog and telemarketing sales at World Almanac's school library
segments, World Almanac Education Library Services and Gareth Stevens, Inc., and
(2) an increase in sales at American Guidance of $1.2 million, or 11.2%, to
$11.9 million for the three months ended March 31, 2000 from $10.7 million for
the same period in 1999, primarily as a result of increases in sales of
assessment products and textbooks. These increases were partially offset by a
decrease in sales at Weekly Reader,
69
<PAGE>
not including World Almanac and American Guidance, of $0.3 million, or 2.8%, to
$10.5 million for the three months ended March 31, 2000 from $10.8 million for
the same period in 1999, primarily as a result of lower periodical subscription
sales due to the timing of the number of issues shipped and lower licensing
sales, partially offset by increased sales of sponsored instructional materials
by Lifetime Learning Systems, Inc.
GROSS PROFIT. For the three months ended March 31, 2000, gross profit
increased by $1.2 million, or 4.8%, to $26.0 million from $24.8 million for the
same period in 1999. This increase was due to (1) an increase in gross profit at
World Almanac of $0.8 million, or 9.9%, to $8.9 million for the three months
ended March 31, 2000 from $8.1 million for the same period in 1999, primarily as
a result of the increased sales described above, partially offset by an increase
in obsolescence reserves at Gareth Stevens, Inc., and (2) an increase in gross
profit at American Guidance of $0.7 million, or 9.0%, to $8.5 million for the
three months ended March 31, 2000 from $7.8 million for the same period in 1999,
primarily as a result of the increase in sales described above. These increases
were partially offset by a decrease in gross profit at Weekly Reader, not
including World Almanac and American Guidance, of $0.3 million, or 3.4%, to
$8.6 million for the three months ended March 31, 2000 from $8.9 million for the
same period in 1999, primarily due to the sales decrease described above. Gross
profit as a percentage of net sales decreased to 72.8% for the three months
ended March 31, 2000 from 74.9% for the same period in 1999. This decrease was
primarily a result of a lower gross profit margin for World Almanac due to
product mix at World Almanac Books and Gareth Stevens, Inc., where lower margin
sales channels drove the sales increases, and the increase in obsolescence
reserves at Gareth Stevens, Inc.
OPERATING COSTS AND EXPENSES. For the three months ended March 31, 2000,
operating costs and expenses decreased by $0.1 million, or 0.5%, to
$20.5 million from $20.6 million for the same period in 1999. General and
administrative expenses increased by $0.8 million, or 22.5%, to $4.4 million for
the three months ended March 31, 2000 from $3.6 million for the same period in
1999, primarily due to increased expenses at Weekly Reader resulting from
increases in reserves for accrued vacation expenses and subscription
cancellations. Corporate overhead costs of World Almanac, American Guidance and
Weekly Reader decreased by $0.8 million, or 46.0%, to $0.8 million for the three
months ended March 31, 2000 from $1.6 million for the same period in 1999 due to
the lower corporate overhead cost structure established by WRC Media after the
acquisition of those entities from PRIMEDIA. Depreciation and amortization
decreased by $0.3 million, or 7.0%, to $3.7 million for the three months ended
March 31, 2000 from $4.0 million for the same period in 1999, primarily due to
intangible assets with lower amortization schedules in the later part of their
lives and intangible assets that were fully amortized in 1999. Distribution and
circulation costs increased by $0.2 million, or 4.0%, to $3.2 million for the
three months ended March 31, 2000 from $3.0 million for the same period in 1999.
Operating costs and expenses as a percentage of sales decreased to 57.4% for the
three months ended March 31, 2000 from 62.2% for the same period in 1999 due to
the fact that sales increased as described above while operating costs and
expenses decreased slightly.
OPERATING INCOME. For the three months ended March 31, 2000, operating
income increased by $1.3 million, or 29.6%, to $5.5 million from $4.2 million
for the same period in 1999 and operating income as a percentage of sales
increased to 15.3% from 12.7% for the same period in 1999. These increases were
primarily due to the factors described above.
INTEREST EXPENSE. For the three months ended March 31, 2000, interest
expense increased by $4.9 million, or 146.9%, to $8.2 million from $3.3 million
for the same period in 1999 and interest expense as a percentage of sales
increased to 23.0% from 10.1% for the same period in 1999. The interest expense
for the three months ended March 31, 2000 relates to debt associated with the
transactions described under "The Acquisition and Recapitalization." Since
Weekly Reader is jointly and severally liable for that debt, the interest
expense related to that debt is reflected in the financial
70
<PAGE>
statements of Weekly Reader. The interest expense for the three months ended
March 31, 1999 represents interest charged by PRIMEDIA to Weekly Reader on
outstanding intercompany debt.
OTHER, NET. For the three months ended March 31, 2000, other expense, net
decreased to $0 from $0.6 million for the same period in 1999. This decrease was
a result of a decrease in miscellaneous taxes at Weekly Reader (not including
World Almanac).
NET INCOME (LOSS). For the three months ended March 31, 2000, net income
(loss) decreased by $3.5 million, or 1,108.3%, to a net loss of $3.2 million
from net income of $0.3 million for the same period in 1999. Net income (loss)
as a percentage of net sales decreased to negative 8.9% for the three months
ended March 31, 2000 from positive 0.9% for the same period in 1999. These
decreases were primarily due to the factors described above.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
SALES, NET. For the twelve months ended December 31, 1999, net sales
increased $30.1 million, or 25.4%, to $148.3 million from $118.2 million for the
same period in 1998. This increase was primarily due to the inclusion of an
additional $23.0 million of sales attributable to American Guidance as it was
included in Weekly Reader's operations for a full twelve months in 1999 compared
to six months in 1998, as American Guidance was acquired on July 1, 1998.
American Guidance's sales were $49.6 million for the twelve months ended
December 31, 1999 compared with $26.6 million for the six months ended
December 31, 1998. American Guidance's net sales also grew as a result of strong
sales of supplemental testing materials. Additionally, Weekly Reader's net
sales, not including World Almanac and American Guidance, increased by
$2.0 million, or 4.6%, to $45.7 million in 1999 from $43.7 million in 1998,
primarily due to an increase in Weekly Reader's subscription sales to schools
resulting from a price increase, increased sales of sponsored instructional
materials by Lifetime Learning Systems, Inc. and increased sales of Weekly
Reader's skill books. Also, World Almanac's net sales increased by
$5.0 million, or 10.4%, to $52.9 million in 1999 from $47.9 million in 1998,
primarily due to increases in the sales of Millennium Almanac and licensing
revenues, and increased sales by World Almanac's school library segments, World
Almanac Education Library Services and Gareth Stevens, Inc.
GROSS PROFIT. For the twelve months ended December 31, 1999, gross profit
increased by $20.5 million, or 23.4%, to $108.1 million from $87.6 million for
the same period in 1998. This increase was primarily due to the inclusion of an
additional $17.5 million of gross profit attributable to American Guidance as it
was included in the operations for twelve months in 1999, compared to six months
in 1998. American Guidance's gross profit was $36.4 million for the twelve
months ended December 31, 1999 compared with $18.9 million for the six months
ended December 31, 1998. World Almanac's gross profit increased by
$2.0 million, or 6.2%, to $34.1 million in 1999 from $32.1 million in 1998 as a
result of increased sales, which was partially offset by a charge of
$1.2 million related to excess inventory at World Almanac's Gareth
Stevens, Inc. division. Weekly Reader's gross profit, not including World
Almanac and American Guidance, increased by $1.0 million, or 2.7%, to
$37.6 million in 1999 from $36.6 million in 1998, primarily due to increased
sales at Lifetime Learning Systems, Inc. and Weekly Reader's increased
subscription sales. Gross profit as a percentage of sales decreased to 72.9%,
from 74.1% for the same period in 1998. This decrease was primarily a result of
a lower gross profit percentage for Weekly Reader, not including World Almanac
and American Guidance, due to a product mix change, as a greater percentage of
sales consisted of Lifetime Learning Systems, Inc.'s sponsored instructional
materials which are sold at a lower gross profit margin than Weekly Reader's
classroom subscriptions. Additionally, World Almanac's gross profit margin
decreased primarily due to the inventory related charge previously noted.
OPERATING COSTS AND EXPENSES. For the twelve months ended December 31,
1999, operating costs and expenses increased by $12.8 million, or 17.7%, to
$85.0 million from $72.2 million for the same
71
<PAGE>
period in 1998. This increase was primarily due to the inclusion of an
additional $13.0 million of operating expenses attributable to American Guidance
as it was included in the operations for twelve months in 1999, compared to six
months in 1998. American Guidance's operating costs and expenses were
$30.1 million for the twelve months ended December 31, 1999 compared with
$17.1 million for the six months ended December 31, 1998. For the twelve months
ended December 31, 1999, operating costs and expenses as a percentage of sales
decreased to 57.4% from 61.0% for the same period in 1998. This percentage
decrease was primarily due to increased sales at Weekly Reader, while operating
costs and expenses increased at a lower rate over the same period.
OPERATING INCOME. For the twelve months ended December 31, 1999, operating
income increased by $7.7 million, or 50.0%, to $23.1 million from $15.4 million
for the same period in 1998, and operating income as a percentage of sales
increased to 15.5% from 13.0% for the same period in 1998. These increases were
primarily due to the factors described above.
INTERCOMPANY INTEREST EXPENSE. Intercompany interest expense was charged to
Weekly Reader by PRIMEDIA based on the intercompany debt outstanding between
Weekly Reader and PRIMEDIA and on PRIMEDIA's then current debt service rates.
Intercompany debt on Weekly Reader's financial statements is included in the
balance sheet line, "Investment by PRIMEDIA, net." Intercompany interest expense
was no longer charged after the recapitalization on November 17, 1999. The
intercompany interest charges between PRIMEDIA and Weekly Reader represent
ordinary and usual activities between a parent company and a subsidiary.
For the twelve months ended December 31, 1999, intercompany interest expense
increased by $0.9 million, or 9.8%, to $10.1 million from $9.2 million for the
same period in 1998; and intercompany interest expense as a percentage of sales
decreased to 6.8% from 7.8% for the same period in 1998. This increase was a
result of the inclusion of additional PRIMEDIA allocations of intercompany
interest expense related to the acquisition of American Guidance. Intercompany
interest allocations by PRIMEDIA were discontinued upon the recapitalization of
Weekly Reader on November 17, 1999.
INTEREST EXPENSE. For the twelve months ended December 31, 1999, interest
expense was $4.5 million and interest expense as a percentage of sales was 3.0%.
Interest expense relates to the debt associated with the recapitalization of
Weekly Reader on November 17, 1999. As Weekly Reader is jointly and severally
liable for these new borrowings, the interest expense related to the debt is
reflected in the financial statements of Weekly Reader.
OTHER, NET. For the twelve months ended December 31, 1999, other, net,
increased by $0.4 million, to $0.6 million from $0.2 million for the same period
in 1998. This increase was a result of an increase in miscellaneous taxes at
Weekly Reader (not including World Almanac and American Guidance) and American
Guidance.
INCOME TAX PROVISION. For the twelve months ended December 31, 1999, the
income tax provision increased by $0.6 million to $4.5 million from
$3.9 million, in 1998. As a percentage of net sales, the income tax provision
decreased to 3.0% from 3.3% in 1998. The income tax provision as a percentage of
net sales decreased due to Weekly Reader's recapitalization by WRC Media. As a
result of the recapitalization, Weekly Reader files its income taxes as part of
a consolidated return for which income in one consolidated entity can be offset
by losses in others, thus lowering the income tax provision.
NET INCOME (LOSS). For the twelve months ended December 31, 1999, net
income increased by $1.3 million, to $3.2 million from $1.9 million, for the
same period in 1998. Net income as a percentage of net sales increased to 2.2%
from 1.6% for the same period in 1998. These increases were primarily due to the
factors described above.
72
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES, NET. For the year ended December 31, 1998, net sales increased by
$25.3 million, or 27.2%, to $118.2 million from $92.9 million in 1997. This
increase was primarily due to the acquisition of American Guidance, which added
$26.6 million in sales. This increase was partially offset by a decrease in
Weekly Reader's net sales, not including American Guidance and World Almanac, of
$1.5 million, or 3.3%, to $43.7 million in 1998 from $45.2 million in 1997 as a
result of a change in the publishing schedule in 1997 which shifted one issue of
the periodicals from January 1998 to December 1997. As a result of this
permanent change, 1997 contained 27 issues instead of the conventional 26 that
were shipped in 1998, as well as years prior to and subsequent to 1997. World
Almanac sales increased by $0.2 million, or 0.4%, to $47.9 million in 1998 from
$47.7 million in 1997 as a result of a sales increase of $1.6 million due to
increases in the number of products offered in its customer, prospect and
specialized reference catalogs and the mailing volume of its customer and
prospect catalogs and as a result of a sales increase of $1.4 million as a
result of a full year of sales in 1998 for Gareth Stevens, Inc., which was
acquired in February, 1997. These increases were partially offset by a sales
decrease of $2.4 million at Funk & Wagnalls from the decline in print
encyclopedia sales and attrition to the annuals customer list.
GROSS PROFIT. For the year ended December 31, 1998, gross profit increased
by $18.5 million, or 26.8%, to $87.6 million from $69.1 million in 1997. Gross
profit as a percentage of net sales decreased to 74.1% in 1998 from 74.4% in
1997. This increase and decrease, respectively, were primarily due to the
acquisition of American Guidance which added $19.0 million in gross profit but
operated at a lower gross margin than Weekly Reader's other businesses.
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1998,
operating costs and expenses increased by $13.2 million, or 22.4%, to
$72.2 million from $59.0 million in 1997. This increase was primarily due to the
acquisition of American Guidance, which added $17.1 million to operating costs
and expenses, partially offset by a reduction of $3.8 million in operating
expenses at World Almanac, as a result of lower intangible amortization at Facts
On File News Services and Funk & Wagnalls. For the year ended December 31, 1998,
operating costs and expenses as a percentage of sales decreased to 61.1% from
63.5% in 1997. This decrease was primarily due to the decline in intangible
asset amortization at World Almanac, which decreased World Almanac's operating
costs and expenses as a percentage of sales to 56.2% in 1998 from 64.4% in 1997
and was partially offset by the inclusion of American Guidance which had higher
operating costs and expenses as a percentage of sales than Weekly Reader's other
businesses for the period.
OPERATING INCOME. For the year ended December 31, 1998, operating income
increased by $5.3 million, or 52.5%, to $15.4 million from $10.1 million in 1997
and operating income as a percentage of net sales increased to 13.0% from 10.9%
in 1997. These increases were primarily due to the factors described above.
INTERCOMPANY INTEREST EXPENSE. For the year ended December 31, 1998,
intercompany interest expense increased $2.2 million, or 31.4%, to $9.2 million
from $7.0 million in 1997 and intercompany interest expense as a percentage of
net sales increased to 7.7% from 7.5% for the same period in 1997. These
increases were primarily due to increased allocations from PRIMEDIA as a result
of the acquisition of American Guidance.
OTHER, NET. For the year ended December 31, 1998, other, net decreased by
$1.7 million to $(0.2) million from $1.5 million. This decrease was the result
of a gain on the sale of assets realized by Weekly Reader in 1997 that did not
recur in 1998.
INCOME TAX PROVISION (BENEFIT). For the year ended December 31, 1998,
income tax provision decreased $1.9 million, or 32.8%, to $3.9 million from
$5.8 million in 1997 and income tax provision as
73
<PAGE>
a percentage of income (loss) before income tax provision (benefit), or the
effective income tax rate, decreased to 67.2% from 145.0%. In both years, the
effective income tax rate was higher than the statutory income tax rate
primarily due to provisions recorded to establish a valuation allowance, in both
years, against net deferred income tax assets of Weekly Reader. The effective
income tax rate decreased during 1998 primarily due to a reduction in the
provision to record the valuation allowance.
NET (LOSS) INCOME. For the year ended December 31, 1998, net income
increased by $3.7 million to $1.9 million, from a net loss of $1.8 million in
1997 and net income as a percentage of sales increased to 1.6% from a net loss
for the same period in 1997. These increases were primarily due to the factors
described above.
74
<PAGE>
RESULTS OF OPERATIONS--AMERICAN GUIDANCE
The following table sets forth, for the periods indicated, statement of
income data, expressed in millions of dollars and as a percentage of sales.
PRIMEDIA acquired all of the capital stock of American Guidance effective as of
July 1, 1998. Prior to PRIMEDIA's acquisition of American Guidance, American
Guidance's fiscal year ended on June 30 of each year. Following its acquisition
by PRIMEDIA, the fiscal year of American Guidance was changed to December 31 of
each year. American Guidance's results of operations subsequent to July 1, 1998
are included in the results of operations of Weekly Reader.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1997 1998
------------------------- -------------------------
AMOUNT % OF NET SALES AMOUNT % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales, net......................................... $33.5 100.0% $42.7 100.0%
Cost of sales...................................... 9.5 28.4% 11.8 27.6%
----- ----- ----- -----
Gross Profit....................................... 24.0 71.6% 30.9 72.4%
Operating costs and expenses:
Development...................................... 4.4 13.1% 5.3 12.4%
Sales............................................ 7.5 22.4% 8.5 19.9%
General and administrative....................... 6.3 18.8% 7.0 16.4%
Pension.......................................... 0.5 1.5% 0.5 1.2%
ESOP contribution(a)............................. 1.3 3.9% 1.6 3.8%
----- ----- ----- -----
Operating income................................... 4.0 11.9% 8.0 18.7%
Other expense(b)................................... 0.9 2.6% 0.8 1.8%
----- ----- ----- -----
Income before income tax expense................... 3.1 9.3% 7.2 16.9%
Income tax expense................................. 0.8 2.4% 2.7 6.4%
----- ----- ----- -----
Net income......................................... $ 2.3 6.9% $ 4.5 10.5%
===== ===== ===== =====
</TABLE>
- ------------------------
(a) Employee Stock Ownership Plan ("ESOP") contribution expenses represent
American Guidance contributions to its leveraged ESOP plan, primarily used
to repay debt of the ESOP. These contributions ended with the acquisition of
American Guidance by PRIMEDIA and will not recur in the future.
(b) Amounts shown net of interest income.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. For the year ended June 30, 1998, sales increased $9.2 million, or
27.5%, to $42.7 million from $33.5 million for the same period in 1997. This
increase was primarily due to revisions of American Guidance products, resulting
in increased sales of testing and assessment products of $4.4 million and
supplemental hard cover textbooks of $2.7 million. In addition, sales of
supplemental instructional materials increased $2.1 million primarily as a
result of increased purchases of some of our products by a provider of
nationwide language education programs and increased sales of new test
preparation materials.
GROSS PROFIT. For the year ended June 30, 1998, gross profit increased
$6.9 million, or 28.8%, to $30.9 million from $24.0 million for the same period
in 1997. The increase in gross profit was primarily due to the increase in
sales. For the year ended June 30, 1998, gross profit as a percentage of sales
increased to 72.4% from 71.6% for the same period in 1997. The increase in gross
profit margin was due to product mix.
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EXPENSES. For the year ended June 30, 1998, expenses increased
$2.9 million, or 14.5%, to $22.9 million from $20.0 million for the same period
in 1997. Development expenses increased by $0.9 million as a result of the
American Guidance strategy of fueling sales growth with new and revised
products. Sales expenses increased by $1.0 million, due to expanded marketing
campaigns to support new and revised products, and increased costs related to
growth in the sales force. General and administrative costs increased by
$0.7 million while an increase in contribution to the ESOP accounted for
$0.3 million. For the period ended June 30, 1998, expenses as a percentage of
net sales decreased to 53.6% from 59.7% in the same period in 1997. This
decrease was primarily due to improved operating margins primarily resulting
from growth in sales exceeding growth rates in expenses.
OPERATING INCOME. For the year ended June 30, 1998, operating income
increased by $4.0 million, or 100.0%, to $8.0 million from $4.0 million for the
same period in 1997 and operating income as a percentage of sales increased to
18.7% from 11.9% for the same period in 1997. These increases were primarily due
to the factors described above.
OTHER EXPENSE. For the year ended June 30, 1998, other expense decreased
$0.1 million, or 11.1% to $0.8 million from $0.9 million for the same period in
1997 and other expense as a percentage of sales decreased to 1.8% from 2.6% for
the same period in 1997. These decreases were primarily due to lower interest
expense related to lower debt.
INCOME TAX EXPENSE. For the years ended June 30, 1998 and 1997, income tax
expense increased by $1.9 million, or 237.5%, to $2.7 million from
$0.8 million. The effective tax rates were 37.5% and 25.8%. The effective tax
rate for the year ended June 30, 1998 is higher than the statutory rate
primarily due to state income taxes. The effective tax rate for the year ended
June 30, 1997, is less than the statutory rate primarily due to the tax benefit
recorded for the reduction of the valuation allowance for net deferred income
tax assets.
NET INCOME. For the year ended June 30, 1998, net income increased
$2.2 million, or 95.7%, to $4.5 million from $2.3 million for the same period in
1997 and net income as a percentage of sales increased to 10.5% from 6.9% for
the same period in 1997. These increases were primarily due to the factors
described above.
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RESULTS OF OPERATIONS--COMPASSLEARNING
CompassLearning was acquired by WRC Media on July 14, 1999.
CompassLearning's statement of operations for the periods prior to July 14,
1999, relate to predecessor operations. The Securities and Exchange Commission
deems an acquired business to be a predecessor when the registrant is in
substantially the same business as the entity acquired and the registrant's own
operations, prior to the acquisition, appear insignificant to the business
acquired. The purchase method of accounting was used to record assets acquired
and liabilities assumed. This accounting method generally results in increased
amortization and depreciation reported in periods subsequent to the date of
acquisition. Accordingly, the statement of operations of CompassLearning pre-
and post-acquisition are not comparable in all material respects as the results
of operations report the results of two separate entities.
The following tables set forth, for the periods indicated, statement of
operations data for CompassLearning and its predecessor, expressed in millions
of dollars and as a percentage of net revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
PREDECESSOR--1999 2000
------------------------- -------------------------
AMOUNT % OF NET SALES AMOUNT % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenue, net...................................... $13.6 100.0% $ 12.7 100.0%
----- ------ ------ -------
Cost of products sold............................. 6.4 46.8% 5.9 46.6%
----- ------ ------ -------
Gross profit...................................... 7.2 53.2% 6.8 53.4%
Operating expenses:
Sales and marketing............................. 4.9 36.3% 6.0 46.7%
Research and development........................ 1.7 12.8% 2.1 16.5%
General and administrative...................... 1.9 14.2% 1.8 14.0%
Corporate overhead.............................. -- 0.0% 0.3 2.3%
Amortization of intangible assets............... 0.1 0.4% 2.1 16.8%
----- ------ ------ -------
Loss from operations.............................. (1.4) (10.5%) (5.5) (43.1%)
Interest expense.................................. (1.3) (9.6%) (8.2) (64.6%)
Other income, net................................. 0.4 3.0% -- 0.1%
----- ------ ------ -------
Loss before income tax expense.................... (2.3) (17.3%) (13.7) (107.6%)
Income tax expense................................ -- 0.0% -- 0.0%
----- ------ ------ -------
Net loss.......................................... $(2.3) (17.3%) $(13.7) (107.6%)
===== ====== ====== =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
PREDECESSOR PREDECESSOR
------------------------- -------------------------
1997 1998
------------------------- -------------------------
AMOUNT % OF NET SALES AMOUNT % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Revenue:
Software license................................. $ 29.2 40.6% $31.0 44.9%
Service.......................................... 36.0 50.2% 33.9 49.3%
Hardware......................................... 6.6 9.2% 4.0 5.8%
------ ------ ----- ------
71.8 100.0% 68.9 100.0%
Cost of products sold:
Software license................................. 30.4 42.4% 6.9 10.1%
Service.......................................... 23.4 32.6% 19.3 27.9%
Hardware......................................... 5.6 7.7% 3.2 4.7%
------ ------ ----- ------
59.4 82.7% 29.4 42.7%
Gross profit....................................... 12.4 17.3% 39.5 57.3%
Operating Expenses:
Sales and marketing.............................. 31.4 43.7% 24.0 34.9%
Research and development......................... 11.2 15.6% 8.0 11.6%
Write-off of purchased in process research and
development.................................... -- -- -- --
General and administrative....................... 13.5 18.8% 7.7 11.2%
Restructuring (a)................................ -- -- 3.0 4.4%
Amortization of intangible assets................ 5.4 7.6% 0.3 0.4%
------ ------ ----- ------
Income (Loss) From Operations...................... (49.1) 68.3% (3.5) (5.1%)
Interest Expense................................... (5.0) 7.0% (4.3) 6.2%
Other Income (Expense), net........................ (2.1) 3.0% -- --
Loss Before Income Tax Expense..................... (56.2) 78.3% (7.8) (11.3%)
------ ------ ----- ------
Income Tax Expense................................. -- -- -- --
------ ------ ----- ------
Loss Before Extraordinary Loss..................... (56.2) 78.3% (7.8) (11.3%)
Extraordinary Loss on Debt
Extinguishment, net of income tax.................. -- -- -- --
------ ------ ----- ------
Net Loss........................................... $(56.2) 78.3% $(7.8) (11.3%)
====== ====== ===== ======
</TABLE>
- ------------------------
(a) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The restructuring included a realignment of sales and service
functions, various on-line training and headcount reductions.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999
---------------------------------------------------
PREDECESSOR SUCCESSOR
----------- ------------
JANUARY 1 JULY 14 TOTAL % OF
JULY 13, DECEMBER 31, AMOUNT NET REVENUE
----------- ------------ -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Revenue:
Software license................................ 16.3 16.5 32.8 49.8%
Service......................................... 16.1 13.5 29.6 45.0%
Hardware........................................ 1.6 1.8 3.4 5.2%
----- ------ ------ ------
$34.0 $ 31.8 $ 65.8 100.0%
Cost of Products Sold:
Software license................................ 2.8 2.9 5.7 8.7%
Service......................................... 9.3 7.6 16.9 25.7%
Hardware........................................ 1.3 1.1 2.4 3.6%
----- ------ ------ ------
13.4 11.6 25.0 38.0%
Gross profit...................................... 20.6 20.2 40.8 62.0%
Operating Expenses:
Sales and marketing............................. 11.0 10.5 21.5 32.6%
Research and development........................ 3.8 3.9 7.7 11.7%
Write-off of purchased in-process research and
development (b)............................... -- 9.0 9.0 13.7%
General and administrative........................ 4.0 2.5 6.5 9.9%
Restructuring (a)................................. -- -- -- --
Amortization of intangible assets................. 0.1 4.0 4.1 6.3%
----- ------ ------ ------
Income (Loss) From Operations..................... 1.7 (9.7) (8.0) (12.3%)
Interest Expense.................................. (2.9) (5.7) (8.6) (12.9%)
Other Income (Expenses), net...................... 0.4 -- 0.4 0.6%
----- ------ ------ ------
Loss Before Income Tax Expense.................... (0.8) (15.4) (16.2) (24.5%)
Income Tax Expense................................ -- -- -- 0.0%
----- ------ ------ ------
Loss Before Extraordinary Loss.................... (0.8) (15.4) (16.2) (24.5%)
Extraordinary Loss on Debt
Extinguishment, net of income tax (c)........... -- (3.3) (3.3) (5.1%)
----- ------ ------ ------
Net Loss.......................................... $(0.8) $(18.7) $(19.5) (29.6%)
===== ====== ====== ======
</TABLE>
- ------------------------
(a) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The restructuring included a realignment of sales and service
functions, various on-line training and headcount reductions.
(b) Immediately following the acquisition, CompassLearning recognized a
$9.0 million charge related to the write-off of purchased in-process
research and development costs acquired in connection with the acquisition.
(c) On November 17, 1999, CompassLearning wrote-off deferred financing fees
through an extraordinary charge as it refinanced all of its debt.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE, NET. For the three months ended March 31, 2000, net revenue
decreased $0.9 million, or 6.3%, to $12.7 million from $13.6 million for the
same period in 1999. This decrease was due to (1) a
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decrease in service revenue of $0.4 million, or 5.5%, to $6.9 million for the
three months ended March 31, 2000 from $7.3 million for the same period in 1999
primarily as a result of lower service contract renewal sales, (2) a decrease in
hardware revenue of $0.4 million, or 30.8%, to $0.9 million for the three months
ended March 31, 2000 from $1.3 million for the same period in 1999 resulting
from our strategy to exit the hardware business and (3) a decrease in software
revenue of $0.1 million, or 2.0%, to $4.9 million for the three months ended
March 31, 2000 from $5.0 million for the same period in 1999 primarily as a
result of lower catalogue sales.
GROSS PROFIT. For the three months ended March 31, 2000, gross profit
decreased $0.4 million, or negative 6.0%, to $6.8 million from $7.2 million for
the same period in 1999. This decrease was primarily due to the decrease in net
revenue described above. Gross profit as a percent of revenue was 53.4% for the
three months ended March 31, 2000, compared to 53.2% for the same period in
1999.
OPERATING EXPENSES. For the three months ended March 31, 2000, operating
expenses increased $3.6 million, or 41.6%, to $12.3 million from $8.7 million
for the same period in 1999 and operating expenses as a percentage of revenue
increased to 96.4% from 63.8% for the same period in 1999. These increases were
due to a $2.1 million increase in amortization of intangibles related to the
July 14, 1999 acquisition of CompassLearning by WRC Media, a $1.1 million
increase in sales and marketing expense and a $0.4 million increase in research
and development expenses. For the three months ended March 31, 2000, sales and
marketing expense increased $1.1 million, or 20.8%, to $6.0 million from
$4.9 million for the same period in 1999 and sales and marketing expense as a
percentage of revenue increased to 46.7% from 36.3% for the same period in 1999.
These increases were primarily due to a $0.6 million increase in compensation, a
$0.3 million increase in travel and meeting expenses and $0.2 million in company
name change expenses. For the three months ended March 31, 2000, research and
development expense increased $0.4 million, or 20.9%, to $2.1 million from
$1.7 million for the same period in 1999 and research and development expense as
a percentage of revenue increased to 16.5% from 12.8% for the same period in
1999. These increases were primarily due to increased compensation and outside
services.
LOSS FROM OPERATIONS. For the three months ended March 31, 2000, loss from
operations increased $4.1 million, or 280.4%, to $5.5 million from $1.4 million
for the same period in 1999 and loss from operations as a percentage of net
revenue increased to negative 43.1% from negative 10.6% for the same period in
1999, primarily due to the factors described above.
INTEREST EXPENSE. For the three months ended March 31, 2000, interest
expense increased $6.9 million, or 528.5%, to $8.2 million from $1.3 million for
the same period in 1999 primarily due to the change in debt structure following
the change in ownership in 1999. Since CompassLearning is jointly and severally
liable for debt associated with the transactions described under "The
Acquisition and Recapitalization," the interest expense related to that debt is
reflected in the financial statements of CompassLearning.
OTHER INCOME, NET. For the three months ended March 31, 2000, other income,
net decreased to $0 from $0.4 million for the same period in 1999 due to a
non-recurring gain resulting from a sale of a marketable security in 1999.
NET LOSS. For the three months ended March 31, 2000, net loss increased
$11.4 million, or 483.9%, to $13.7 million from $2.3 million for the same period
in 1999 and net loss as a percentage of net revenue increased to negative 107.6%
from negative 17.3% for the same period in 1999. These decreases were primarily
due to the factors described above.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUE. For the year ended December 31, 1999, net revenue decreased
$3.1 million, or 4.5%, to $65.8 million from $68.9 million for the year ended
December 31, 1998. This decrease was primarily due to an anticipated erosion of
service-related revenue streams supporting older software versions that declined
$4.3 million, or 12.7%, to $29.6 million for the year ended December 31, 1999
from $33.9 million for the year ended December 31, 1998. Hardware revenue
decreased $0.6 million, or 15.0%, to $3.4 million for the year ended
December 31, 1999 from $4.0 for the year ended December 31, 1998, consistent
with CompassLearning's strategy to exit the hardware business. These decreases
were partially offset by the growth of new software sales of $1.8 million, or
5.8%, to $32.8 million for the year ended December 31, 1999 from $31.0 million
for the year ended December 31, 1998, primarily due to higher sales volume from
customers migrating to COMPASS and TOMORROW'S PROMISE products.
GROSS PROFIT. For the year ended December 31, 1999, gross profit increased
$1.3 million, or 3.3%, to $40.8 million from $39.5 million for the year ended
December 31, 1998. Gross profit as a percentage of net revenue increased to
62.0% for the year ended December 31, 1999 from 57.3% for the year ended
December 31, 1998. This increase was primarily due to the increase in software
revenue described above, which has a higher gross profit percentage and a
decrease in service revenue, which has a lower gross profit percentage. For the
year ended December 31, 1999, software-related sales which have a higher margin
comprised 66.4% of total gross profit compared to 61.0% for the year ended
December 31, 1998, while service-related sales which have a lower margin
comprised 31.1% of total gross profit for the year ended December 31, 1999
compared to 37.0% of gross profit for the year ended December 31, 1998.
OPERATING EXPENSES. For the year ended December 31, 1999, operating
expenses increased $5.8 million, or 13.5%, to $48.8 million from $43.0 million
for the year ended December 31, 1998. Operating expenses as a percentage of net
revenue increased to 74.2% for the year ended December 31, 1999 from 62.4% for
the year ended December 31, 1998. This increase was primarily due to a
$9.0 million write-off of purchased in-process research and development and a
$3.8 million increase in amortization of intangible assets related to the
July 14, 1999 acquisition of CompassLearning by WRC Media. The increase was
partially offset by a $3.0 million reduction in restructuring expenses, in 1999
when compared to 1998, and $3.8 million in associated effects of the
restructuring and other general cost reductions including: a $3.9 million
reduction in compensation and outside services expenses; a $0.4 million
reduction in travel expenses; and a $0.3 million reduction in advertising
expenses which was offset by a $0.3 million increase in commission expenses.
INCOME (LOSS) FROM OPERATIONS. For the year ended December 31, 1999, loss
from operations increased $4.5 million, or 128.6%, to $8.0 million from
$3.5 million for the year ended December 31, 1998, and loss from operations as a
percentage of net revenue increased to a negative 12.3% from a negative 5.1% for
the year ended December 31, 1998. As described above, the increased loss from
operations was primarily due to the $9.0 million write-off of purchased
in-process research and development and the $3.8 million increase in
amortization of intangible assets. This increased loss from operations was
partially offset by higher gross margins and lower operating expenses excluding
the write-off of purchased in-process research and development and amortization
of intangible assets, previously mentioned.
INTEREST EXPENSE. For the year ended December 31, 1999, interest expense
increased $4.3 million, or 100%, to $8.6 million from $4.3 million for the year
ended December 31, 1998 and interest expense as a percentage of net revenue
increased to 12.9% from 6.2% for the year ended December 31, 1998. These
increases were primarily due to higher loan balances during the second half of
the year on subordinated debt, which carried a higher interest rate and
increased borrowing relating to the acquisition of CompassLearning by WRC Media
on July 14, 1999. As CompassLearning is jointly and
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<PAGE>
severally liable for the new borrowings, the interest expenses related to this
debt is reflected in the financial statements of CompassLearning.
LOSS BEFORE EXTRAORDINARY LOSS. For the year ended December 31, 1999, loss
before extraordinary loss increased $8.4 million, or 107.7%, to $16.2 million
from $7.8 million for the year ended December 31, 1998 and loss before
extraordinary loss as a percentage of net revenue increased to a negative 24.5%
from a negative 11.3% for the year ended December 31, 1998. As described above,
the increase in net loss was primarily due to the $9.0 million write-off of
in-process research and development and the $3.8 million increase in
amortization of intangible assets, offset by higher gross margin and lower
expenses.
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT, NET OF INCOME TAXES. For the
year ended December 31, 1999, CompassLearning recorded an extraordinary loss
related to the write-off of deferred financing fees. The fees related to
CompassLearning's old indebtedness which were written off on November 17, 1999
when CompassLearning refinanced its indebtedness.
NET LOSS. For the year ended December 31, 1999, net loss increased
$11.7 million, or 150%, to $19.5 million from $7.8 million for the year ended
December 31, 1998 and net loss as a percentage of net revenue increased to a
negative 29.6% from a negative 11.3% for the year ended December 31, 1998. These
decreases were primarily due to the factors described above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE. For the year ended December 31, 1998, net revenue decreased
$2.9 million, or 4.1%, to $68.9 million from $71.8 million in 1997. This
decrease was primarily due to a $2.6 million, or 39.4%, decrease in hardware net
revenue as a result of CompassLearning's decision to de-emphasize its hardware
sales business. The decrease was also the result of a decline in services net
revenue, primarily in professional development services, and to a lesser extent
in technical support services, of $2.1 million, or 5.8%, due to lower software
sales in 1997 which led to fewer service contracts being signed in that year,
causing fewer service contracts to be available for renewal in 1998. Services
revenue also decreased as a result of reduced customer demand for training and
support services due to improved software product quality and customers'
increasing abilities to provide these services internally. These decreases were
partially offset by a $1.8 million, or 6.1%, increase in software net revenue in
the 1998 period due to an increased number of units sold in this first full year
of COMPASS and TOMORROW'S PROMISE sales.
GROSS PROFIT. For the year ended December 31, 1998, gross profit increased
$27.1 million, or 217.8%, to $39.5 million from $12.4 million for the same
period in 1997 and gross profit as a percentage of net revenue increased to
57.3% from 17.3% for the same period in 1997. These increases were primarily due
to the software gross profit improving to $24.0 million, or 77.6%, in 1998 from
a loss of $1.3 million, or (4.4)%, in 1997. Software gross profit increased
primarily as a result of a $1.8 million increase in revenue and a $23.5 million
reduction in cost of products sold, principally from lower amortization cost due
to amortization of capitalized software declining by $22.6 million in 1998 due
to the 1997 accelerated amortization charges of $17.3 million for the reduction
of capitalized software development costs to their new net realizable value in
connection with a change in product focus. Services gross profit also increased
to $14.7 million, or 43.3%, in 1998 from $12.6 million, or 35.1%, in 1997. These
increases in services gross profit were primarily the result of a $4.2 million,
or 17.8%, decrease in services cost of products sold primarily from a
$2.6 million reduction in staffing costs associated with the delivery of
services; a $1.0 million reduction in travel costs; and a $0.5 million reduction
in third party costs as hardware support revenue declined.
Many of these cost savings are a direct result of CompassLearning's
restructuring efforts. These increases were partially offset by a $2.3 million,
or 41.8%, decline in hardware gross profit primarily
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due to lower sales volume. However, the hardware gross profit rate improved to
19.6% in 1998 from 16.2% in 1997 primarily as a result of internal cost
reductions.
OPERATING EXPENSES. For the year ended December 31, 1998, selling and
administrative expenses decreased $18.5 million, or 30.0%, to $43.0 million from
$61.5 million in 1997 and selling and administrative expense as a percentage of
net revenue decreased to 62.4% in 1998 from 85.6% in 1997. Sales and marketing
expenses decreased $7.3 million, or 23.4%, to $24.0 million in 1998 from
$31.4 million in 1997 and as a percentage of net revenue decreased to 34.9% in
1998 from 43.7% in 1997. These decreases were primarily due to a $2.7 million
reduction resulting from staffing reductions and their associated expenses; a
$0.8 million reduction in commissions; a $1.9 million reduction in marketing
campaigns and promotional materials; a $0.9 million reduction in recruiting
expenses; and a $0.3 million decrease in depreciation.
Research and development expenses decreased $3.2 million, or 28.2%, to
$8.0 million in 1998 from $11.2 million in 1997, on a net spending basis, and
$5.5 million, or 40.8%, on a gross spending basis prior to capitalizing software
development costs. As a percentage of net revenue, research and development
expenses decreased to 11.6% in 1998 from 15.6% in 1997. From a gross spending
perspective, the cost reductions were primarily the result of a $3.8 million
reduction in the use of temporary employees, a $0.8 million reduction in
depreciation, a $0.3 million reduction in rental expense from reduced space, a
$0.3 million reduction in employee expenses due to lower headcount, and a
$0.3 million reduction in supplies. These reductions were partially offset by a
$2.4 million lower level of development costs being capitalized in 1998 as
compared to 1997 due to the fact that no development costs were considered
eligible for capitalization. General and administrative expenses decreased
$5.8 million, or 43.0%, to $7.7 million in 1998 from $13.5 million in 1997 and
as a percentage of net revenue decreased to 11.2% in 1998 from 18.8% in 1997.
These decreases were primarily due to a $1.4 million reduction in staffing and
associated expenses; a $0.6 million reduction in depreciation; a $0.7 million
reduction in bad debt; a $0.9 million reduction in rental expense; and a
$0.3 million reduction in telephone expense.
Amortization of intangibles decreased $5.2 million, or 95.5%, to
$0.2 million in 1998 from $5.4 million in 1997 primarily as a result of the
acceleration of amortization of intangibles that resulted from a change in
product focus in 1997. The above 1998 expense reductions were primarily the
result of CompassLearning's restructuring efforts, partially offset by a
$3.0 million charge associated with the restructuring.
LOSS FROM OPERATIONS. For the year ended December 31, 1998, loss from
operations decreased $45.6 million, or 92.8%, to $3.5 million from
$49.1 million for the same period in 1997 and loss from operations as a
percentage of net revenue decreased to 5.1% in 1998 from 68.3% in 1997. These
decreases were primarily due to the factors described above.
INTEREST EXPENSE. For the year ended December 31, 1998, interest expense
decreased $0.7 million, or 14.5%, to $4.3 million from $5.0 million in 1997 and
interest expense as a percentage of net revenue decreased to 6.2% in 1998 from
7.0% in 1997. These decreases were primarily due to lower borrowing levels on
the revolving credit line resulting from shorter average collection periods for
receivables.
NET LOSS. For the year ended December 31, 1998, net loss decreased
$48.4 million, or 86.2%, to $7.8 million from $56.2 million in 1997 and net loss
as a percentage of net revenue decreased to 11.3% in 1998 from 78.3% in 1997.
These decreases were primarily due to the factors described above as well as the
1997 write-off of a $2.2 million investment.
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LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW.
WRC Media's sources of cash are its operating subsidiaries, Weekly Reader
and CompassLearning, and a $30.0 million revolving credit facility. WRC Media
and its subsidiaries' principal uses of cash are for debt service, capital
expenditures, working capital and acquisitions. WRC Media and its subsidiaries'
operations used cash of $10.9 million for the three months ended March 31, 2000
and provided cash of $15.5 million for the period from May 14, 1999 through
December 31, 1999. WRC Media and its subsidiaries' investing activities
consisted of capital expenditures of $1.4 million for the three months ended
March 31, 2000 and $467.6 million for the period from May 14, 1999 through
December 31, 1999 including $0.7 million for capital expenditures and
$466.9 million for payments for acquisition of businesses.
Weekly Reader's operations used cash of $10.7 million for the three months
ended March 31, 2000 and, primarily as a result of income before depreciation
and amortization, generated cash of $26.6 million for the twelve months ended
December 31, 1999. Weekly Reader's investing activities consisted of capital
expenditures of $1.1 million in the three months ended March 31, 2000 and
$5.9 million in the twelve months ended December 31, 1999.
CompassLearning's operations used cash of $13.0 million for the three months
ended March 31, 2000 and $6.6 million for the twelve months ended December 31,
1999. CompassLearning's investing activities in the three months ended
March 31, 2000 consisted of capital expenditures of $0.3 million and in the
twelve months ended December 31, 1999 consisted of capital expenditures of
$0.5 million, $0.4 million used for purchase of a trademark and $0.4 million
provided from the disposition of marketable securities.
WRC Media and its subsidiaries' financing activities for the three months
ended March 31, 2000 provided cash of $1.4 million as a result of a
$2.0 million borrowing under our revolving credit facility and a repayment of
$0.6 million of our senior secured term loans. Financing activities for the
three months ended March 31, 1999 provided cash of $14.5 million to Weekly
Reader and CompassLearning and consisted of $9.7 million provided to Weekly
Reader by its previous owner, PRIMEDIA, and a $4.8 million borrowing by
CompassLearning under its predecessor's revolving credit facility. Financing
activities for WRC Media, Weekly Reader and CompassLearning during 1999
consisted of the financing transactions described under "The Acquisition and
Recapitalization." The proceeds of WRC Media's financing activities during 1999,
amounting to $467.6 million, were used to finance the acquisition of
CompassLearning in July of 1999 and the recapitalization in November of 1999.
HISTORICAL.
WEEKLY READER. Weekly Reader's principal uses of cash are for debt service,
capital expenditures, working capital and acquisitions. Funds for these purposes
have been principally generated by income from operations. For the three months
ended March 31, 2000, Weekly Reader's operations used cash of $10.7 million,
compared to a use of cash of $8.1 million for the same period in 1999, primarily
due to (1) an allocation of $8.2 million for interest expense, compared to
$3.3 million for the same period in 1999, (2) offset by an increase in operating
income of $1.3 million and (3) changes in operating assets and liabilities and
depreciation and amortization of $0.9 million due to the seasonal nature of
Weekly Reader's business. Cash flow from operating activities at Weekly Reader
is seasonal primarily because the majority of cash receipts for periodical
subscriptions are received in the third and fourth quarters of the year in which
the subscriptions are sold. Weekly Reader generated cash from operating
activities of approximately $26.6 million during the twelve months ended
December 31, 1999 and approximately $32.2 million during the twelve months ended
December 31, 1998. Funding from PRIMEDIA is reflected on Weekly Reader's
financial statements as investment by PRIMEDIA, net and relates to net transfers
of cash under the centralized cash management system of PRIMEDIA and allocations
of
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specific expenses and PRIMEDIA debt and equity prior to the acquisition of 94.9%
of Weekly Reader by WRC Media.
Weekly Reader made capital expenditures of $1.1 million in the three months
ended March 31, 2000, $1.0 million in the three months ended March 31, 1999,
$5.9 million in the twelve months ended December 31, 1999 and $4.3 million in
the twelve months ended December 31, 1998. Weekly Reader's capital expenditures
consist primarily of property and equipment and prepublication costs for
American Guidance. In the twelve months ended December 31, 1999, $4.5 million of
Weekly Reader's capital expenditures were for capitalized prepublication costs
at American Guidance.
COMPASSLEARNING. CompassLearning's principal uses of cash are for debt
service, capital expenditures, working capital and acquisitions. Funds for these
purposes have been principally generated by income from operations and
borrowings under credit facilities. For the three months ended March 31, 2000,
CompassLearning's operations used cash of $13.0 million, compared to a use of
cash of $4.7 million for the same period in 1999, due to (1) an allocation for
interest expense from WRC Media of $8.2 million, compared to interest expense of
$1.3 million for the same period in 1999, and (2) an increase in loss from
operations of $4.1 million, offset by changes in operating assets and
liabilities and depreciation and amortization of $2.7 million. CompassLearning
used cash of approximately $6.6 million for the twelve months ended
December 31, 1999 and $0.3 million for the twelve months ended December 31, 1998
for operating activities. CompassLearning's use of cash for the twelve months
ended December 31, 1999 was primarily due to $2.5 million of one-time,
non-recurring payments associated with the sale of the company (retention
bonuses and SAR's), $0.5 million of severance payments related to the July 1998
restructuring and a $3.6 million reduction in deferred revenue resulting from
lower service sales in 1999 compared to 1998.
CompassLearning made capital expenditures of $0.3 million in the three
months ended March 31, 2000 and made insignificant capital expenditures in the
same period in 1999. CompassLearning made capital expenditures of approximately
$0.5 million in the twelve months ended December 31, 1999 and $0.5 million in
the twelve months ended December 31, 1998. CompassLearning's capital
expenditures consist primarily of expenses related to personal computers for the
product development team, mainframe computer upgrades and
infrastructure/hardware upgrades.
PROSPECTIVE.
As part of the transactions described under "The Acquisition and
Recapitalization," Weekly Reader and CompassLearning entered into a credit
agreement relating to the senior credit facilities pursuant to which
$131.0 million of committed senior secured term loans and a $30.0 million
revolving credit facility for general corporate purposes were made available.
All of the senior secured term loans were borrowed as part of the financing for
the transactions described under "The Acquisition and Recapitalization." As of
March 31, 2000, after scheduled principal repayments, the senior secured term
loans under the senior credit facilities consisted of a $30.2 million term loan
A facility that fully amortizes within six years and a $99.5 million term loan B
facility that fully amortizes over seven years. The revolving credit facility
matures on the date that is six years after the date of the initial funding
under the senior credit facilities. As of March 31, 2000, $2.0 million of the
revolving credit facility was drawn. Additionally, we have applied for and
received a stand-by letter of credit in the amount of $2.0 million in connection
with a real estate lease. While this letter of credit is in effect, it reduces
available borrowing under our revolving credit facility by $2.0 million.
Loans under the senior credit facilities bear interest at a rate per annum
equal to:
(1) for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement plus 3.25% or the alternate base
rate as defined in the credit agreement plus 2.25% subject to performance
based stepdowns; and
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(2) for the term loan B facility, the LIBO rate plus 4.00% or the alternate base
rate plus 3.00%.
The senior credit facilities and the new notes offered in this prospectus
do, and other debt instruments of ours may, impose various restrictions and
covenants on us. In addition, both the old and new senior preferred stock will
continue to accrue dividends at 15% payable quarterly in cash or at, the option
of WRC Media and prior to the fifth anniversary of the first dividend payment
date, through accretion to the liquidation preference of the senior preferred
stock. In addition, prior to the fifth anniversary of the first dividend payment
date, at the election of the senior preferred stockholders dividends may be
payable in additional shares of senior preferred stock rather than through an
accretion to the liquidation preference.
Our primary future cash needs will be for debt service, capital expenditures
and working capital. We believe that our cash balance as of March 31, 2000 of
$4.6 million, our revolving credit facility of $30.0 million and cash generated
by operating activities will be sufficient to fund our debt service requirements
under the senior credit facilities and senior subordinated notes and to fund our
capital expenditures and working capital requirements for at least the next few
years. We expect our capital expenditures for the nine months of the fiscal year
ending December 31, 2000 to be approximately $8.5 million, including
approximately $5.2 million of capitalized prepublication costs for American
Guidance.
To the extent we make future acquisitions, we may require new sources of
funding, including additional debt or equity financing or some combination of
both. The senior credit facilities and the new notes offered will, and other
debt instruments of ours may, impose restrictions and covenants on us including
our ability to:
- incur additional indebtedness;
- create liens; or
- sell or otherwise dispose of assets.
These restrictions and covenants may restrict our ability to make
acquisitions, consolidate or merge. Notwithstanding these restrictions, however,
we can not assure you that we will be able to obtain additional funding for
acquisitions. See "Risk Factors--Inability to Implement Our Business Strategy"
and "Risk Factors--Substantial Leverage and Debt Service."
SEASONALITY
Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader's and
CompassLearning's sales are significantly affected by the school year. Weekly
Reader's sales in the third, and to a lesser extent the fourth, quarter are
generally the strongest as products are shipped for delivery prior to the start
of the school year. CompassLearning's sales are generally strongest in the
second quarter, and to a lesser extent the fourth quarter. CompassLearning's
sales are strong in the second quarter generally because schools frequently
combine funds from two budget years, which typically end on June 30 of each
year, to make significant purchases, such as purchases of CompassLearning's
electronic courseware, and because by purchasing in the second quarter, schools
are able to have the software products purchased installed over the summer and
ready to train teachers when they return from summer vacation. CompassLearning's
fourth quarter sales are strong as a result of sales patterns driven in part by
its commissioned sales force seeking to meet year-end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June.
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WORKING CAPITAL
As of March 31, 2000, working capital for Weekly Reader was composed of
$6.9 million. As of March 31, 2000, working capital for WRC Media and its
subsidiaries and CompassLearning was composed of deficits of $13.8 million and
$16.3 million, respectively.
As of December 31, 1999, working capital for Weekly Reader was composed of
$0.2 million. As of December 31, 1999, working capital for WRC Media and its
subsidiaries and CompassLearning was composed of deficits of $10.0 million and
$16.9 million, respectively. There are no unusual registrant or industry
practices or requirements relating to working capital items.
MARKET RISK
We are exposed to market risk. Market risk, with respect to our business, is
the potential loss arising from adverse changes in interest rates. We manage our
exposure to this market risk through regular operating and financing activities
and, when deemed appropriate, through the use of derivatives. We use derivatives
as risk management tools and not for trading purposes.
We are subject to market risk exposure related to changes in interest rates
on our $30.0 million revolving credit facility and our $129.7 million senior
secured term loan facilities under our senior credit facilities. Interest on
borrowings under our senior credit facilities will bear interest at a rate per
annum equal to:
(1) for the $30.0 million revolving credit facility maturing in six years and
the $30.2 million senior secured term loan A facility maturing in six years,
the LIBO rate as defined in the credit agreement plus 3.25% or the alternate
base rate as defined in the credit agreement plus 2.25% subject to
performance-based step downs; and
(2) for the $99.5 million senior secured term loan B facility maturing in seven
years, the LIBO rate plus 4.00% or the alternate base rate plus 3.00%.
Our senior credit facilities require us to obtain interest rate protection
for at least 50% of our senior secured term loans for the duration of the senior
credit facilities. On May 3, 2000, we entered into an arrangement with a
notional value of $65.0 million which terminates on November 17, 2001 and
requires us to pay a floating rate of interest based on the three-month LIBO
rate as defined in that arrangement with a cap rate of 8.0%.
Historically, we have, on occasion, entered into interest rate swap
agreements to exchange fixed and variable interest rates based on agreed upon
notional amounts and have entered into interest rate lock contracts to hedge the
interest rate of an anticipated debt issue. As of the date of this prospectus,
no derivative financial instruments were outstanding to hedge interest rate
risk.
INFLATION
We do not believe that inflation has had a material impact on our financial
position or results of operations for the periods discussed above. Although
inflationary increases in paper, postage, labor or operating costs could
adversely affect operations, we have generally been able to offset increases in
costs through price increases, labor scheduling and other management actions.
RECENT ACCOUNTING PRONOUNCEMENTS
WEEKLY READER
In 1998, Weekly Reader adopted the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Under Weekly
Reader's previous accounting policy, internal
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use software costs, whether developed or obtained, were generally expensed as
incurred. In compliance with SOP 98-1, Weekly Reader expenses costs incurred in
the preliminary project stage and, thereafter, capitalizes costs incurred in the
developing or obtaining of internal use software. Some costs, such as
maintenance and training, are expensed as incurred. Capitalized costs are
amortized over a period of not more than five years and are subject to
impairment evaluation in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption
of SOP 98-1, which primarily related to the non-recurring replacement of a
marketing and fulfillment system at Weekly Reader, resulted in an increase in
net income of approximately $0.7 million for the year ended December 31, 1998.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which becomes
effective for Weekly Reader's 2001 consolidated financial statements. SFAS
No. 133 requires that derivative instruments be measured at fair value and
recognized as assets or liabilities in a company's balance sheet. Weekly Reader
is currently evaluating the effect, if any, that SFAS No. 133 will have on its
consolidated financial statements.
In 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective for
Weekly Reader's 1999 consolidated financial statements. In the opinion of Weekly
Reader management it is not anticipated that the adoption of SOP 98-5 will have
a material effect on the consolidated financial statements of Weekly Reader.
COMPASSLEARNING
CompassLearning adopted SFAS No. 130, "Reporting Comprehensive Income" for
the year ended December 31, 1998. SFAS 130 requires CompassLearning to measure
and disclose all elements of comprehensive income that result from recognized
transactions and other events in the financial statements. Accordingly,
CompassLearning has reported unrealized gains on marketable securities as a
separate component of stockholders' deficit.
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INDUSTRY
THE PRE K PORTION OF THE EDUCATION MATERIALS MARKET DESCRIBED IN THIS
SECTION REFERS TO PRE-KINDERGARTEN CLASSES HELD AT K-12 PUBLIC OR PRIVATE
SCHOOLS AND DOES NOT INCLUDE SALES TO PRE-KINDERGARTEN FACILITIES SEPARATE FROM
K-12 PUBLIC OR PRIVATE SCHOOLS SUCH AS DAY CARE FACILITIES.
Unless otherwise specified, all industry and market data, including industry
data concerning the size of the industry, numbers of schools, teachers and
libraries, our share of sales in any market and the numbers of schools, school
districts and libraries that use our products, are based on management
estimates, market research, publicly available sources, industry experts and a
variety of industry publications. The statements made in this prospectus
concerning the size of the supplemental education materials market, as defined
in this prospectus, and the size of the four components of the supplemental
education materials market are management estimates based on a review of
available information, and are not derived from any single industry source.
Industry publications generally state that the information contained in them has
been obtained from sources believed to be reliable, but that the accuracy and
completeness of the information is not guaranteed. Similarly, management
estimates, market research, industry experts and publicly available sources,
while believed to be reliable, have not been independently verified, and no
representations as to the accuracy or completeness of the information are being
made. Unless otherwise indicated, "schools" refers to all public and private
schools for all K-12 students in the United States and "teachers" refers to
teachers in those schools.
We estimate, based on various industry sources, that the Pre K-12 education
materials market had approximately $6.2 billion in sales of products and related
services in 1998. Sales of our products and services are included in the rapidly
growing supplemental education materials segment of the overall education
materials market. We estimate this segment had approximately $3.6 billion in
sales in 1998, representing 58% of the overall Pre K-12 education materials
market, with the remainder consisting of the approximately $2.6 billion basal
materials segment. The supplemental education materials segment consists of:
- print and electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
The basal materials segment, in which we do not compete, consists primarily
of textbook programs that include student editions, teacher editions and
companion materials to teach particular subject areas, with each program
offering a grade specific textbook in the subject area for a span of grades.
Based on data provided in Simba Information Inc.'s Print Publishing for the
School Market, 1999-2000, Simba Information Inc.'s Print Publishing for the
School Market, 1997-1998, and Simba Information Inc.'s Electronic Media for the
School Market, 1998-1999, we estimate that the supplemental education materials
segment, excluding the supplemental education materials described below, has
grown from approximately $1.4 billion in sales in 1993, to $2.3 billion in 1998,
representing a compound annual growth rate of 10.7%. Simba Information Inc. is a
publisher of news, analysis, statistics and forecasts, including in the
education market, and a subsidiary of PRIMEDIA. Simba Information Inc. does not
report statistics for some supplemental education materials included in this
segment, consisting primarily of some testing and assessment products and some
library materials, which we estimate accounted for approximately $1.3 billion in
sales during 1998. Our management calculated the estimated sales value based on
the sum of management's own market estimates and data available in Simba
Information Inc.'s Print Publishing for the School Market, 1999-2000, and Simba
Information Inc.'s Publishing for Library Markets, 1999.
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Growth in the education materials market is expected to continue to be
driven by several factors, including:
- increasing Pre K-12 student enrollment;
- a rise in the number of Pre K-12 teachers;
- additional educational spending fueled by public concern over the quality
of education in the United States; and
- the growing installed base of personal computers in libraries, labs,
classrooms and homes.
In addition to the growth factors that affect the overall education
materials market, growth in the supplemental education materials segment is
driven by:
- the increasingly diverse sources of education funding;
- teachers and school and school district-level administrators using a
greater amount of supplemental education materials to improve student
performance, as they are increasingly held accountable for student
achievement; and
- a growing acceptance among teachers of theories of teaching that support
the use of different instructional methods to accommodate the many ways in
which students learn.
PRE K-12 EDUCATION MATERIALS MARKET
The Pre K-12 education materials market serves the approximately 108,000
public and private Pre K-12 schools and school libraries in the United States.
Purchasing decisions for supplemental education materials are primarily made by
teachers and school-level administrators, as opposed to the basal materials
segment where these decisions are typically made at the school district level.
Funding for education materials comes from a variety of Federal, state and local
sources. Some of these sources are allocated for specific uses, such as to
improve reading or increase access to technology, depending on the policy
objectives of the funding source.
The Pre K-12 education materials market has grown and is expected to
continue to grow, due to a number of factors, including the factors described
below.
INCREASING STUDENT ENROLLMENT. As student enrollment rises, schools must
increase their expenditures to purchase education materials for their new
students. Student enrollment in K-12 grades has grown from approximately
49 million students in the 1993-94 school year to approximately 52 million in
the 1997-98 school year. The National Center for Educational Statistics
estimates student enrollment will continue to grow every year until at least
2009.
GROWING NUMBER OF NEW TEACHERS. According to a report by the 1997
President's Committee of Advisors on Science and Technology, Panel on
Educational Technology, over 200,000 new teachers will enter the profession each
year for the next 15 years. Many states are accelerating their recruitment
efforts to increase the size of the teacher workforce and replace exiting
teachers. New teachers typically must purchase new education materials and are
often more open to new methods of teaching and types of instructional materials.
For example, younger teachers are often familiar with the use of personal
computers and the Internet, making them more open to using supplemental
electronic instructional materials. The number of new teachers in any year is
due to both an increase in the number of teachers and to turnover among current
teachers. The number of K-12 teachers has grown from approximately 2.9 million
in the 1993-94 school year to approximately 3.1 million in the 1997-98 school
year. The National Center for Educational Statistics estimates the number will
continue to increase each year through at least the 2005-2006 school year. This
growth has been driven by increasing student enrollment and, to a lesser extent,
by recent initiatives to maintain or decrease the student to teacher ratio in
elementary schools, generally in kindergarten through third grade. In addition,
the President's
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Committee of Advisors on Science and Technology, Panel on Education Technology
estimates that approximately 50% of the teacher workforce will turnover in the
next 15 years.
INCREASING SPENDING/FUNDING. Partially as a response to a growing
dissatisfaction among parents with the quality of education, average spending
per pupil for educational materials, as well as the type and amount of funding,
has been increasing and is expected to continue to increase, particularly for
supplemental education materials. In recent years, GALLUP polls have indicated
that lack of financial support and quality of education have been among the top
concerns of the general public regarding education. The average spending per
student for educational materials in elementary, middle and secondary schools
has grown from $5,584 per student in 1993 to $6,562 in 1998. The National Center
for Educational Statistics estimates average spending per pupil will grow to
$7,927 in 2003. Growth in the number of students up to 21 years old who are
classified as special education students also has contributed to the increase in
per pupil spending in the United States. A school, by law, must expend the
resources necessary to provide an equivalent educational environment for these
students, including individualized educational programs for each student. The
number of students classified for special education has increased to
2.6 million in the 1996-97 school year from 2.4 million in the 1993-94 school
year and is expected to continue to grow in the future. The amount and types of
funding also have been increasing. For example, since the early 1990s,
government policy and funding has supported the increased use of technology in
education, a key driver of growth in the supplemental education materials
segment. One of the results of this policy was The Technology Literacy Challenge
Fund, a five-year, $2.0 billion Federal fund initiated in 1995, that has been
providing grants to state education agencies to support grassroots efforts at
the state and local levels to meet national education goals.
INCREASING TEACHER ACCOUNTABILITY. Parents and policy makers are exerting
greater pressure to hold teachers and school administrators accountable for poor
student performance. Many different teacher and school administrator
accountability mechanisms have been implemented. Examples include:
- requiring schools to issue "school report cards" indicating student
performance on achievement tests;
- financial incentives based on student, school or school district
attainment of specified objectives; and
- states taking control of seriously under performing schools.
Greater accountability has helped increase the use of supplemental education
materials to help students improve learning and performance.
One area of particular note is the use of supplemental education materials
that enhance performance on achievement tests. Achievement tests are used by
states and school districts as a method of evaluating student progress. There
are two types of achievement tests: criterion reference tests, which are based
on a state or district standard of learning and norm reference tests, such as
the Iowa Test of Basic Skills, which are designed to produce statistics to
compare to the national population. Currently 40 states have mandated or are in
the process of mandating state-specific standards of learning which are
evaluated through statewide criterion reference testing, typically at the
fourth, eighth and eleventh grade levels.
INCREASING SCHOOL-LEVEL DECISION MAKING. Generally, there has been a trend
toward more school-level decision making for the supplemental education
materials segment. This trend is a result of the belief that localized decision
making is better able to match students' needs with the materials being
provided. This trend is consistent with the increased accountability being
demanded of schools and teachers, each of whom are increasingly being given the
right to make decisions but also are being held responsible for the results.
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INCREASED ACCESS TO TECHNOLOGY. One of the most rapidly growing categories
of the supplemental education materials segment is electronic instructional
materials. This growth has been fueled by increased access by schools and
libraries to technology. There has been widespread introduction of computers
into elementary and secondary schools in recent years. In the 1993-1994 school
year, the installed base of computers in U.S. schools was approximately
4.1 million. This number rose to 7.4 million in the 1997-1998 school year. In
addition there was an average of seven students per computer in the 1997-1998
school year compared to an average of 12 students per computer in the 1993-1994
school year. One important technological innovation that has become available to
schools following the introduction of computers is the Internet. The percentage
of schools with Internet access has increased rapidly from 35% in 1994 to 89% in
1998. Many of those schools provide Internet access primarily in their school
libraries or media centers, rather than classrooms. We expect the rate at which
schools are connected to the Internet to continue to grow, due in part to the
funds available through the Education rate program, which was established by the
Telecommunications Act of 1996 to help make telecommunications services and
technologies available to schools and libraries at discount rates.
DECREASING CLASS SIZES. Seventeen states have mandated and funded a reduced
student/teacher ratio at the elementary school level. In addition to the hiring
of new teachers, the demand for teachers imposed by these reduced ratios has
been partially satisfied by a shift in teachers from middle and secondary
schools to elementary school classrooms which is generally kindergarten through
third grade, with larger classroom sizes after elementary school. New teachers
and teachers undergoing a shift generally need to purchase new education
materials designed for elementary school students.
INCREASING LENGTH OF SCHOOL DAY. Over 30% of school districts in the United
States have extended day programs, a high percentage of which are located in
urban schools, and an increasing number of these programs include an
instructional component. These programs lengthen the school day and require the
expenditure of additional funds for their operation, including for education
materials.
GROWTH IN CHARTER SCHOOLS. Charter schools typically receive state and
local funding and are an alternative form of schooling to traditional public and
private schools, usually with a distinct mission such as a school focused on the
basics or science. Charter schools began in 1991, with the passage of charter
legislation at the state level and the number of charter schools has grown to
over 1,000 in 1998. As with the opening of any new school, charter schools
typically purchase substantial amounts of education materials before they become
operational.
DEVELOPING PARENT MARKET. Due to the growing dissatisfaction among parents
with public schools and increasing interest in education, there is a rapidly
developing market of parents seeking education materials, which we believe will
contribute to future growth in this market. A significant part of this
developing market is due to parents of children in public and private schools
buying supplemental instructional materials to use in their homes to augment
their children's education. In addition, part of this developing market is due
to the trend toward more home schooling. In 1993, it became legal in all 50
states for parents to teach their children themselves at home. In the 1997-1998
school year, there were an estimated 800,000 to 1.0 million children receiving
home schooling.
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The following table sets forth some of the trends described above. Unless
otherwise specified, the statistics in the following table are for the school
year ending in the year specified.
<TABLE>
<CAPTION>
HISTORICAL ESTIMATED PROJECTED
---------------------------------------------------- ------------------- -------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
K-12 student
enrollment(a)(b).... N/A 48.9 49.7 50.5 51.4 51.8 52.7 53.1 53.5
Number of K-12
teachers(a)......... N/A 2.9 2.9 3.0 3.1 3.0 3.1 3.1 3.1
Students classified as
special ed(a)(c).... N/A 2.4 2.5 2.6 2.7 N/A N/A N/A N/A
Number of public K-12
schools(d).......... N/A 85,393 86,221 87,125 88,223 N/A N/A N/A N/A
Total number of
charter
schools(e).......... 2 36 100 254 432 721 1050 N/A N/A
Current expenditure
per student in
average daily
attendance, public
K-12(f)............. $5,584 $5,767 $5,989 $6,146 $6,378 $6,562 $6,771 $7,053 $7,305
<CAPTION>
PROJECTED
-------------------
2002 2003
-------- --------
<S> <C> <C>
K-12 student
enrollment(a)(b).... 53.7 54.0
Number of K-12
teachers(a)......... 3.1 3.1
Students classified as
special ed(a)(c).... N/A N/A
Number of public K-12
schools(d).......... N/A N/A
Total number of
charter
schools(e).......... N/A N/A
Current expenditure
per student in
average daily
attendance, public
K-12(f)............. $7,640 $7,927
</TABLE>
- ------------------------
(a) Numbers in millions.
(b) Includes most kindergarten and some nursery school enrollment.
(c) Students classified in this category are students with learning disabilities
receiving additional school supplied resources.
(d) Number of private schools for each year is not available. For the 1993-94
and 1995-96 school years, there were 26,093 and 27,686, respectively,
private K-12 schools.
(e) The 1999 figure represents the total number of charter schools operating as
of December 1998.
(f) Numbers are for the calendar year.
Sources: National Center for Education Statistics, PROJECTIONS OF EDUCATION
STATISTICS TO 2009 and DIGEST OF EDUCATION STATISTICS, 1998 and U.S. Department
of Education, Office of Educational Research and Improvement, THE STATE OF
CHARTER SCHOOLS (1999).
SUPPLEMENTAL EDUCATION MATERIALS
We compete in the approximately $3.6 billion supplemental education
materials segment of the education materials market. Our management calculated
the estimated market size based on the sum of management's own market estimates
and data available in Simba Information Inc.'s Print Publishing for the School
Market, 1999-2000, Simba Information Inc.'s Electronic Media for the School
Market, 1998-1999, Simba Information Inc.'s Publishing for Library Markets,
1999, Education Market Research, 1996-1997 and Education Market Research, 1998.
The supplemental education materials segment benefits not only from increases in
total educational spending but from the variety of funding sources with money
targeted to specific programs. Virtually any instructional materials or supplies
funds not designated for textbooks can be used to purchase supplemental
education materials. An increasing number of these funding sources have targeted
dollars to specific programs and initiatives. One example of targeted funding is
Title I, the largest elementary, middle and secondary school Federal education
program, which accounted for $7.8 billion of Federal educational spending in
1998. Title I supplements state and local funding for low-performing children,
particularly in economically deprived schools. The program finances the
additional academic support and learning opportunities that are
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often required to help disadvantaged students achieve the same level of progress
as their classmates. Two other examples of targeted funding are the Technology
Literacy Challenge Fund and the National Challenge Grants for Technology in
Education. These Federal programs are designed to foster growth and development
of technology in the classroom.
The supplemental education materials segment has four categories of
materials:
- print instructional materials;
- electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
Growth in the supplemental education materials segment is driven by the
factors influencing the overall market, some of which we believe are having a
greater effect on this particular segment.
SUPPLEMENTAL PRINT INSTRUCTIONAL MATERIALS
We estimate that supplemental print instructional materials accounted for
approximately $1.6 billion of the supplemental education materials segment in
1998. Our management calculated the estimated size of this market segment based
on data available in Simba Information Inc.'s Print Publishing for the School
Market, 1999-2000, Education Market Research, 1996-1997 and Education Market
Research, 1998. The supplemental print instructional materials category consists
of the following:
- supplementary texts and workbooks;
- magazines/periodicals;
- manipulatives;
- teaching aids and guides;
- games/puzzles; and
- trade books.
Manipulatives are instructional materials designed to provide concrete,
tactile learning experiences, such as blocks used to teach the base ten math
system and materials used for scientific experiments. Of this approximately
$1.6 billion category, approximately $585 million consists primarily of
manipulatives, trade books and games/puzzles, which are products that we do not
offer but which we consider to be alternatives to some of our supplemental print
instructional materials. Our management calculated the estimated size of this
market segment based on data available in Simba Information Inc.'s Print
Publishing for the School Market, 1999-2000 and Education Market Research,
1996-1997.
Purchase decisions for supplemental print instructional materials are made
primarily by individual teachers. These decisions are generally based on the
product's quality, price, educational content, consistency and its ease of
integration into the school curriculum. Strong brand names and long histories
are important for companies serving this category to better address teachers'
purchasing criteria.
SUPPLEMENTAL ELECTRONIC INSTRUCTIONAL MATERIALS
We estimate that sales of supplemental electronic instructional materials
accounted for approximately $870 million of the supplemental education materials
segment in 1998. Our management calculated the estimated sales value based on
the sum of management's own market estimates and data
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available in Simba Information Inc.'s Electronic Media for the School Market,
1998-1999. The supplemental electronic instructional materials category is
comprised of the following:
- comprehensive courseware and modular courseware;
- stand-alone/non-networked software (e.g., CD-ROMs);
- Internet/browser-based products;
- TV satellite distance learning; and
- video cassettes and video disks.
Of the $870 million supplemental electronic instructional materials
category, approximately $230 million is comprised of TV satellite distance
learning and video disks, which are products that we do not offer. Our
management calculated the estimated size of this market segment based on data
available in Simba Information Inc.'s Electronic Media for the School Market,
1998-1999.
The success of companies competing in the supplemental electronic
instructional materials segment is based on their ability to deliver engaging,
effective, pedagogically sound content that is easy for students and teachers to
use. A recognized brand name and references and testimonials from product users
are important, particularly to help purchasers distinguish among a variety of
offerings which, because of their electronic format, are not as easy to review
for content. Unlike other categories of the supplemental education materials
segment, the purchasing decisions for electronic instructional materials, other
than stand-alone/non-networked software, are primarily made by school
district-level administrators, including superintendents, curriculum directors
and technology directors. Sales also are made, however, at the state and local
level. In addition, although individual teachers do not typically make final
purchasing decisions, they frequently have substantial input in the decision
making process.
Electronic instructional materials, which were infrequently used in the
early 1990s, have shown the most growth in the supplemental education materials
market. In 1998, at least one-third of elementary, middle and secondary school
teachers used some form of electronic delivery of instruction. Although
electronic delivery through mainframe computers as a medium for the transmission
of educational materials has existed for over thirty years, the introduction of
the personal computer in the early 1980s, and more importantly, its widespread
use over the past decade have changed the landscape for instructional providers.
The use of electronic instructional materials is expected to continue to rapidly
grow. Fueling this growth are four national technology goals set by the Federal
government for schools:
- universal student accessibility to modern computers;
- the inclusion of engaging, educationally sound software in school
curriculums;
- teachers ready to use and teach with technology; and
- classrooms electronically connected to one another and the Internet.
Government policy and funding have supported these goals. In addition to The
Technology Literacy Challenge Fund, the National Challenge Grants for Technology
in Education, a Federal initiative beginning in 1995, challenges communities to
form partnerships among local schools, students, colleges, universities and
private businesses to develop new ways to use technology in learning. Since
1995, the National Challenge Grants program has funded 62 projects in 33 states
including over 500 school districts. These government policies have led to
increased technology spending, with approximately $5 billion expected to be
spent by schools on educational technology infrastructure, including hardware,
in 1999. Furthermore, the Education rate program is expected to continue to fund
the connection of schools and libraries to the Internet.
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TESTING AND ASSESSMENT PRODUCTS
We estimate that testing and assessment products accounted for approximately
$600 million of the supplemental education materials segment in 1998. This
category consists of two primary groups of products and related services:
- an approximately $525 million to $550 million group of testing products
and related scoring and reporting services used to determine entrance to
post-secondary schools such as the American College Testing Assessment
(ACT) or the Scholastic Aptitude Test (SAT), achievement tests that assess
the academic performance of individuals or groups against a normed
population and related scoring and reporting services, and some other
similar tests (collectively, "Academic Assessment Products"); and
- an approximately $50 million to $75 million group of testing and
assessment products that are individually administered to assess the
progress of individuals and provide counseling on a course of study to
achieve a set of learning objectives ("Academic Guidance Testing
Products").
We compete in the Academic Guidance Testing Products group. In addition,
some of our testing and assessment products are also used by clinical
professionals for both children and adults in settings such as clinics,
hospitals and community mental health centers as well as in correctional
facilities. We estimate that the combined supplemental and other testing and
assessment products markets in which we compete had total sales of products and
related services in 1998 of approximately $125 million.
Purchasing decisions for Academic Assessment Products are typically made by
individuals, in the case of tests used to determine entrance to post-secondary
schools, and by school districts in the case of achievement and other tests.
Purchasing decisions for Academic Guidance Testing Products are made by a wide
variety of professionals, including school district administrators, guidance
counselors, speech pathologists and psychologists. These professionals generally
purchase products from several different developers and use them as appropriate.
In order to compare performance of their student populations over time, these
professionals tend to use the same tests repeatedly. These products do not tend
to be particularly price sensitive because of their specialized nature.
Competition for all testing and assessment products is based primarily on
quality and reputation.
Criterion reference tests are usually commissioned, and paid for, by the
state. Because these tests are paid for by the state, they have not been
included in the $600 million testing and assessment products category described
above. The size of this market changes each year depending on the number of new
state criterion testing programs commissioned in each year.
LIBRARY MATERIALS
According to Publishing for Library Markets, 1999 by Simba
Information Inc., libraries in the United States spent $5.1 billion in 1998 on
information both print and electronic. In addition, in Publishing for Library
Markets, 1999, Simba Information Inc. estimates that, spending in the United
States library materials segment will experience a compound annual growth rate
from 1997 to 1999 of 6.5%. There were over 139,000 libraries in the United
States in 1998, consisting of four types: academic including college and other
higher education libraries, public, school (K-12) and special corporate,
government, legal and medical according to Simba Information Inc.'s Print
Publishing for Library Markets, 1999. Of these libraries, approximately 108,000
were K-12 school libraries, approximately 16,000 were public libraries and the
remainder were academic and special libraries. According to Simba
Information Inc.'s Publishing for Library Markets, 1999, approximately
$600 million of the $5.1 billion in sales in the library materials market in
1998 were made to school libraries for print materials. We include library
materials targeted to school libraries in the supplemental education materials
market because students often use these materials to complete homework
assignments and school reports. We sell products to school libraries and to a
lesser extent to public, academic and special libraries.
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School libraries are primarily funded by state and local sources and to a
lesser extent Federal sources. Public libraries are primarily funded by local
sources and to a lesser extent state and Federal sources. Academic and special
libraries have a variety of funding sources, both public and private.
Libraries generally are becoming multimedia centers, providing both print
and electronic information. Although libraries have rapidly increased spending
on electronic information, print remains the dominant medium in libraries. Print
information, which includes books, periodicals, audiovisual and microform
products, accounted for approximately 73% of sales to libraries in 1998 and in
Publishing for Library Markets, 1999, Simba Information Inc. estimates that
sales of print information, including books and periodicals, will continue to
experience moderate growth. Books were the leading source of revenue for
products in print format, followed by periodicals and journals. In Publishing
for Library Markets, 1999, Simba Information Inc. estimates that by 2003,
electronic materials will generate 32% of information sales to all libraries.
Within electronic information, Internet delivery of library materials is the
fastest growing medium, while spending for CD-ROMs and software is showing a
decline after leading growth during the early 1990s. The majority of libraries
in public schools have Internet access. As the amount of online materials has
increased, there has been a trend, which is expected to continue, away from
information on CD-ROMs.
The number of competitors in the library materials market varies depending
on the category of products involved. Competition is primarily based on
reputation and brand names of products, the length of time products have been on
the market, the uniqueness of a product and suitability for libraries. For
example, libraries primarily buy hardcover books. Therefore, products in this
library materials market tend to be less price sensitive than in other consumer
markets. The primary distribution channel for libraries is wholesalers.
Libraries also often purchase through catalogs, direct mail packages and
brochures and to a lesser extent from direct sales or telemarketing.
BASAL MATERIALS
The approximately $2.6 billion basal materials segment of the overall
education materials market primarily consists of textbook programs that include
student editions, teacher editions and companion materials to teach particular
subject areas, with each program offering a grade specific textbook in the
subject area for a span of grades according to Simba Information Inc.'s Print
Publishing for the School Market, 1999-2000. Basal materials are generally
designed to be useful for a period of five to seven years before requiring a
major revision. Basal textbooks are typically purchased at the school district
level, often using textbook selection committees that include administrators,
teachers and, occasionally, parents. School districts may purchase textbooks in
any given subject area for one or more of the grades for which textbooks in a
program are available. School districts usually employ a selection process that
can be lengthy and time consuming for publishers. Most states and districts
earmark a certain portion of their education funds specifically for textbooks.
The processes and practices used in selecting and adopting textbooks vary by
state. Twenty-two states, mostly in the Southern and Western United States, make
available all or a portion of their textbook funds only for approved textbooks.
These states have statutes that provide procedures for the approval and
selection of textbooks for use in each state school. In general, most states
with statutes governing adoption of textbooks use textbook selection committees
to approve textbooks. These committees typically include teachers and
administrators, and sometimes parents. Textbooks are reviewed according to a
list of specific curricular requirements developed by the state and made
available to publishers well before the selection process begins. Once the
review is concluded, the committee "lists" approved textbooks. The actual
selection of textbooks is left to individual districts. School districts may
purchase "off-list" texts, but may receive reduced or no funding from the state
textbook funding source for these purchases. In states without statutes
governing the approval and selection of textbooks, each school district
generally selects and adopts textbooks for the school district without using any
approved list.
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Because a significant number of states require that textbooks satisfy
specific criteria, textbook publishers must incur significant up-front costs to
produce materials that meet these standards before they know whether their
products will be adopted and purchased. Because supplemental education materials
are intended to address individual needs or to supplement parts of the
curriculum, they have not been the subject of the kind of approval process that
adoption states use for textbooks, which are focused on standards for the entire
population of students.
Textbook funds in both states with and without statutes governing the
approval and selection of textbooks are usually used to purchase basal textbooks
and companion materials. For adoption states, basal material publishers are
typically the publishers willing to incur the significant up-front costs
described above. In states without adoption statutes, basal materials also are
usually purchased with textbooks funding because basal materials are correlated
to the accepted scope of the course and the order in which a subject is taught.
Some publishers, however, do sell their products in both the basal and
supplemental education materials segments.
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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. Our strong brand names, several of
which have been published for over 40 years, include:
- WEEKLY READER;
- TEEN NEWSWEEK;
- THE PEABODY PICTURE VOCABULARY TEST;
- TOMORROW'S PROMISE;
- THE WORLD ALMANAC AND BOOK OF FACTS; and
- FACTS ON FILE WORLD NEWS DIGEST.
Utilizing sophisticated sales and marketing methods, which include the use of
proprietary databases, we have established long standing customer relationships
and an extensive network with direct distribution channels. Our targeted
customers are:
- teachers;
- school and school district-level administrators;
- librarians;
- other educational professionals; and
- parents.
On May 14, 1999, Ripplewood Holdings L.L.C., which specializes in private
equity investments, formed WRC Media as a holding company to pursue a leveraged
acquisition in the media industry. WRC Media now serves as a holding company for
CompassLearning, Weekly Reader and Weekly Reader's subsidiaries. CompassLearning
was incorporated on July 30, 1969, and Weekly Reader Corporation was
incorporated on November 28, 1990.
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, we completed the recapitalization of the
Supplemental Education Group of PRIMEDIA Inc., consisting of the businesses of
Weekly Reader, American Guidance and World Almanac and their respective
subsidiaries. As a result of this transaction, Weekly Reader became a subsidiary
of WRC Media. For more information on the recapitalization of the Supplemental
Education Group of PRIMEDIA see "The Acquisition and Recapitalization". Our
operations are now conducted primarily through the following four operating
subsidiaries, each of which is a market leader in its respective product
categories.
WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for Pre K-12 students for over 70 years. Weekly Reader or its former
parent or affiliates of its former parent acquired Facts On File News Services
in 1996, Gareth Stevens, Inc. in 1997 and American Guidance in 1998. We were the
largest publisher of classroom periodicals during the 1997-1998 school year in
terms of total circulation with over 8.7 million subscribers, more than the
other two primary competitors in this market combined. In addition to our well
recognized classroom periodicals, such as WEEKLY READER, TEEN NEWSWEEK and
CURRENT EVENTS, we publish 177 distinct, grade-specific basic and life skills
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workbooks. We also publish instructional materials paid for by various sponsors,
such as Chrysler and the American Health Foundation, which are distributed for
free primarily to K-12 students throughout the United States. For the twelve
months ended December 31, 1999, Weekly Reader, not including American Guidance
or World Almanac, had net revenue of $45.7 million, representing approximately
21% of our total pro forma net revenue during this period.
AMERICAN GUIDANCE. American Guidance has been a leading publisher of
individually administered testing and assessment products and supplemental
instructional materials for over 35 years. In 1996, American Guidance acquired
assets of Lake Publishing Company. Subsequently, in 1997, American Guidance
acquired various assets of Craig-Hart Publishing Company and International
Thomson Publishing Inc. American Guidance's testing and assessment products are
primarily for K-12 students and its supplemental instructional materials are
primarily for low-performing students in middle and secondary schools. One or
more of American Guidance's testing and assessment products or supplemental
instructional materials are used in over 12,000 school districts, or
approximately 80% of the school districts in the United States. Our testing and
assessment products are used to diagnose learning disabilities and measure the
cognitive ability, educational achievement or personal and social adjustment of
individual students. American Guidance's supplemental instructional materials
include various textbooks and worktexts, many of which we believe set the
standard for quality in their respective product categories, with full color
content and accompanying extensive teacher support materials. For the twelve
months ended December 31, 1999, American Guidance had net revenue of
$49.6 million, representing approximately 23% of our total pro forma net revenue
during this period.
COMPASSLEARNING. CompassLearning is a leading publisher of electronically
delivered supplemental instructional materials and teacher management and
student assessment products for the K-12 market. CompassLearning has been
serving this market for over 20 years and one or more of its products have been
sold to more than 20,000 K-12 schools, representing approximately 19% of all
schools in the United States. We have approximately 7,000 hours of proprietary
electronic courseware providing interactive curriculum lessons for K-12
students. Our electronic courseware primarily covers reading, math and language
arts, is generally correlated to the five leading achievement tests for K-12
students, and can be customized to correlate with specific state tests or school
district standards. Our management and assessment tools and services are
integrated with our courseware and assess and report each student's progress,
assist the teacher in developing the appropriate response to each student's
performance and allow the teacher to incorporate our products into his or her
specific lesson plan. For the twelve months ended December 31, 1999,
CompassLearning had net revenue of $65.8 million, representing approximately 31%
of our total pro forma 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 40 years. During the
past three years, over 55% of the approximately 124,000 school and public
libraries in the United States have purchased products from World Almanac. World
Almanac publishes well-known print reference materials, such as THE WORLD
ALMANAC AND BOOK OF FACTS and nonfiction and fiction books for K-6 students
under the GARETH STEVENS brand. In addition, World Almanac publishes electronic
reference materials such as the FUNK & WAGNALLS ENCYCLOPEDIA database and CD-ROM
and Internet-based versions 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 89% from 1996 through 1999. World Almanac also
distributes third-party products that are targeted for K-12 students through its
World Almanac Education Library Services catalogs. For the twelve months ended
December 31, 1999, World Almanac had net revenue of $52.9 million, representing
approximately 25% of our total pro forma net revenue during this period.
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COMPETITIVE STRENGTHS
A number of competitive strengths have contributed to our leading market
positions, including:
BROAD PRODUCT PORTFOLIO. We are a leading publisher in the supplemental
education materials market and one of the few companies with a comprehensive
portfolio of products covering all the major segments of this market. We offer a
wide range of products to our customers which consists of:
- 25 periodicals;
- 310 instructional books and workbooks;
- approximately 7,000 hours of proprietary electronic courseware;
- 29 testing and assessment products;
- six reference products;
- over 1,000 nonfiction and fiction books and videos; and
- over 3,750 books and other products that we distribute for third parties.
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.
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 over 40 years, including WEEKLY
READER, which was first published in 1928, the PEABODY PICTURE VOCABULARY TEST,
which was first published in 1959, and THE WORLD ALMANAC AND BOOK OF FACTS,
which was first published in 1868. We believe that our products are well-known
and trusted by teachers, other educational professionals and parents for their
effectiveness and consistent, high quality educational content. Brand name and
reputation are significant criteria in the purchasing decision process for
supplemental education materials as they are usually selected at the discretion
of individual teachers, school and school district-level administrators or
parents.
STABLE REVENUE BASE. We have a significant base of long-term customers who
have exhibited substantial product loyalty, resulting in a consistent level of
revenues from recurring sales to these customers. In our experience, once a
teacher or administrator is familiar with and accustomed to using a supplemental
instructional product and has developed lesson plans using the product, it is
difficult to convince that teacher to switch to new products. In addition, we
believe there is an important component of trust in the quality, consistency and
support of many of our products which makes it difficult for a competitor to
introduce new products for the same subject area without significant investment
and the support of key opinion makers in the industry. As a result of this
loyalty, many of our products enjoy long customer histories with high renewal
rates. For example, in each of the last ten years, over 80% of elementary,
middle and secondary schools at which subscriptions to one or more of our
periodicals were sold in the previous year subscribed to one or more of our
periodicals in the following year. We believe our school renewal rates are
important because of the value we place on ensuring that our periodicals remain
available within any given school, providing us with a base on which to further
penetrate that school. In addition, six of our top ten testing and assessment
products, based on net revenues, have been published for over 25 years.
SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over
20 years of experience in developing and providing electronically delivered
supplemental instructional materials and are well positioned to capitalize on
this rapidly growing market segment. In 1979, CompassLearning introduced its
first electronic learning product, the Computerized Learning Approach System
(CLAS), which operated on an 8K Commodore "Pet" computer. It was a stand-alone
product that included
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vocabulary comprehension and math skills. One or more of CompassLearning's
products have been sold to over 20,000 K-12 schools in the United States, more
schools than have been reached by any other publisher of comprehensive
electronic courseware.
CompassLearning curriculum is delivered electronically over local area
networks by installing the curriculum on a server with a CD-ROM. A server is a
computer on a network of computers that manages the network resources. The
curriculum may then be accessed from student computer stations located within
the lab or classroom. After the content is installed on the server, the CD-ROM
is no longer needed to run the lesson plans from the student stations.
Each of our primary operating subsidiaries have web sites that promote their
respective products, provide product information and, in some cases, enable
users to order products over the Internet. Given the importance of quality and
name recognition to the development of Internet-based business, we believe that
the strength of our brands and our direct distribution channels position us well
for significant growth in this area.
STRONG DISTRIBUTION CHANNELS. Our products are used in over 80,000 schools,
by over ten million students, in over 6.5 million homes (through Weekly Reader
periodicals being taken home) and in over 68,000 school and public libraries. We
have an extensive network with direct distribution channels into these end user
markets. Some of our products are sold using direct field and telephone sales,
emphasizing personal relationships with teachers, school and school
district-level administrators and other educational professionals.
CompassLearning, for example, uses a three-pronged approach that provides every
customer a sales contact, an educational consultant and a technology support
person, for comprehensive customer service. We also utilize sophisticated direct
mail campaigns, which at Weekly Reader and World Almanac are enhanced by our
proprietary databases. These databases track the purchasing habits of teachers,
schools and/or librarians for many of our products as well as specific
demographic and other factors we believe affect purchasing habits.
EXPERIENCED MANAGEMENT TEAM. We have assembled an experienced management
team at both the administrative and the operating levels. This management team
is led by Martin E. Kenney, Jr., our Chief Executive Officer, who has over
25 years of experience in educational publishing and electronic courseware.
Prior to joining WRC Media, Mr. Kenney was Executive Vice President of the
Educational Publishing Group and President of the Education Technology Group at
Simon & Schuster, the world's largest educational publisher at that time. The
top 11 members of our management team have an average of approximately 15 years
of experience in the educational publishing industry.
BUSINESS STRATEGY
Our objective is to become the leading publisher of supplemental education
materials in the United States by using our competitive strengths to maintain
and solidify our leading market positions as well as to selectively emphasize
those market segments which demonstrate sustainable and high rates of growth and
return. To achieve this objective, we are focusing on the following strategies:
CAPITALIZE ON THE GROWING SUPPLEMENTAL EDUCATION MATERIALS MARKET. 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
market segments. This market has experienced strong growth in recent years, and
we believe that usage of supplemental education materials will continue to
increase and that the breadth of our product portfolio and our leading market
positions will allow us to continue to benefit from this market growth. As
educational priorities and funding shift over time, we intend to focus on the
growth segments of the market, which we believe will generate high returns on
investment, by selectively allocating resources to products and services in
response to industry trends.
EXTEND OUR STRONG BRAND NAMES INTO NEW PRODUCTS, SERVICES AND END-USER
MARKETS. We intend to use our strong brand names, significant market presence
and extensive base of existing customers to
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extend our brands into new products and services and to expand into new end-user
markets. We believe that the home market will be an important market for our
products in the future because of the heightened awareness, interest and concern
among parents for education and the increasing number of home computers. Charter
schools are also an attractive emerging segment because these new schools start
without any supplemental education materials or instructional materials and are
growing at a rapid rate. The number of charter schools has grown from less than
ten in 1993 to over 1,000 in 1998.
EXPAND THROUGH ELECTRONIC DELIVERY CAPABILITIES. We intend to focus on the
rapidly growing electronic delivery segments of our market. Although delivery of
supplemental education materials over the Internet currently accounts for a
small segment of our market, it constitutes one of the most rapidly growing
areas and provides significant expansion potential for each of our primary
operating subsidiaries through brand extension and continuing conversion of our
print materials for electronic delivery. In the 1993-1994 school year, there was
an average of 12 students per computer as compared to seven students per
computer in the 1997-1998 school year. Furthermore, the number of schools with
Internet access has increased significantly from 35% in 1994 to 89% in 1998. We
are well-positioned to expand in this area because of our significant experience
in electronic delivery of materials, strong brand names and extensive
educational content. In addition, we developed our existing electronic
courseware products using a standardized authoring tool which facilitates,
expedites and reduces the cost to convert our products into a format for
delivery over the Internet.
SELL ACROSS DISTRIBUTION CHANNELS. We intend to make use of the experience,
market contacts, installed base and distribution channels that our four primary
operating subsidiaries have developed in their respective market segments to
increase sales to new and existing customers. For example, we may conduct
cooperative direct marketing of multiple product lines. In addition, we intend
to bundle or repackage different products together, such as linking electronic
reference materials with electronic courseware or bundling periodicals with
supplemental instructional materials in social studies.
In order to achieve our business objectives, we may seek to acquire, or
invest in, suitable companies. These acquisitions and investments may require
additional funding which may be provided in the form of additional debt or
equity financings or a combination of both. However, the senior credit
facilities or the notes indenture may restrict our ability to obtain these
financings. Moreover, we cannot guarantee that any acquisition may successfully
accomplish our business objectives due to the possible loss of key employees and
the necessary demands on resources associated with integrating new assets or
businesses.
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PRODUCTS AND SERVICES
The following chart outlines our product offerings by primary operating
subsidiary in each of the segments of the supplemental education market in which
we compete:
<TABLE>
<CAPTION>
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
<S> <C> <C> <C> <C>
PRINT AND ELECTRONIC PERIODICALS: 19 grade or BASIC SKILLS: ELECTRONIC COURSEWARE: TEACHING KITS: Kits
INSTRUCTIONAL MATERIALS subject-specific Supplemental textbooks Approximately 7,000 developed by World
periodicals for Pre K-12 and worktexts targeted hours of proprietary Almanac Education
students, including for low- performing electronic courseware Library Services used to
Weekly Reader, Teen students in middle and for K-12 students, teach a variety of
Newsweek and Current secondary schools primarily for reading, skills including
Events. covering core curriculum math and language arts, research skills, map
SKILLS BOOKS: 177 subjects. including TOMORROW'S skills and Internet
distinct, grade TEST PREPARATION: PROMISE. skills.
specific, workbooks for Instructional materials MANAGEMENT SYSTEMS:
K-9 students that build to prepare for three of COMPASS management
and reinforce basic the leading achievement system enables teachers
skills, including the tests for K-12 students. to track student
Map Skills series, or PERSONAL GROWTH: Various performance, record
focus on current topics personal growth grades, report on
such as health issues or materials covering progress and prescribe
upcoming Presidential topics such as drug use lessons based on
elections. prevention and career results.
SPONSORED INSTRUCTIONAL education targeted for INTERNET-BASED PRODUCTS:
MATERIALS: A variety of K-12 students. Worldware software
free instructional integrates more than 400
materials, including pre-selected "safe" web
print and video sites into the
products, paid for by curriculum and is also a
corporate, trade web site with
association and/or educational activities
not-for-profit sponsors for students. Compass
primarily for K-12 Virtual Classroom allows
students. teachers and students to
access Compass through
the Internet.
TESTING AND ASSESSMENT N/A INDIVIDUALLY COMPUTERIZED ASSESSMENT N/A
PRODUCTS ADMINISTERED TESTS: TESTS:
Assessment products for COMPASS COMPREHENSIVE
K-12 students and adults ASSESSMENT
including the PEABODY TESTS,electronic tests
PICTURE VOCABULARY TEST, based on the test items
KAUFMAN TEST OF in the five leading
EDUCATIONAL ACHIEVEMENT achievement tests. Based
AND BEHAVIOR ASSESSMENT on COMPASS COMPREHENSIVE
SYSTEM FOR CHILDREN. ASSESSMENT TESTS
evaluations, electronic
courseware can be
assigned to students.
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.
</TABLE>
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WEEKLY READER.
Weekly Reader has four primary product lines:
- elementary school periodicals;
- middle and secondary school periodicals;
- sponsored instructional materials published by its subsidiary, Lifetime
Learning Systems, Inc.; and
- skills books.
In addition, Weekly Reader licenses the content of some of its publications
for commercial use by third parties and sells advertising space in some of its
publications and on its WEEKLY READER GALAXY web site.
ELEMENTARY SCHOOL PERIODICALS. WEEKLY READER, first published in 1928, has
established itself as a leading source for current events information for
students in grades Pre K-6. WEEKLY READER features seven grade-specific editions
for students, with between 25 and 32 issues per school year for each edition.
Weekly Reader also offers two optional monthly supplements, SCIENCESPIN and
GEOSPIN. The following table lists each edition of the WEEKLY READER and our
other elementary school periodicals indicating issues per subscription and
subscription price.
<TABLE>
<CAPTION>
ISSUES PER 1999 SUBSCRIPTION PRICE
PUBLICATION SUBSCRIPTION (PER STUDENT, PER YEAR)(A)
- ----------- ------------ --------------------------
<S> <C> <C>
WEEKLY READER:
Pre K..................................................... 28 $5.20
K......................................................... 28 4.36
Grade 1................................................... 32 3.10
Grade 2................................................... 25 3.10
Grade 3................................................... 25 3.52
Grade 4................................................... 25 3.52
Grades 5-6................................................ 25 3.83
SCIENCESPIN................................................. 7 1.00
GEOSPIN..................................................... 7 1.00
</TABLE>
- ------------------------
(a) Includes shipping and handling costs.
Subscriptions to Weekly Reader elementary school periodicals in the
1997-1998 school year represented approximately 54.5% of all elementary school
periodical subscriptions circulated in that year by the three major publishers
of these periodicals which we believe together account for virtually all
periodicals targeted for classrooms. According to Weekly Reader, its periodicals
had the highest total circulation of elementary school periodicals in the
1997-1998 school year, totaling approximately 7.1 million subscriptions
including approximately 0.5 million unpaid promotional or teacher reference
subscriptions.
Each edition of WEEKLY READER is specifically written and designed for
particular grade levels in order to bring information on current events to
elementary school students at a conceptually appropriate level. The editions for
younger audiences contain "soft" news focusing on topics such as fire prevention
and animals. Higher grade level editions contain "hard" news concerning topics
such as world news and current events, including, for example, the Kosovo
conflict, the 2000 Presidential elections and the Olympics bribery scandal. A
teacher's guide with background information, discussion topics and follow-up
questions is included with each issue of each edition.
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To capitalize on our large customer base of elementary school teachers and
schools, in the 1997-1998 school year, we launched SCIENCESPIN, an optional
monthly science news supplement to WEEKLY READER. Each edition of SCIENCESPIN
contains science news tailored to student reading levels and school curriculum.
MIDDLE AND SECONDARY SCHOOL PERIODICALS. We publish ten subject-specific
periodicals covering six subject areas for students in middle and secondary
schools, with between six and 30 issues per school year per periodical. For
example, CURRENT EVENTS, one of our most popular periodicals for middle school
students, provides information on current events tailored to the reading levels
and school curriculum of students in the sixth through ninth grades. The
following table lists each of our middle and secondary school periodicals
indicating target grades, issues per subscription, subject area and subscription
price.
<TABLE>
<CAPTION>
1999 SUBSCRIPTION PRICE
ISSUES PER (PER STUDENT,
PUBLICATION GRADE SUBSCRIPTION SUBJECT AREA PER YEAR)(A)
- ----------- -------- ------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Current Events................... 6-9 25 Social Studies $8.85
Current Science.................. 6-9 16 Science 9.49
READ............................. 6-9 18 Language Arts 9.49
Writing.......................... 7-10 6 Language Arts 9.28
Extra............................ 5-9 12 Remedial Reading 10.55
Career World..................... 7-12 6 Career Guidance 9.81
Current Health 1................. 5-6 8 Health 9.49
Current Health 2................. 7-12 8 Health 9.49
Human Sexuality.................. 7-12 8 Health 3.45
Teen Newsweek.................... 6-9 30 Social Studies 5.95
</TABLE>
- ------------------------
(a) Includes shipping and handling costs.
Weekly Reader's middle and secondary school periodical subscriptions in the
1997-1998 school year represented approximately 39.9% of all middle and
secondary school periodical subscriptions circulated that year by the three
major publishers which we believe account for virtually all middle and secondary
school periodicals targeted for classrooms. Weekly Reader's middle and secondary
school periodicals had the second highest total circulation of periodicals for
these schools in the 1997-1998 school year with approximately 1.6 million
subscriptions including approximately 0.2 million unpaid promotional or teacher
reference subscriptions. In each of the last ten years, over 70% of middle and
secondary schools that have subscribed to one or more of our middle or secondary
school periodicals subscribed to one or more of our middle or secondary school
periodicals in the following year.
To specifically target the growing sixth to ninth grade market, Weekly
Reader recently entered into a partnership with NEWSWEEK magazine to create TEEN
NEWSWEEK, which was launched in September 1999. TEEN NEWSWEEK focuses on social
studies and current events and contains grade-appropriate news stories that link
history, geography, government and cultures to the news stories. The partnership
is intended to capitalize on Weekly Reader's expertise in publishing and
marketing materials for classroom use and NEWSWEEK's strong news image, rapid
distribution capabilities and experience in advertising sales.
LIFETIME LEARNING SYSTEMS, INC. Our Lifetime Learning Systems, Inc.
business is a leader in the creation and distribution of a variety of
supplemental education materials which are paid for by corporate, trade
association and/or not-for-profit sponsors and are distributed free to a target
audience. The materials produced focus on topics chosen by the sponsor and are
typically targeted for use in K-12 classrooms. Lifetime Learning Systems, Inc.
also produces sponsored supplemental education materials targeted for the
college and senior citizen markets. Lifetime Learning Systems, Inc. has created
a variety of formats for supplemental education materials over the years,
ranging from:
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- posters, teacher's guides and reproducible student activities;
- audio and video tapes; and
- web sites.
Sponsors of Lifetime Learning Systems, Inc. projects have included corporate
sponsors such as Chrysler, Home Box Office, ABC-TV and Ford as well as
not-for-profit sponsors such as the American Health Foundation, the Tennessee
Valley Authority and Save the Children.
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 177 distinct,
grade-specific titles spanning K-9 grades. For example, the highly successful
Map Skills series builds geographic literacy by teaching students basic
map-reading concepts and skills. The success of this series is attributable to a
proven sequential approach to teaching map skills that matches the curriculum
established by many school systems. Additional products include series covering
topics such as AIDS and Presidential elections.
WEEKLY READER GALAXY. In addition to our presence in the classroom through
printed materials, in 1996 we launched our web site, WEEKLY READER GALAXY, with
the goal of strengthening the brand image of our print products and positioning
Weekly Reader to capitalize on electronic distribution opportunities. WEEKLY
READER GALAXY is a free web site with pages specifically addressing students,
teachers and parents. It offers materials, in the form of puzzles, experiments
and games, which correlate with the content of Weekly Reader periodicals. The
web site is also connected to various other resources such as the "world's
largest classroom key pal network," which connects classrooms from 103
countries. In addition, the WEEKLY READER GALAXY web site informs users about
our periodicals and allows them to subscribe over the Internet. For the twelve
months ended December, 1999, the web site had approximately 36 million page
views with the average user spending approximately nine minutes on the site per
visit.
OTHER PRODUCTS AND SERVICES. Weekly Reader also licenses the content of
some of its publications, promotes other products in its publications and
provides its "seal of approval" to various products. For example, Weekly Reader
is one of several educational publishers providing content to JUNIORNET, a
subscription based web site launched in March 1999 targeted to children ages
3-12. Weekly Reader licenses some content for use on JUNIORNET and is
compensated for the use of its content based upon the amount of time visitors to
the web site spend viewing Weekly Reader's licensed content. In addition, in
November 1998, Weekly Reader began its "Weekly Reader Seal of Approval" program.
In this program, producers of educational products submit their products to
Weekly Reader for review and, if approved by Weekly Reader based upon the
educational value of the product, these products are granted the Weekly Reader
Seal of Approval. Producers of the products pay Weekly Reader an annual
licensing fee in exchange for this endorsement.
AMERICAN GUIDANCE.
American Guidance has two product lines:
- testing and assessment products; and
- supplemental instructional materials.
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Our testing and assessment products and supplemental instructional materials
are primarily used in K-12 schools. In addition to K-12 schools, American
Guidance's testing and assessment products and supplemental instructional
materials are used in:
- community health centers;
- clinics;
- hospitals;
- correctional facilities;
- community colleges; and
- other adult education programs.
Approximately 18% of American Guidance's net revenue for the twelve months
ended December 31, 1999 were from sales of testing and assessment products and
supplemental instructional materials in which the end users were not K-12
schools. This percentage is consistent with the percentage of net revenue for
sales of these products in 1996 through 1998.
TESTING AND ASSESSMENT PRODUCTS. American Guidance's testing and assessment
products provide educators and clinicians, including school psychologists,
guidance counselors, special education teachers, speech pathologists and other
similar school or district-level specialists with reliable individually
administered tests and manuals explaining how to administer our tests. The
testing and assessment products also include related third-party professional
development books covering various theories of testing which we offer through
our catalogs. American Guidance's testing and assessment products are used to
diagnose learning disabilities and measure the cognitive ability, educational
achievement and personal and social adjustment of students, for example:
- the PEABODY PICTURE VOCABULARY TEST (PPVT) measures a student's listening
comprehension for "Standard American English" and screens for verbal
ability;
- the KAUFMAN TEST OF EDUCATIONAL ACHIEVEMENT (KTEA) measures a student's
reading, mathematics and spelling skills; and
- the BEHAVIOR ASSESSMENT SYSTEM FOR CHILDREN (BASC) test assesses the
behaviors and emotions of children and is used, among other things, to
assess whether a student has attention deficit hyperactivity disorder.
American Guidance currently publishes over 25 testing and assessment
products. Six of American Guidance's top ten testing products, based on sales,
have been published for over 25 years and its leading testing publication, the
PEABODY PICTURE VOCABULARY TEST, was initially developed in 1959 and continues
to rank among American Guidance's top selling products. American Guidance's
tests are revised periodically to ensure that they reliably measure existing
populations. Achievement tests generally require revisions every eight to ten
years while tests that measure personal and social adjustment or cognitive
ability in some cases do not require revision for as long as 15 years.
American Guidance's tests are generally sold as part of a test kit. Test
kits typically contain the test, test record forms, "easels" used to administer
the test, scoring sheets used to score the test and a manual describing the
proper method to score and evaluate the particular test. Test kits range in
price from $80 to $600 depending on the content of the test kit and the demand
for the test. Each test uses a different test record form which must be
reordered from us. Test record forms are generally sold in packages of 25 with
an average price range of $25 to $40 per package. A test kit usually contains
one package of 25 test record forms. Sales from our top ten testing and
assessment products and related materials including easels and scoring sheets
represented approximately 71% of American Guidance's
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total net revenue from testing and assessment products for the twelve months
ended December 31, 1999, with no individual set of testing products accounting
for more than 11%.
Educators and clinicians apply American Guidance's testing and assessment
products on an individual basis to understand a student's particular educational
needs. The need for our testing and assessment products generally arises after
someone close to the student, either a parent or teacher, determines that the
student is having behavioral or academic difficulty. The student is then
referred to the appropriate clinician or educator at the school who has
responsibility for determining what test or tests should be administered in
order to correctly diagnose the student's problem.
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.
SUPPLEMENTAL INSTRUCTIONAL MATERIALS. American Guidance's supplemental
instructional materials consist of curriculum-based instructional materials,
many of which are for low-performing students. Low-performing students are
defined as those students scoring in the lower 50th percentile of the student
population at a particular grade level. We focus primarily on serving middle and
secondary schools with additional sales to post-secondary markets, such as
community colleges and correctional facilities. We generally produce four types
of instructional materials:
- supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as workbooks;
- softcover worktexts in core curriculum areas for low-performing students;
- test preparation materials which can be used to prepare all students for
leading achievement tests; and
- personal growth products.
American Guidance's supplemental hardcover textbooks are designed to provide
comprehensive coverage of skills and concepts in short, concise lessons. They
are geared to a fourth grade reading level or below with photography and content
that are appropriate for middle and secondary school students as well as adults.
American Guidance's current catalog offers supplemental hardcover textbooks in
the following subject areas:
<TABLE>
<S> <C>
Basic English Grammar General Science
Basic English Composition Earth Science
English for the World of Work Physical Science
English to Use United States Government
Life Skills English United States History
Life Skills Math World History
Algebra World Literature
Pre-Algebra Exploring Literature
Geometry American Literature
Consumer Mathematics Life Skills Health
Basic Math Skills Discover Health
Biology
</TABLE>
We believe American Guidance's supplemental hardcover textbooks set the
standard for quality in the market, with full-color content and accompanying
extensive teacher support materials. Each textbook has a wrap-around teacher's
edition that reproduces the student edition with notes for the
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teacher indicated next to the text such as overviews for each new lesson,
alternative questions a teacher may ask and answers to questions in the text.
Each textbook has available a set of quizzes, worksheets, problem sets and other
materials that teachers are permitted to reproduce for their classes. These
materials also are available on CD-ROM. Most of American Guidance's supplemental
hardcover textbooks have related softcover workbooks generally 50 to 60 pages in
length, activity books and study guide programs including videos available in
print and on CD-ROM for self-guided learning. Pricing for American Guidance's
hardcover textbooks ranges from $33 to $40 dollars each; workbooks range from $7
to $10 each; and the CD-ROMs containing the quizzes, worksheets, problem sets
and other materials are approximately $160 each.
American Guidance's softcover worktexts also cover core curriculum areas.
These worktexts generally 90 to 120 pages in length are designed as stand-alone
products so that a teacher may use them to supplement any textbook. These
softcover worktexts cover smaller portions of any given curriculum area than our
supplemental hardcover textbooks. For example, we have a softcover worktext on
how to balance a checkbook which is only one topic of many that are covered in
our hardcover Life Skills Math textbook. Pricing for our softcover worktexts
ranges from $6 to $13 each.
American Guidance also publishes a rapidly growing line of test-preparation
materials developed to assist students preparing to take three of the leading
achievement tests:
- Stanford Achievement Test (SAT9);
- Iowa Test of Basic Skills (ITBS); and
- TERRANOVA (Comprehensive Test of Basic Skills (CTBS) and Multiple
Assessments tests).
American Guidance's test preparation materials are sold in package format and
generally contain 25 activity books per package covering one subject area.
Prices for test preparation packages range from $40 to $90 each. The emphasis in
education on accountability for teachers and school administrators for the
performance of their students on these achievement tests has helped make this a
rapidly growing segment for our business.
American Guidance also markets a full line of personal growth products aimed
at:
- developing behavior skills;
- parenting training;
- drug use prevention and anti-violence training;
- self-esteem; and
- career education.
These materials have differing audiences ranging from the entire K-12 student
population to teachers and adults, and are produced using various formats
including print, computer software and video.
COMPASSLEARNING.
CompassLearning derives revenues from three sources:
- software products;
- professional development services and technical support services; and
- sales of hardware.
CompassLearning's electronic courseware, assessment software and management
systems products are purchased under perpetual license agreements between
CompassLearning and the applicable purchaser. Courseware products sell for an
average of approximately $120 per subject per grade level
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plus $100 per workstation for simultaneous access. The COMPASS management system
sells for $3,500 and the assessment software sells for $2,000, subject to any
applicable discount. Electronic courseware, assessment software and a management
system are typically sold as a package, together with professional development
and technical support services. These packages sell for an average of
approximately $25,000 per school. CompassLearning's professional development
services range in price from $850 per day for a standard course to $1,000 per
day for a customized training session. These services are typically purchased
under a contract for specific number of days of service to be provided over a
period of up to one year. Technical support services are typically purchased
under one year contracts for an average cost of $5,500 per year. After the
expiration of any service contract, these services may be purchased on an
ongoing basis.
SOFTWARE PRODUCTS. CompassLearning's software products consist of
electronic courseware, assessment software, management systems and
Internet-based products. Most of CompassLearning's current electronic
courseware, assessment software and management systems operate in:
- a networked environment with file servers and several student stations;
- a peer-to-peer environment connecting several student stations in a
"mini-network;" and
- a stand-alone CD-ROM environment.
These products are typically compatible with both Windows and Macintosh
operating systems. CompassLearning also has two products that are
Internet-based, which were introduced in 1996 and 1999, respectively. In
addition, CompassLearning distributes a small amount of third-party products,
typically bundled with its own products.
ELECTRONIC COURSEWARE: CompassLearning's primary product line is its
proprietary electronic courseware. CompassLearning has approximately
7,000 hours of proprietary electronic courseware, including TOMORROW'S PROMISE,
a comprehensive library of over 3,600 hours of electronic courseware with
complete correlation to major national and state educational standards. The
content of CompassLearning's electronic courseware curriculum is grade-specific
and focuses on core curriculum topics such as reading, spelling, math, science
and language arts, as well as emphasizing higher-order thinking and problem
solving skills. Most of our current courseware is available in a networked,
peer-to-peer or CD-ROM environment. In addition, these existing electronic
courseware products have been developed using a standardized authoring tool
which facilitates, expedites and reduces the cost to convert these products into
a format for delivery over the Internet.
Most of CompassLearning's electronic courseware covering core curriculum
topics such as reading, math and language arts, is available in comprehensive,
modular or stand-alone formats. In the comprehensive format, which accounted for
approximately 66% of CompassLearning's sales of electronic courseware for the
twelve months ended December 31, 1999, customers purchase all current electronic
courseware for a particular subject in each of the grades offered by
CompassLearning which are typically K-6 or K-8. The remaining 34% of
CompassLearning's electronic courseware sales were made in the modular and
stand-alone formats. In the modular format, customers purchase grade and/or
subject specific electronic courseware according to their specific needs. The
modular format allows, for example, a school to add courseware over the years as
additional funds become available or to buy courseware to address a specific
need or implementation plan. Typically, schools intending to use courseware in a
computer lab often purchase courseware in a comprehensive format while schools
intending to use courseware in a classroom often purchase courseware in a
modular format. Finally, in the stand-alone format, customers purchase
courseware on stand-alone CD-ROMs for use without the need for a computer
connected to file servers running CompassLearning's system software.
ASSESSMENT SOFTWARE: CompassLearning offers a series of comprehensive
assessment tests referred to as Compass Comprehensive Assessment Test. Compass
Comprehensive Assessment Test is a series of
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computerized achievement tests based on the subjects typically tested in the
following five leading achievement tests for K-12 students:
- the Iowa Test of Basic Skills examination (ITBS);
- Metropolitan Achievement Test examination (MAT);
- Stanford Achievement Test examination (SAT9);
- California Achievement Test examination (CAT); and
- TERRANOVA examination (Comprehensive Test of Basic Skills (CTBS) and
Multiple Assessments tests).
The computerized tests seek to establish the test taker's knowledge of subject
matters that are typically tested on the achievement tests mentioned above, with
a computerized test emulating each of the five achievement tests. In addition,
the computerized test items can be customized by teachers to reflect other
tests, subjects or testing strategies. CompassLearning's assessment software has
been customized for educational requirements in states such as Florida and
Texas. CompassLearning's assessment software scores the computerized tests and
determines whether the test taker possesses the particular skills tested. If a
test taker fails any particular subject on the computerized test, the assessment
software prescribes lessons found in CompassLearning's electronic courseware.
MANAGEMENT SYSTEMS: CompassLearning offers the COMPASS management program.
COMPASS is a computerized management system that enables teachers with students
using CompassLearning's electronic courseware to:
- create student lesson plans;
- track student performance;
- record grades;
- report on progress; and
- assess results against major state, national or self-defined standards.
Using the COMPASS system, a teacher is able to directly assess an individual
student's performance on CompassLearning's electronic courseware and assessment
software products and devise individualized learning paths for each student.
INTERNET-BASED PRODUCTS: WORLDWARE is an Internet-based classroom
integration product for use with our electronic courseware, assessment software
and management systems, which we introduced in 1996. WORLDWARE has two parts:
the software and the web site. The WORLDWARE software enables teachers to
integrate a comprehensive collection of more than 400 pre-selected "safe" web
sites into their daily lessons in a controlled manner by providing web controls
limiting students' access to other Internet sites. The WORLDWARE web site
features educational activities for students and resources for parents and
teachers. In addition, CompassLearning now offers COMPASS VIRTUAL CLASSROOM,
with the first installations made in September 1999. COMPASS VIRTUAL CLASSROOM
works with our electronic courseware, assessment software and management systems
by allowing students and teachers working on computers at home to access
COMPASSfunctions through the Internet. Students can have at-home access to
assessment tests and electronic courseware for self-paced learning. Teachers can
have full access from remote computers to all COMPASSfunctions from creating
assignments to reviewing results.
SERVICES. CompassLearning provides professional development services and
technical support services. CompassLearning has a team of over 90 full-time
educational consultants providing professional development services to teachers,
ranging from basic software training to services designed to assist teachers in
implementing and integrating technology into the classroom. These services are
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provided in connection with our software products as well as third-party
products. An initial buyer of our software products typically purchases eight
days of professional development services for training on the software
purchased, to be provided over a period of up to one year. Following the
completion of the eight days of training, our customers can purchase additional
days of professional development services. In 1998, we were chosen as the leader
in customer training according to a survey by Education Market Research. In
addition, in October 1998, we began to offer a series of training courses for
teachers that address topics such as productivity, leadership, parental
involvement and Internet use and implementation.
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. Following the
expiration of the initial technical support services contract, our customers can
purchase continuing support at varying levels, ranging from limited telephone
help line services to priority systems engineer dispatching. We also offer our
customers hardware support services, which we provide through a contract with a
third party.
HARDWARE. In 1994, we essentially exited the business of selling hardware
due to the lower profitability of this business compared to our other segments,
high inventory requirements and the risk of obsolescence associated with these
products. Today, upon request, we resell hardware to customers who request a
package of hardware and software.
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WORLD ALMANAC.
World Almanac's operations are divided into five divisions. The following
table describes the product lines and their prices for each of its divisions.
<TABLE>
<CAPTION>
DIVISION PRODUCT LINES PRICING
- -------- -------------------------------------------- ----------------------
<S> <C> <C>
World Almanac Books......................... Publishes:
THE WORLD ALMANAC AND BOOK OF FACTS $11 print
$195 Internet
THE WORLD ALMANAC FOR KIDS $11
THE WORLD ALMANAC OF U.S. POLITICS various prices
World Almanac Education Library Services.... Catalog-based distribution of:
Third-party and World Almanac publications
targeted for the K-12 market $5-$479
Gareth Stevens, Inc......................... Publishes:
K-6 nonfiction and fiction books $13-$25
Distributes:
Two nonfiction book product lines of a
third-party publisher $12-$20
Facts On File News Services................. Publishes:
FACTS ON FILE WORLD NEWS DIGEST $480-$795 print;
$595-$1,150 CD-ROM;
$1,350 Internet
ISSUES AND CONTROVERSIES ON FILE $375 print
$575 Internet
TODAY'S SCIENCE ON FILE $225 print
$350 Internet
EDITORIALS ON FILE $495
SOFTWARE AND CD-ROM REVIEWS ON FILE $295
Funk & Wagnalls............................. Publishes:
Electronic FUNK & WAGNALLS ENCYCLOPEDIA
database various prices
A general yearbook $24
A science yearbook $23
</TABLE>
WORLD ALMANAC BOOKS. THE WORLD ALMANAC AND BOOK OF FACTS is, we believe, one
of the most widely used and well-respected general reference publications in the
United States. In 1998, the American Library Association named it one of the
three most important information sources found in libraries and the best almanac
overall. According to World Almanac, in 1998, market research was completed that
indicated that 56% of those surveyed who purchase the almanac purchase it on an
annual basis. We believe THE WORLD ALMANAC AND BOOK OF FACTS provides more
complete and up-to-date information than competing almanacs. Its
comprehensiveness and brand identity are critical assets. In print for over
130 years, THE WORLD ALMANAC AND BOOK OF FACTS perennially makes the NEW YORK
TIMES' bestseller list. World Almanac Books also licenses the content of THE
WORLD ALMANAC AND BOOK OF FACTS to third parties for inclusion in their
products. Since 1995, World Almanac Books has also published THE WORLD ALMANAC
FOR KIDS, with over 1,000,000 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 108,000 K-12 school libraries and 16,000 public libraries in the
United States. World Almanac Education Library Services reviews and selects
materials from third-party publishers for inclusion in its nine catalogs. The
catalogs also include THE WORLD ALMANAC AND BOOK OF FACTS, THE WORLD ALMANAC FOR
KIDS and several best selling series from Gareth Stevens, Inc. World Almanac
Education Library Services mailed a total of approximately 1.8 million catalogs
in 1999. World Almanac Education Library Services also publishes a small amount
of proprietary teaching kits,
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including kits covering research skills, map skills and Internet skills, which
include items such as lesson plans for books we believe are appropriate for
classroom use to encourage multiple-copy sales.
GARETH STEVENS, INC. Gareth Stevens, Inc. publishes nonfiction and fiction
books for K-6 students. These books cover a broad spectrum of topics including
nature, science, social studies and the arts. Approximately 78% of Gareth
Stevens, Inc.'s sales are derived from books that are published under the GARETH
STEVENS imprint. A majority of these titles are sourced from domestic and
international third parties for which Gareth Stevens, Inc. holds exclusive
distribution rights for K-12 school and public libraries in North America. The
remaining approximately 22% of Gareth Stevens, Inc.'s sales are derived from the
distribution of two product lines from Rosen Publishing, with one line targeted
for secondary school students and the other targeted for K-6 students.
FACTS ON FILE NEWS SERVICES. World Almanac, through Facts On File News
Services, publishes and sells subscription news reference products in print,
CD-ROM and Internet formats. There are five products:
- FACTS ON FILE WORLD NEWS DIGEST;
- ISSUES AND CONTROVERSIES ON FILE;
- TODAY'S SCIENCE ON FILE;
- EDITORIALS ON FILE; and
- SOFTWARE AND CD-ROM REVIEWS ON FILE.
Its core product, FACTS ON FILE WORLD NEWS DIGEST, is a highly respected
publication used by libraries as a comprehensive index of world events beginning
in 1940 in the print version and in 1988 in the electronic version. Librarians,
journalists and library patrons typically use Facts On File News Services
products to research historical events. The in-house editorial staff of FACTS ON
FILE WORLD NEWS DIGEST distills key news information from more than 100
different newspapers, periodicals, journals and government Internet sources and
uses it to update the product weekly in the print and Internet formats and
quarterly for the CD-ROM format. The core print product has an annual
subscription list price of $795, which is discounted for public and school
libraries. The print edition of FACTS ON FILE WORLD NEWS DIGEST sold over 4,900
subscriptions in 1999 and continues to meet with great acceptance, as evidenced
by renewal rates averaging approximately 89% from 1996 through 1999.
Subscriptions to the print edition, however, are expected to decline gradually
as it is replaced by Internet-based versions of the product described below.
To take advantage of accelerated library spending on electronic delivery of
reference materials, in 1997 we developed a Windows compatible CD-ROM version of
FACTS ON FILE WORLD NEWS DIGEST. In April 1999, World Almanac launched an
Internet version of FACTS ON FILE WORLD NEWS DIGEST which currently has 1,865
subscribers, or 40% of the total number of print and CD-ROM subscribers for this
product. The increased functionality of the Internet version allows World
Almanac to price this product higher than the print or CD-ROM versions. The
Internet version has a list price of $1,350 for a single-site installation, with
price discounts per site for multiple-site installation. This year we have
launched three additional World Almanac databases as part of the Facts On File
News Services web site.
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. Funk & Wagnalls
also annually publishes a general yearbook containing a review of the major news
events that transpired in the previous year and a science yearbook containing a
review of the major scientific events in the previous year. The general yearbook
is licensed from World Book
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Encyclopedia, Inc. and the science yearbook is licensed from Grolier
Enterprises Inc. The active subscriber list for these two publications, which
primarily consists of former subscribers to the print edition of the FUNK &
WAGNALLS ENCYCLOPEDIA, is approximately 65,000 for the general yearbook and
29,000 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 78% for the
general yearbook and 76% for the science yearbook from 1996 through 1999.
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team of 62 people working in product and
content development. This team includes:
- editors and writers, who are typically grade and subject specialists with
journalism or teaching experience; and
- designers, who are responsible for the "look and feel" of the products,
including the layout of each publication.
Editors, writers and designers work in teams on any particular project
including planning meetings used for determining content and educational focus,
the selection of appropriate graphics and photographs and final editing before
submission for printing. The time it takes to develop our products varies
substantially according to the type of product. Product development for a new
periodical typically takes approximately nine months from concept to initial
marketing, whereas new issues of our existing periodicals typically take
approximately one to two weeks from conception to printing. Our skills books
typically take approximately eight to twelve months from concept to initial
marketing for an entirely new title, and approximately four to six months for
updated versions of existing titles. Development times for Lifetime Learning
Systems, Inc.'s products vary substantially depending upon the type of product
involved, but typically take approximately three to four months from concept to
distribution.
Weekly Reader's periodicals are written by a combination of staff and
freelance writers. WEEKLY READER, for example, is written internally. Our staff
of editors, writers and designers determine the subject matter for the
particular edition after which the content is written and edited by Weekly
Reader's employees. For SCIENCESPIN, however, once the content and educational
focus for a particular issue is determined internally, the writing is contracted
out to third parties with the relevant scientific knowledge and the ability to
write for the applicable target audience. TEEN NEWSWEEKis written internally
based upon content from upcoming stories in NEWSWEEK made available to our
writers prior to NEWSWEEK'Spublication, and our own internally created content.
The TEEN NEWSWEEKwriters determine which stories are appropriate for the
targeted audience and then rewrite the stories with age appropriate information
and language. TEEN NEWSWEEK'S content is subject, in all cases, to NEWSWEEK'S
approval.
Weekly Reader's skills books are typically written by freelance writers at
the direction of Weekly Reader's editors. Lifetime Learning Systems, Inc.'s
products are developed in a variety of formats by an in-house editorial and
design staff with varying degrees of direction provided by the applicable
sponsor. In the past, some sponsors of Lifetime Learning Systems, Inc. projects
have approached Lifetime Learning Systems, Inc. with a definitive concept for
which they are seeking implementation and production, while other sponsors
simply have a message they wish to get across to a target audience and request
proposals as how best to accomplish that goal.
Prior to distribution, whether created internally or externally, all of
Weekly Reader's products are reviewed by either the Editor in Chief of Weekly
Reader or one or more Senior Managing Editors to ensure that the content of the
applicable product is appropriate for the age group targeted by the
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product, according to standards developed by Weekly Reader. Lifetime Learning
Systems, Inc.'s products are reviewed by its editorial director for their age
and content appropriateness.
AMERICAN GUIDANCE. American Guidance's new testing and assessment products
and revisions to existing products are developed internally by in-house
personnel which include 27 full-time employees, most of whom are trained in one
or more specialties including psychology, education, early childhood development
and speech/language, among other disciplines.
Our testing and assessment products are firmly rooted in established
psychological and pedagogic theory, and our product development philosophy is
customer-focused. New test concepts are usually derived from the marketplace,
often from our sales representatives who are in contact with:
- teachers;
- guidance counselors;
- school psychologists;
- school administrators; and
- other professionals who identify a testing need.
We also develop new products through a systematic review of industry trends,
including emerging trends in the education community, or in conversations with
educators and other professionals who attend various trade and professional
conferences where we are an exhibitor or attendee. Occasionally, we will be
approached by an author with a new test concept, which we will then evaluate in
terms of its overall market potential.
After we have created a test, we then subject it to field tests. Once field
testing and any indicated adjustments are complete, the test undergoes
standardization, generally being tested on 200 students per age year targeted by
the test and covering a broad range of demographic characteristics. In addition,
we seek support for the test from key opinion makers in the subject area of the
test. Only at this stage do we begin to market the test. The process is similar
for most revisions of existing tests because when a test is updated, the new
content similarly must be field-tested and then the revised test must undergo
standardization. The development cycle for a new test or to make revisions to an
existing test is typically five years from concept through the launch of the new
or revised test. The life cycle for the new or revised test can be up to
15 years or more. We are continuously working on new products or product
concepts or revisions of existing products. For example, in June 1999, we
released a new test, CASL (COMPREHENSIVE ASSESSMENT OF SPOKEN LANGUAGE), an
in-depth assessment of oral language skills.
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. Our in-house development team for
supplemental instructional materials consists of eight full-time employees. New
product concepts are derived from various sources, including:
- our in-house development staff;
- outside authors; and
- our sales force based on their regular meetings with educators and
administrators.
Most of these products have a development cycle of approximately one year. In
general, we solicit bids for our new products from outside developers and award
the contract based on price and other factors relating to the developer's
ability to deliver the finished product according to our exact specifications.
We continuously work on product development for existing supplemental
instructional materials in addition to development of new products. Our
1999-2000 supplemental instructional materials catalog
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offers new textbooks in four different subject areas. In 1997 and 1998, we
released a total of 14 new and revised hardcover supplemental texts in language
arts, math, science and social studies, as well as 21 softcover worktexts and
three parent training programs.
Our product and content development staff includes eight Ph.D.s and 23
former certified teachers. We supplement our product development with selective
acquisitions of product lines. For example, in October 1997, we acquired a line
of test preparation materials for achievement tests from Craig-Hart Publishing
Company. In March 1997, we acquired a line of grade equivalency diploma and
pre-grade equivalency diploma test preparation materials along with a line of
life skills worktexts from International Thompson Publishing Inc. In
April 1996, we acquired a line of paperback fiction books for low-level readers
from Lake Publishing Company.
COMPASSLEARNING. CompassLearning has a product development team of 83
employees, including 22 individuals with state issued teaching credentials and
an average of nine years of teaching experience. These 83 employees also have on
average nine years of software development experience and have been working for
CompassLearning for an average of six years. In addition, CompassLearning
periodically hires temporary employees or outsources work to supplement its
in-house product development team. These temporary employees and third-party
contractors are generally used for functions such as product testing, while
CompassLearning employees perform the core competency functions necessary for
the development of its products. The time it takes to develop our products
varies according to the type of product, but typically ranges from
12-18 months.
CompassLearning's product development team is divided into the following
four groups:
- the curriculum and assessment design group;
- the integration and management systems group;
- the quality assurance group; and
- the documentation group.
The curriculum and assessment design group develops the content and
functionality for the curriculum lessons and assessment components of
CompassLearning products. This group is responsible for designing products which
meet the educational objectives for the curriculum or assessment element being
addressed. They use an "authoring tool," a computer program which enables the
curriculum and assessment design group to choose from a variety of standardized
computer program features, such as lesson templates, without the need to write
extensive source code in order to create the basic computer program for the new
product. The integration and management systems group is responsible for
developing current and future management programs and the integration of the
management programs with the curriculum and assessment offerings. This group
also is responsible for maintaining all of the source code for CompassLearning's
products and addressing any problems which arise within the code. The quality
assurance group tests all of our new products. The documentation group is
responsible for the documentation that accompanies the new product offerings.
WORLD ALMANAC. World Almanac has a 51 person in-house editorial staff that:
- in the case of the World Almanac Books and Funk & Wagnalls, works in
conjunction with outside work-for-hire editors to develop its content; and
- in the case of the Facts On File New Services products, develops the
content of these products.
Individual members of the in-house editorial staff are generally responsible for
only one of the product lines. The content 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 repackaged
and/or rewritten for the K-12 market in the United States or content written by
in-house staff or freelance writers. World Almanac Education Library Services
has a three-person
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creative staff which designs the layout for the catalogs and selects the
reference and informational materials which will be included in the catalogs.
World Almanac Education Library Services updates its catalogs twice each
year. New editions of THE WORLD ALMANAC AND BOOK OF FACTS and THE WORLD ALMANAC
FOR KIDS are published each year. New product development is currently focused
on offering products through Internet delivery. This year we have launched three
additional World Almanac databases as part of the Facts On File News Services
web site.
CUSTOMERS
Our targeted customers, which vary depending on the product line, are
teachers, school and school district-level administrators, librarians, other
educational professionals and parents.
Weekly Reader's periodicals and other instructional materials are purchased
mainly by teachers, as well as by school and school district-level
administrators. In addition, schools sometimes ask parents of students to pay
for their children's subscriptions to Weekly Reader periodicals. According to
Weekly Reader, it was the largest publisher of classroom periodicals in terms of
total circulation in the 1997-1998 school year with over 8.7 million
subscribers, approximately equal to our two primary competitors in this market
combined.
Customers of Lifetime Learning System, Inc.'s products generally are:
- corporations;
- trade associations;
- not-for-profit organizations; and
- government agencies.
Customers of American Guidance's testing products generally are:
- guidance counselors;
- school psychologists;
- speech pathologists;
- special education teachers; and
- other similar school and school district-level specialists.
Customers of American Guidance's supplemental instructional materials generally
are teachers and school-level administrators as well as school district-level
administrators. American Guidance also has customers outside of K-12 schools for
its testing and assessment products and supplemental instructional materials
which include:
- clinical psychologists;
- community colleges;
- adult educational programs; and
- correctional facilities.
One or more of American Guidance's testing and assessment or supplemental
instructional products are used in over 12,000 school districts, or
approximately 80% of the school districts in the United States.
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CompassLearning's customers consist primarily of school and school
district-level administrators, including:
- superintendents;
- curriculum directors;
- technology directors; and
- principals.
Although individual teachers do not typically make final purchasing decisions,
they frequently have substantial input in the decision making process. One or
more of CompassLearning's products has been sold to more than 20,000 K-12
schools, representing approximately 19% of all schools in the United States.
In 1999, approximately 80% of World Almanac's sales were to schools and
libraries. The remaining 20% of its sales consisted of sales of yearbooks to
former encyclopedia purchasers and sales of THE WORLD ALMANAC AND BOOK OF FACTS
and THE WORLD ALMANAC FOR KIDS to consumers.
Funk & Wagnalls licenses its electronic encyclopedia database to various
licensees, the largest of which is Versaware Technologies Inc., 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 publications 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. In the last three years, over 55% of the
approximately 124,000 school and public libraries in the United States have
purchased products from World Almanac.
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SALES, MARKETING AND DISTRIBUTION
We have an extensive network with direct distribution channels to reach our
primary customers. Our four primary operating subsidiaries use one or more of
the following methods to sell and market our products: direct mail, direct
sales, telemarketing and distribution through retail channels. The chart set
forth below contains information regarding sales, marketing and distribution by
Weekly Reader, American Guidance, CompassLearning and World Almanac, including
their primary distribution channels.
<TABLE>
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
<S> <C> <C> <C> <C>
Primary Method of Direct Mail Direct Sales Force (field Direct Sales Force Direct Mail: Facts On File
Sales and Marketing and telesales) News Services, World
Almanac Education Library
Services and Funk &
Wagnalls Telemarketing:
Gareth Stevens, Inc. and
Facts On File News Services
Retail Marketing: World
Almanac Books
Size of Staff 10 38 65 112
Number of Mailings 2 (in February and 3 (in March, August and N/A Facts On File News Services
in 1998 August) December or January) generally mails twice a
year; World Almanac
Education Library Services
generally mails four times
a year; Yearbook mail
campaigns once a year
Number of Schools/ 108,000 schools; 250,000 customer locations N/A Approximately 105,240
Teachers/Libraries 2.7 million schools, 16,850 school
in Database teachers districts, 15,600 public
libraries, 4,830 academic
libraries
Estimated Number of 75,000 schools Over 12,000 school Over 20,000 schools Over 68,000 school and
Schools/ School districts have purchased our public libraries have
Districts/Libraries products purchased products from
with our Products World Almanac in the past
as of Summer, 1999 three years
</TABLE>
DIRECT MAIL. Direct mail consists mainly of well-planned mailings that
target current and prospective customers, often with enclosed product samples
and catalogs, which are used to generate product sales. This marketing technique
is utilized to a significant extent by Weekly Reader, World Almanac's Facts On
File News Services and World Almanac Education Library Services, and to a lesser
extent by American Guidance, CompassLearning and World Almanac's Funk &
Wagnalls.
Weekly Reader's classroom periodicals are marketed primarily through the use
of direct mailings. Its experienced and skilled marketing staff of ten people
has developed detailed mailing schedules and marketing strategies to reach
current and prospective customers. In the marketing of its classroom
periodicals, Weekly Reader has developed and maintained a valuable and
proprietary database tracing the purchasing habits of approximately 2.7 million
individual teachers and administrators and approximately 108,000 schools over
the past five years as well as various demographic factors in each locale. In
1998, Weekly Reader mailed over 0.4 million catalogs and 6.9 million direct mail
pieces primarily to teachers as well as to school and school district-level
administrators, librarians and parents. Schools are segmented for mailings
according to "purchasing" and "non-purchasing" status, with marketing campaigns
based on purchasing history specifically targeted to teachers, who are typically
the key decision makers in connection with the purchase of Weekly Reader's
classroom periodicals. Schools that currently purchase Weekly Reader's classroom
periodicals are then further segmented according to penetration levels for each
elementary school grade or middle or secondary school subject area. The timing
of mailings, inclusion of product samples and timing and amount of discounts
offered, among other things, vary depending on which segment is being targeted.
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World Almanac also uses direct mail to generate sales. For example, Facts On
File News Services uses direct mailings for general product announcements, to
generate sales leads and for order procurement from new customers. The strategy
for attracting new customers consists of using targeted direct mail, followed by
telesales calls from representatives who are recruited and trained by Facts On
File News Services. World Almanac's World Almanac Education Library Services
also uses direct mail to sell its products. This division of World Almanac has
developed a sophisticated database that tracks customers and purchasing habits,
including monetary value of an average purchase and other relevant factors,
which it uses to target customers with the appropriate catalogs. Most of World
Almanac Education Library Services' sales are generated from mailings of its
main catalog, which is sent to existing customers, and its prospect catalog,
which is mailed to prospective customers. World Almanac mailed approximately
2.0 million direct mail pieces in 1999, including 1.8 million catalogs.
American Guidance printed and mailed more than one million promotional
pieces and 1.7 million catalogs in 1999, aimed at developing customer leads,
spurring direct-response sales and building overall marketplace awareness of its
brand and products. CompassLearning also sells its products with the aid of
mailings and catalogs targeted at smaller schools and school districts. World
Almanac's Funk & Wagnalls primarily markets its yearbooks to former subscribers
of its previously published print format encyclopedia using direct mail.
TELEMARKETING. Telemarketing involves the use of the telephone to contact
current and prospective customers as a means of generating sales. World
Almanac's Gareth Stevens, Inc. and Facts On File News Services utilize this
marketing technique to a significant extent, while CompassLearning, Weekly
Reader and World Almanac Education Library Services use it to a lesser extent.
Gareth Stevens, Inc.'s marketing strategy consists primarily of selling
products through its active and growing telemarketing program. Telemarketing
representatives generate approximately 57% of all Gareth Stevens, Inc. sales by
contacting existing and prospective accounts to solicit commitments to preview
Gareth Stevens, Inc. titles. 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. Librarians have purchased an average of
22% of the titles they previewed for the period 1996 to 1999. 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.
CompassLearning's telemarketing group, comprised of ten people, assists its
direct sales force by pursuing sales leads generated at educational conferences
or through other means and also promotes renewal sales of professional
development and technical support services contracts. World Almanac's Facts On
File News Services' strategy for attracting new customers consists of using
targeted direct mail, followed by telemarketing calls from representatives who
are recruited and trained by Facts On File News Services. World Almanac
Education Library Services also has recently begun using telemarketing to
promote its products. Weekly Reader's telemarketing efforts, conducted
externally by contractors, are used to assist in the generation of renewal
sales.
DIRECT SALES FORCES. American Guidance, CompassLearning and Weekly Reader's
Lifetime Learning Systems, Inc. each primarily use a direct sales force to sell
and market their products.
To market its testing and supplemental instructional materials, American
Guidance pursues a strategy of developing strong relationships with its current
and prospective customers primarily by using its sales organization, consisting
of:
- 21 field sales representatives;
- 13 telephone sales representatives; and
- four managers.
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These representatives work closely with schools to determine which of
American Guidance's products best serve the needs of a specific school's student
body. Unlike traditional telemarketing, American Guidance's telephone sales
representatives develop relationships with customers and occasionally make field
visits. All of American Guidance's sales representatives go through a training
process with defined objectives that they must satisfy during the initial six
months of their employment and each year thereafter. In addition, American
Guidance enlists professionals on a per diem basis to provide instruction to
educators concerning test administration, scoring and other professional
training such as disciplinary methods and substance abuse and violence
prevention techniques.
CompassLearning uses a three-pronged approach to sales and service that
provides every customer with a sales contact, an educational consultant and a
technology support person for comprehensive customer service. It maintains a
direct sales force of 65 sales representatives. The sales representatives are
each assigned to a sales region within the United States. Each member of the
direct sales force has access to CompassLearning's database of detailed
information concerning the school districts, current customers, school funding
and other data for its sales territories. On the basis of this information, the
sales representatives seek to establish relationships with, and brand awareness
for, CompassLearning's products among existing and potential customers in their
respective districts by making personal sales visits to the schools or school
administrators.
Weekly Reader's Lifetime Learning Systems, Inc. has a dedicated marketing
and sales team of eight people who make presentations directly to potential
corporate, trade association and not-for-profit organization clients.
Presentations generally consist of proposals for education materials and
programs to be shipped free to teachers and schools under the client's
sponsorship.
RETAIL MARKETING/WHOLESALERS. Approximately 70% of World Almanac Books'
products are sold through retail bookstores or through wholesalers into
mass-market locations such as supermarkets and newsstands. World Almanac Books'
products are also sold to book clubs and other resellers as well as into
libraries through World Almanac Education Library Services. In addition, Gareth
Stevens, Inc. distributes approximately 35% of its products through its network
of wholesalers to libraries.
INTERNET WEB SITES. Each of Weekly Reader, American Guidance and World
Almanac 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 American Guidance web site, launched in 1996, provides extensive company
information, customer service information, order placement information and a
complete description of its products. The World Almanac web site offers Internet
ordering for World Almanac Education Library Services.
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 using Newsweek's distribution network. Our other print
materials are typically delivered by fourth class mail or, in some cases, by the
United Parcel Service or other courier services. Since 1986, we have distributed
FACTS ON FILE WORLD NEWS DIGEST through third parties which provide electronic
on-line delivery of databases to libraries and have paid these distributors a
royalty for each subscription. Because we have now developed our own Internet
delivery format, we expect our use of these distributors to decline.
COMPETITION
WEEKLY READER. Our primary competitors in the Pre K-12 classroom periodicals
market are Scholastic Inc. and Time, Inc. These publishers together with Weekly
Reader constitute virtually the entire market of periodicals targeted for Pre
K-12 classrooms. Scholastic Inc. publishes six editions in
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the elementary school market and eight editions in the middle and secondary
school market. Time, Inc. publishes two 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;
- reputation; and
- customer service.
In the elementary school periodicals market, we believe we have a
competitive advantage over both our competitors with respect to:
- content that has close ties to school curriculum; and
- an extensive marketing system.
In the secondary school periodicals market, our competitive strengths
include:
- content that has strong educational value;
- content that has close ties to school curriculum; and
- strong database marketing capabilities.
Our primary competitors in the school periodicals market, Scholastic Inc.
and Time, Inc., have larger marketing budgets. In addition, a small segment of
the market views some of our products as old-fashioned. We also require a longer
lead time to deliver news to classrooms than Time, Inc., and we charge customers
prices that are generally higher than Scholastic Inc.
In skills books we compete with many large and small publishers, primarily
on the basis of:
- subject matter expertise;
- breadth of offerings; and
- price.
Although we have developed a strong niche in mapping books and geography
books and believe we use efficient marketing techniques, our skills books line
maintains a relatively small market share in the larger market for supplementary
instructional materials. This market includes many widely recognized brands
published by competitors with greater brand recognition, larger marketing
budgets and more frequent product revision.
In sponsored supplemental educational materials, Lifetime Learning
Systems, Inc. competes primarily with Scholastic Inc., as well as with other
regional competitors. Competition in this market is based primarily on
distribution capability and cost.
Lifetime Learning Systems, Inc.'s strengths, which we believe give us a
significant competitive advantage over our smaller competitors, include:
- name recognition with our corporate sponsors;
- breadth and variety of product development offerings; and
- broad distribution capabilities through both its own and Weekly Reader's
distribution channels.
Notwithstanding, we face competition from Scholastic Inc. which combines
similar strengths with stronger corporate relationships and greater promotional
capabilities. Both Scholastic, Inc. and we face price competition from our
smaller competitors which have, and may continue to, undercut prices on their
product offerings.
AMERICAN GUIDANCE. In the assessment area, our principal competitors are:
- The Psychological Corporation;
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- The Riverside Publishing Company; and
- CTB/McGraw-Hill.
These companies focus mainly on norm reference achievement tests, which are
administered in large groups, while individually administered assessment tests,
our target market, represent a secondary product line. We believe we are
well-positioned to compete successfully in both the individually administered
assessment test market and the supplemental print instructional materials market
based on our:
- reputation;
- content; and
- ability to reach the customer base.
In the individually administered assessment test market, where quality and
reputation are the primary decision criteria, we have been providing market
leading materials for over 35 years.
We believe we are internationally recognized for publishing technically
sound diagnostic assessments that are primarily used to identify strengths and
weaknesses at the individual level. Because we believe none of our competitors
has matched our depth in content, authorship and test instruction in
speech/language assessments, we maintain a competitive advantage in the
individually administered assessment test market.
In the supplemental print instructional materials market, we compete
directly with Globe-Fearon Inc., which also targets low-performing students.
Other competitors include:
- Steck-Vaughn Company;
- Scholastic Inc.;
- NTC/Contemporary Publishing Group, Inc.; and
- other large and small publishers which have some products for
low-performing students,
but none of these large publishers focus exclusively on low-performing students
as we do.
In the supplemental print instructional materials market, we believe we are
the only publisher to offer full color textbooks with complete teacher support
for students reading below grade level in middle and senior high school.
COMPASSLEARNING. Within the supplemental electronic instructional materials
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:
- Pearson Education;
- TRO Learning Inc.;
- Broderbund Software, Inc.;
- Educational Resources;
- McGraw-Hill School Division;
- Edmark Corporation;
- American Education Company;
- Knowledge Adventure, Inc.; and
- Advantage Learning Systems, Inc.
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
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on all these factors. Our products have some competitive price disadvantages
when compared to standalone offerings, and some of our competitors may have
broader or deeper curriculum offerings.
WORLD ALMANAC. World Almanac Education Library Services is a niche player in
the school and public library distribution business. 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 focused exclusively on the library market to large
publishers which also sell into the trade market. 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.;
- Online Computer Library Center, Incorporated, a not-for-profit
organization; and
- UMI Company.
Products sold to school and public libraries tend to be less price sensitive
than in a consumer market. The WORLD ALMANAC AND BOOK OF FACTS competes
primarily with the two other almanacs currently available:
- THE TIME/INFORMATION PLEASE ALMANAC; and
- THE NEW YORK TIMES ALMANAC.
We believe that our almanac has a market share greater than 70%. THE WORLD
ALMANAC FOR KIDS competes primarily with SCHOLASTIC KID'S ALMANAC FOR THE 21ST
CENTURY, which was introduced in 1999. We believe our almanac for kids has a
market share greater than 70%. Competition in all of these segments is primarily
based on reputation and brand names of products, the length of time products
have been on the market and the uniqueness of a product. We believe we have a
competitive advantage with all these factors. Our competitors, however, have
larger publishing organizations, and therefore are able to generate greater
potential economies of scale than we can. Our larger competitors, which offer
broader product lines, also provide more comprehensive shopping opportunities to
library customers than we do with our narrower product focus.
PRODUCTION, FULFILLMENT AND CUSTOMER SERVICE
All of our print products are printed and bound by third parties with whom
we have contracts. We believe that outside printing and binding services at
competitive prices are available, and we currently use a different printer for
each product line. Most of our pre-press production, typesetting, layout and
design functions are conducted in-house, with the exception of American Guidance
where some 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 suppliers directly based on pricing and,
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to a lesser extent, availability, while American Guidance purchases paper from
the printers of its publications. Ink utilized by our publications is provided
by the respective printers of our publications and included in the cost of print
production. Both paper and ink are commodity products which are affected by
demand, capacity and economic conditions. We believe that adequate sources of
supply are, and will continue to be, available to fulfill our requirements.
Order processing, customer service, cash application, collection functions
and fulfillment are typically performed at separate locations for each of our
operating subsidiaries, including at:
- Delran, New Jersey for Weekly Reader;
- Circle Pines, Minnesota for American Guidance;
- Phoenix, Arizona, Springfield, Illinois and San Diego, California for
CompassLearning; and
- Mahwah, New Jersey, Milwaukee, Wisconsin, New York, New York and
Cleveland, Ohio for World Almanac.
However, fulfillment and customer service for some of World Almanac's products
are conducted by third parties. In 1998, a new and improved fulfillment system
was installed for Weekly Reader in Delran, New Jersey at a cost of
$1.5 million. This system is client server based, reducing maintenance and
operating costs, and provides electronic access to customer information,
including past purchases, as well as automated cash application and improved
collection processes.
INTELLECTUAL PROPERTY
WEEKLY READER. Each printed periodical or skills book is copyrighted by
Weekly Reader, including any materials written by freelance or third-party
contract writers. Photographs or artwork used in our products are typically used
pursuant to one-time licenses which grant us the right to use the photograph or
artwork in the particular product and within the United States only. Some
material from third parties is reprinted with permission for one-time use.
Ownership of the intellectual property rights in the materials produced by
Lifetime Learning Systems, Inc. are negotiated on a case by case basis with each
sponsor.
AMERICAN GUIDANCE. Our tests, the accompanying score sheets and test record
forms, and supplemental instructional materials all have registered copyrights.
Some material from third parties is reprinted with permission for one-time use.
In addition, some products use registered trademarks.
COMPASSLEARNING. CompassLearning's computer software products are
copyrighted by CompassLearning. In addition, we periodically obtain permission
to use excerpts of third-party materials on an ongoing basis in some of our
products or obtain a license from these parties to act as a distributor of their
products. Furthermore, in connection with WRC Media's acquisition of
CompassLearning, it was granted an exclusive license to use trademarks owned by
Jostens, Inc., the former parent company of CompassLearning, including "Jostens
Learning" and "Jostens Learning Corporation." Under the license agreement, our
right to use these trademarks expires on December 31, 2000. In connection with
the acquisition of CompassLearning and in anticipation of the expiration of
these trademarks, we changed the name of JLC Learning Corporation, which did
business as "Jostens Learning Corporation," to CompassLearning on January 20,
2000. We do not believe that the loss of these trademarks or the change of name
will have a material adverse effect on our business.
WORLD ALMANAC. World Almanac has registered copyrights for THE WORLD ALMANAC
AND BOOK OF FACTS, THE WORLD ALMANAC FOR KIDS, all Facts On File News Services
products other than EDITORIALS ON FILE which consists of editorials reprinted
with permission, all Gareth Stevens, Inc. books which are written in-house or
with outside work-for-hire authors, the FUNK & WAGNALLS ENCYCLOPEDIA database
and the World Almanac Education Library Services catalogs. World Almanac is
typically a licensee of the content of the remainder of its products, other than
products it solely distributes, in which it has no
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intellectual property rights. With respect to all other products, World Almanac
is the distributor only with no rights with respect to the content of the
products.
OTHER. From 1991 until November 1999, Weekly Reader and World Almanac were
owned by PRIMEDIA. Subsequent to its acquisition in 1998 and through
November 1999, American Guidance was owned by PRIMEDIA. Under the
recapitalization agreement with PRIMEDIA described under "The Acquisition and
Recapitalization," we must cease any use of PRIMEDIA name in connection with any
of our operations. As a result, we changed the name of PRIMEDIA Reference Inc.
to World Almanac Education Group, Inc. on December 23, 1999 which we refer to as
"World Almanac" throughout this prospectus. Similarly, prior to July 1999,
CompassLearning was owned by Jostens, Inc. Under the trademark license agreement
dated June 2, 1999 with Jostens, Inc., we must cease any use of the name
"Jostens" among other trademarks, in connection with our operations by
December 31, 2000. As a result, we changed the name of JLC Learning Corporation,
which did business as "Jostens Learning Corporation," to CompassLearning, Inc.
as of January 24, 2000, which we refer to as "CompassLearning" throughout this
prospectus. We do not believe that the change of the name under which World
Almanac or CompassLearning conduct business, or any other effect of ceasing to
use PRIMEDIA's or Josten's name in connection with our business, will have a
material adverse affect on our business.
ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations relating to the
protection of the environment, including those that regulate the generation and
disposal of hazardous materials and worker health and safety. We believe that we
currently conduct our operations in substantial compliance with applicable
environmental laws and regulations. Based on our experience to date, the nature
of our operations and our environmental indemnity from PRIMEDIA, we believe that
the future cost of compliance with existing environmental laws and regulations
and liability for known environmental claims will not have a material adverse
effect on our financial condition or results of operations.
EMPLOYEES
We have a total of approximately 1,100 employees. None of our employees are
represented by any union or other labor organization, and we have had no recent
strikes or work stoppages and believe our relations with our employees are good.
PROPERTIES
We own 10,000 square feet of office space in Minnesota. In addition to our
owned property, we lease an aggregate of approximately 519,125 square feet of
office, warehouse and mixed use space in New York, Connecticut, Kentucky,
California, Arizona, Illinois, Minnesota, Georgia, West Virginia, Florida, New
Jersey, Ohio and Wisconsin.
LITIGATION
From time to time, we are involved in litigation that we consider to be in
the normal course of business. American Guidance has recently been named as a
defendant in a lawsuit which seeks approximately $8.0 million in damages for
products liability, personal injury and other claims. Due to the fact that this
lawsuit is still at a preliminary stage, it is too early to predict the outcome.
In the event that we are found liable in this lawsuit, we believe that we are
entitled to indemnification from PRIMEDIA under the redemption, stock purchase
and recapitalization agreement entered into between PRIMEDIA and WRC Media. We
are not presently involved in any other legal proceedings which we expect
individually or in the aggregate to have a material adverse effect on our
financial condition, results of operations or liquidity.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the persons who,
as of the date of this prospectus, were serving or are expected to serve in the
near future as directors and executive officers of each of WRC Media, Weekly
Reader and CompassLearning, as well as those executive officers and employees of
American Guidance, World Almanac, Lifetime Learning Systems, Inc. and Gareth
Stevens, Inc. who make significant contributions to our business. Each director
will hold office until the next annual meeting of shareholders or until his
successor has been elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Timothy C. Collins..... 43 Director, WRC Media, Weekly Reader and CompassLearning
D. Ronald Daniel....... 69 Non-Executive Chairman, WRC Media, Weekly Reader and
CompassLearning
Ralph D. Caulo......... 61 Nominee for Non-Executive Vice-Chairman, WRC Media
Charles L. Laurey...... 29 Director, WRC Media, Weekly Reader and CompassLearning; and
Secretary, WRC Media, Weekly Reader and CompassLearning
Robert S. Lynch........ 42 Director, WRC Media, Weekly Reader and CompassLearning; Vice
President, WRC Media and CompassLearning; and Treasurer, WRC
Media, Weekly Reader and CompassLearning
Martin E. Kenney, 52 Director, WRC Media, Weekly Reader and CompassLearning;
Jr................... Chief Executive Officer, WRC Media and CompassLearning;
President, CompassLearning; Executive Vice President, Weekly
Reader
James N. Lane.......... 48 Director, WRC Media, Weekly Reader and CompassLearning
William F. Dawson, 35 Director, WRC Media, Weekly Reader and CompassLearning
Jr...................
Michael W. 45 Group Vice President, Sales and Marketing, WRC Media
DePasquale...........
Peter E. Bergen........ 47 President and Chief Executive Officer, Weekly Reader
Robert J. Jackson...... 45 Executive Vice President, Weekly Reader
Lester Rackoff......... 50 Executive Vice President and Chief Financial Officer, Weekly
Reader
Kenneth P. Slivken..... 45 Senior Vice President, Human Resources, WRC Media
Thaddeus C. 47 Senior Vice President and Group Product Director,
Kozlowski............ Elementary, Weekly Reader
Eric M. Ecker.......... 47 Vice President and Group Product Director, Secondary,
Weekly Reader
Joyce F. Russell....... 47 Senior Vice President and Chief Financial Officer,
CompassLearning
Timothy Conroy......... 41 Executive Vice President and General Manager,
CompassLearning
Mary M. Wallace........ 49 Executive Vice President, CompassLearning
Dr. Nancy G. Lockwood.. 52 Senior Vice President, Product Development, CompassLearning
Claudia Mansfield 49 Senior Vice President, Marketing, CompassLearning
Sutton...............
Gary M. Columb......... 49 Vice President, Customer Service, CompassLearning
Colleen M. Hartwell.... 39 Vice President, Human Resources, CompassLearning
Elizabeth J. 51 Vice President, Professional Development, CompassLearning
Menacher.............
Edward P. Ponikvar, 31 Regional Marketing Executive, CompassLearning
Jr...................
Larry J. Rutkowski..... 51 President and Chief Executive Officer, American Guidance
Gerald G. Adams........ 51 Executive Vice President Finance and Chief Financial
Officer, American Guidance
Alfred De Seta......... 37 President and Principal Executive Officer, World Almanac
Janice P. Bailey....... 35 Vice President and Chief Financial Officer, World Almanac
Terry Bromberg......... 48 President, Lifetime Learning Systems, Inc.
Leigh Ann Price........ 41 Director, Client Services, Lifetime Learning Systems, Inc.
</TABLE>
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TIMOTHY C. COLLINS, DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. Since June 2, 1999, Timothy C. Collins has served as a
Director of WRC Media and CompassLearning. Mr. Collins was named a Director of
Weekly Reader as of November 17, 1999. Since October 1995, he has served as
Senior Managing Director and Chief Executive Officer of Ripplewood Holdings
L.L.C., which specializes in private equity investments and is the general
partner of Ripplewood Partners, L.P. which controls EAC III, the majority owner
of WRC Media. He currently serves as Co-head of RHJ Industrial Partners, an
investment fund managed by Ripplewood Holdings L.L.C., with which he has been
affiliated since November 1999. In October 1995, he founded Ripplewood Holdings
L.L.C., to continue the industrial partnership approach to leveraged
acquisitions pioneered at Onex Corporation where he served as Senior Managing
Director from January, 1990 until September, 1995. Prior to joining Onex
Corporation, he was a Vice President at Lazard Freres & Company.
D. RONALD DANIEL, NON-EXECUTIVE CHAIRMAN, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. As of November 17, 1999, Mr. Daniel was named Non-Executive
Chairman of WRC Media, Weekly Reader and CompassLearning. Mr. Daniel is a
Director of McKinsey & Company, Inc., having served as Managing Director from
1976 to 1988. He has been a management consultant for over 42 years. He serves
as the non-executive chairman of Ripplewood Holdings L.L.C., which specializes
in private equity investments and is the general partner of Ripplewood Partners,
L.P., which controls EAC III, the majority owner of WRC Media. Since
September 1998, he has served as an advisory board member of IMG Chase Sports
Capital, LLC. Since October 1997, Mr. Daniel has served on the Board of
Directors of TRICON Global Restaurants, Inc. He has also served on the Board of
Directors of Alliant FoodService since 1996. In addition, he serves as Treasurer
of Harvard University, a member of Harvard University's seven-person
Corporation, a member of the Harvard University Board of Overseers, Chairman of
the Harvard Management Company and Chairman of the Board of Fellows of the
Harvard Medical School.
RALPH D. CAULO, NOMINEE FOR NON-EXECUTIVE VICE-CHAIRMAN, WRC MEDIA. In the
near future, we expect to appoint Mr. Ralph D. Caulo Non-Executive Vice-Chairman
of WRC Media. Since 1998, Mr. Caulo has served as an outside consultant at
Ripplewood Holdings L.L.C., which specializes in private equity investments and
is the general partner of Ripplewood Partners, L.P. which controls EAC III, the
majority owner of WRC Media. From 1991 to 1998, Mr. Caulo held the dual position
of Executive Vice President of Simon & Schuster and President of its Educational
Publishing Group. In this position, Mr. Caulo oversaw one of the world's largest
educational publishers and its Allyn & Bacon, Prentice Hall, Silver Burdett
Ginn, Modern Curriculum, Computer Curriculum Corporation (CCC) and Educational
Management Group (EMG) imprints. From 1989 until 1991, Mr. Caulo was President
and Chief Executive Officer of Harcourt Brace Jovanovich. He began his career at
Harcourt Brace Jovanovich in sales in 1974, and then moved through marketing,
editorial, development and senior management to become President and Chief
Operating Officer in 1988.
CHARLES L. LAUREY, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING
AND SECRETARY, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. Since June 2,
1999, Charles L. Laurey has served as a Director of WRC Media and
CompassLearning. As of November 17, 1999, Mr. Laurey was named a Director of
Weekly Reader and Secretary of CompassLearning and Weekly Reader. In
October 1997, he joined Ripplewood Holdings L.L.C., which specializes in private
equity investments and is the general partner of Ripplewood Partners, L.P. which
controls EAC III, the majority owner of WRC Media. Prior to joining Ripplewood
Holdings L.L.C., Mr. Laurey worked from August 1994 until September 1997 in
Morgan Stanley & Co.'s Corporate Finance Department in New York and in the
Mergers, Acquisitions and Restructurings Department in London, most recently as
an associate. He started his career as a strategy consultant in The Hague, The
Netherlands.
ROBERT S. LYNCH, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING,
VICE PRESIDENT, WRC MEDIA AND COMPASSLEARNING, AND TREASURER, WRC MEDIA, WEEKLY
READER AND COMPASSLEARNING. Since
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June 2, 1999, Robert S. Lynch has served as a Director of WRC Media and
CompassLearning. As of November 17, 1999, Mr. Lynch was named a Director of
Weekly Reader, Vice President of WRC Media and CompassLearning and Treasurer of
WRC Media, Weekly Reader and CompassLearning. Mr. Lynch joined Ripplewood
Holdings L.L.C., which specializes in private equity investments and is the
general partner of Ripplewood Partners, L.P. which controls EAC III, the
majority owner of WRC Media, in April 1998, where he serves as Chief Financial
Officer. He was a partner at Arthur Andersen L.L.P., where he was in charge of
the Metropolitan New York Industrial Products Industry Program, from 1990 until
April 1998.
MARTIN E. KENNEY, JR., DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING, CHIEF EXECUTIVE OFFICER, WRC MEDIA AND COMPASSLEARNING,
PRESIDENT, COMPASSLEARNING, AND EXECUTIVE VICE PRESIDENT, WEEKLY READER. Since
July 14, 1999 Martin E. Kenney, Jr. has served as a Director of WRC Media and
both Director and Chief Executive Officer of CompassLearning. As of
November 17, 1999, Mr. Kenney was named Chief Executive Officer of WRC Media, a
Director of Weekly Reader and Executive Vice President of Weekly Reader. He has
held several executive and management positions, including serving as Executive
Vice President of the Education Publishing Group and President of the Education
Technology Group both from May 1995 to December 1998 at Simon & Schuster. From
May 1994 to May 1995, he held the dual positions of President of the Business,
Training and Healthcare Group and Senior Vice President of Marketing at Simon &
Schuster.
JAMES N. LANE, DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. Since July 13, 1999, James N. Lane has served as a Director of
WRC Media. As of November 17, 1999, Mr. Lane was named a Director of Weekly
Reader and CompassLearning. Since August 1998, he has served as President and
Chief Executive Officer of SG Capital Partners LLC which is the general partner
of SG Merchant Banking Fund L.P. which controls SGC Partners II LLC, which in
turn owns 24.7% of WRC Media common stock. He has also served as the Head of
Merchant Banking for Societe Generale Groupe in the Americas since March 1997.
Prior to joining Societe Generale, his career spanned approximately 20 years at
Goldman Sachs & Co., where he was a General Partner, a founding member and
co-head of the Principal Investment Area, and managed the Leveraged Finance
Group in New York and the European Corporate Finance and Merchant Banking
businesses in London.
WILLIAM F. DAWSON, JR., DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. As of November 17, 1999, William F. Dawson, Jr., was named a
Director of WRC Media, Weekly Reader and CompassLearning. Since January 2000,
Mr. Dawson has been a Managing Director of DLJ Merchant Banking Partners II,
L.P., an equity investment fund which acquired 37.8% of the old senior preferred
stock pursuant to the transactions described under "The Acquisition and
Recapitalization." From August 1997, to January 2000, he was a principal of DLJ
Merchant Banking Partners II, L.P. From December 1995 to August 1997, he was a
Senior Vice President in Donaldson Lufkin & Jenrette, Inc.'s high yield capital
markets group. Prior to that time, Mr. Dawson was a Vice President in the
leveraged finance group within Donaldson, Lufkin & Jenrette, Inc.'s investment
banking group. Mr. Dawson serves as Director of Thermadyne Holdings Corporation,
Von Hoffmann Press, Inc. and Insilco Corporation.
MICHAEL W. DEPASQUALE, GROUP VICE PRESIDENT, SALES AND MARKETING, WRC MEDIA.
Michael DePasquale has served as Group Vice President, Sales and Marketing for
WRC Media since January 2000. Since he began his career at CompassLearning in
December 1996 until his appointment to WRC Media, Mr. DePasquale served as
Senior Vice President of Sales. From December 1994 until joining
CompassLearning, Mr. DePasquale served as a Senior Vice President Sales and
Marketing Services at The McGraw Hill Companies, a publishing company.
PETER E. BERGEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, WEEKLY
READER. Peter E. Bergen was named President and Chief Executive Officer of
Weekly Reader in April 1998. He has held several executive and management
positions, including serving as Chief Executive Officer from March, 1992 to
October,
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1997 at Krames Communications, Inc., a publishing company, which PRIMEDIA owned
until 1997. From 1989 to 1992, he held positions at Newbridge
Communications, Inc., a book club and continuity publisher, where he helped
start Newbridge Educational Publishing, serving as Vice President of New Member
Marketing and Senior Vice President of Marketing. From 1979 to 1989, he served
as Advertising Manager and Director of Advertising at Macmillan Book
Clubs, Inc., a publishing company. He began his career at publisher Doubleday
and Company.
ROBERT J. JACKSON, EXECUTIVE VICE PRESIDENT, WEEKLY READER. As of
November 17, 1999, Robert J. Jackson was named Executive Vice President of
Weekly Reader. Since 1974, when he joined Funk & Wagnalls Yearbook Corp., now a
subsidiary of World Almanac, he has held several executive and management
positions, including serving as Vice President and Chief Financial Officer of
PRIMEDIA's Supplemental Education Group during 1998 and 1999 and as Chief
Operating Officer of World Almanac from November, 1995 to December, 1997.
LESTER RACKOFF, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, WEEKLY
READER. Lester Rackoff was hired as Senior Vice President and Chief Financial
Officer of Weekly Reader in August 1998. In January, 2000 he was promoted to
Executive Vice President and Chief Financial Officer. He has held several
executive and management positions, including serving as Chief Financial Officer
at Grolier, Inc., a publisher, from May, 1994 to February, 1998 and Chief
Financial Officer at Macmillan Publishing Co., a publisher, from 1991 to 1994.
Since leaving public accounting twenty-five years ago to join Macmillan
Publishing Co., he has spent virtually his entire career in publishing.
KENNETH P. SLIVKEN, SENIOR VICE PRESIDENT, HUMAN RESOURCES, WRC MEDIA. As
of November 17, 1999, Kenneth P. Slivken was named Senior Vice President of
Group Human Resources of Weekly Reader. In February 2000, he was promoted to
Senior Vice President, Human Resources for WRC Media. From 1996, when he joined
PRIMEDIA, until November 1999, he held several executive and management
positions, including Vice President of Human Resources for PRIMEDIA's
Information Group, Vice President of Human Resources for PRIMEDIA's Supplemental
Education Group and Director of Employee Benefits. Before joining PRIMEDIA, he
was Vice President of Human Resources and Corporate Secretary for Brooks Fashion
Stores, a retailer, from 1987 to 1996.
THADDEUS C. KOZLOWSKI, SENIOR VICE PRESIDENT AND GROUP PRODUCT DIRECTOR,
ELEMENTARY, WEEKLY READER. On June 6, 1998, Thaddeus Kozlowski was named Senior
Vice President and Group Product Director of Weekly Reader. From June 28, 1993
when Mr. Kozlowski joined the company, until June 22, 1998 he served as a Vice
President and Group Product Director of Weekly Reader.
ERIC M. ECKER, VICE PRESIDENT AND GROUP PRODUCT DIRECTOR, SECONDARY, WEEKLY
READER. Eric Ecker has served as Vice President of Weekly Reader since
July 1993. He has held a number of increasingly responsible management
positions, including Marketing Director and Group Product Manager, since he
joined Weekly Reader in 1980. Prior to joining Weekly Reader, he worked for
Hearst Magazines as Circulation Marketing Manager.
JOYCE F. RUSSELL, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
COMPASSLEARNING. As of November 17, 1999, Joyce F. Russell was named Senior
Vice President, Finance and Administration, and Chief Financial Officer of
CompassLearning. She has been Chief Financial Officer of CompassLearning since
1995. Ms. Russell served as Vice President of CompassLearning from July, 1997 to
November, 1999 and as Secretary from July, 1996 to July, 1999. She joined
CompassLearning in August, 1994 as Chief Administrative Officer, a position she
held until October, 1995. Prior to joining CompassLearning, Ms. Russell held
several executive and management positions, including serving as Controller of
the U.S. Engineering and Product Management Division from 1990 to 1994, the
Director of Administrative Operations from 1989 to 1990 and the Manager of
Financial Operations in the South Central/West from 1987 to 1989, in each case
at Bull HN Information Systems Inc./ Honeywell, an information technology
company.
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TIMOTHY CONROY, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER,
COMPASSLEARNING. On January 24, 1999, Timothy Conroy began work as Executive
Vice President and General Manager of CompassLearning. Prior to joining
CompassLearning, he held several senior management positions with Simon &
Schuster Education Group including, from February 1995 to July 1999, Chief
Financial Officer--Educational Management Group and, from November 1990 to
February 1995, Corporate Controller--Computer Curriculum Corporation.
MARY M. WALLACE, EXECUTIVE VICE PRESIDENT, COMPASSLEARNING. As of July 13,
1999, Mary M. Wallace was named Executive Vice President of CompassLearning.
From 1992-1998, Ms. Wallace held the position of Senior Vice President in charge
of worldwide sales for Computer Curriculum Corporation, an educational software
company within the Simon & Schuster Education Group.
DR. NANCY G. LOCKWOOD, SENIOR VICE PRESIDENT, PRODUCT DEVELOPMENT,
COMPASSLEARNING. Nancy Lockwood has served as Senior Vice President, Product
Development of CompassLearning since December 1995. From December 1992 until
joining CompassLearning, she served as Senior Vice President of Technology for
Macmillian McGraw-Hill, a K-8 publishing company.
CLAUDIA MANSFIELD SUTTON, SENIOR VICE PRESIDENT, MARKETING,
COMPASSLEARNING. Claudia Mansfield Sutton joined the CompassLearning staff as
the Senior Vice President for Marketing bringing extensive experience in the
fields of education and business, having worked as a teacher, a school
administrator, a lobbyist for a major education association, and in both
Marketing and Sales for two K-12 instructional technology companies. Prior to
joining CompassLearning, Ms. Sutton served as the Vice President for Public
Affairs at Computer Curriculum Corporation (CCC) from June 1989 to December
1999. Prior to CCC, Ms. Sutton worked for Control Data Corporation as the
manager of marketing communications in the Plato Education Services Division,
now TRO. While working for the American Association of School Administrators in
their Office of Government Affairs, Ms. Sutton was responsible for legislative,
regulatory, and judicial issue management.
GARY M. COLUMB, VICE PRESIDENT, CUSTOMER SERVICE, COMPASSLEARNING. Gary M.
Columb has served as Vice President, Customer Service of CompassLearning since
April 1998. From August 1997 until April 1998 he served as the Director of
Customer Service. Prior to joining CompassLearning, he served as the Customer
Assistance Center Manager for Harmonic Systems, Inc. from May 1996 to August
1997. He has provided consulting to major corporations to improve support
operations and published articles on related topics.
COLLEEN HARTWELL, VICE PRESIDENT, HUMAN RESOURCES. Colleen Hartwell has
served as Vice President, Human Resources at CompassLearning since April 2000.
Prior to joining CompassLearning, Ms. Hartwell held senior management positions
with Kelly Staff Leasing a division of Kelly Services, Inc. from March 1998
until March 2000 in San Diego, California and Time Warner Cable in San Diego,
California from February 1985 until June 1996 and Time Warner Communications, a
division of Time Warner Cable, in Rochester, New York from June 1996 until March
1998.
ELIZABETH J. MENACHER, VICE PRESIDENT, PROFESSIONAL DEVELOPMENT,
COMPASSLEARNING. Elizabeth Menacher has served as Vice President of Professional
Development of CompassLearning since November 1999. Prior to joining
CompassLearning, she worked for 17 years at Computer Curriculum Corporation
where she held several positions, the most recent ten years as Vice President of
Educational Services. She has also spent ten years as a special education
teacher and a staff development facilitator.
EDWARD P. PONIKVAR, JR., REGIONAL MARKETING EXECUTIVE,
COMPASSLEARNING. Edward P. Ponikvar, Jr. has served as Regional Marketing
Executive of CompassLearning since 1998. Serving as such, Mr. Ponikvar has
generated more revenue for CompassLearning than any other employee. Since he
began his career at CompassLearning in 1988 until his appointment to Regional
Marketing Executive,
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Mr. Ponikvar held several positions at CompassLearning including Technician,
System Engineer, Project Manager and Regional Marketing Manager.
LARRY J. RUTKOWSKI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN
GUIDANCE. Larry Rutkowski has been President and Chief Executive Officer of
American Guidance since January 1999. Since joining American Guidance in 1993 as
Vice President of Sales and Marketing, he also served as Vice President and
Publisher from January 1996 to January 1999. In these capacities, he was
responsible for development, marketing and sale of all products. Prior to
joining American Guidance, he served as Vice President and Director of Sales at
NTC Publishing Group where he was responsible for school, college, library,
trade, business-to-business, special markets and international sales. He has
also been a teacher and principal.
GERALD G. ADAMS, EXECUTIVE VICE PRESIDENT FINANCE AND CHIEF FINANCIAL
OFFICER, AMERICAN GUIDANCE. Gerald G. Adams has been Executive Vice President
Finance and Chief Financial Officer of American Guidance since July, 1996. He
joined American Guidance as its Controller in April, 1992. Prior to joining
American Guidance, he served as Division Controller and Operations Finance
Director for Honeywell, Inc., a technology and manufacturing company, and as an
audit manager at Deloitte & Touche LLP, certified public accountants.
ALFRED DE SETA, PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER, WORLD
ALMANAC. As of November 17, 1999, Alfred De Seta was named President of World
Almanac. Since joining World Almanac in 1993, he served as Director from 1993 to
1995, Vice President from 1995 to 1997 and General Manager and Senior Vice
President from 1998 until November 1999. Mr. De Seta played a key role in the
acquisitions of Facts On File News Services and Gareth Stevens, Inc. He also has
had operational responsibility for World Almanac Education Library Services,
Facts On File News Services, World Almanac Books and, most recently, Gareth
Stevens, Inc. Prior to joining PRIMEDIA, he held several positions at AT&T Bell
Laboratories including Strategic Planning Manager, Product Manager, and Systems
Engineer.
JANICE P. BAILEY, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, WORLD
ALMANAC. Janice P. Bailey has been Vice President and Chief Financial Officer
of World Almanac since June 1997. Since joining World Almanac in January 1995,
she has held several management and executive positions, including Director,
Corporate Finance from January 1995 to February 1996 and Director of Corporate
Operations and Strategy from February 1996 to June 1997. Prior to joining
PRIMEDIA, she worked for General Motors, Inc. as a Senior Financial Analyst from
August 1991 to January 1995.
TERRY BROMBERG, PRESIDENT, LIFETIME LEARNING SYSTEMS, INC. Terry Bromberg
has been President of Lifetime Learning Systems, Inc. since January 1, 2000.
Since joining Lifetime Learning Systems, Inc. in May 1995, he has served in
several management positions including Sales Director from May 1995 to
January 1998, Vice President from January 1998 to September 1998 and Senior Vice
President from September 1998 to December 1999.
LEIGH ANN PRICE, DIRECTOR, CLIENT SERVICES, LIFETIME LEARNING
SYSTEMS, INC. Leigh Ann Price has been Director of Client Services of Lifetime
Learning Systems, Inc. since January 15, 1991. Prior to joining Lifetime
Learning Systems, Inc., she worked for the Zimmerman Group as a Senior Account
Executive from December, 1987 to July, 1990.
134
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes, for the fiscal year ended the last day of
December 1999, all plan and non-plan compensation awarded to, earned by, or paid
to (i) the chief executive officer of each registrant for fiscal year 1999,
(ii) the six most highly compensated executive officers other than the CEO of
Weekly Reader serving at the end of December 1999 in all capacities in which
they served, including those executive officers of World Almanac, American
Guidance, Gareth Stevens, Inc. and Lifetime Learning Systems, Inc. who performed
policy making functions for Weekly Reader and were serving as such at the end of
December 1999 in all capacities in which they served, (iii) the four most highly
compensated executive officers other than the president of CompassLearning
serving at the end of December 1999 in all capacities in which they served and
(iv) up to two additional individuals employed by each registrant who were not
serving as executive officers at the end of December 1999 but received at least
as much compensation as the fourth most highly compensated executive officer of
the registrant for whom they were employed:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------ -----------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(A) ($) SARS (#)(B) ($)
- --------------------------- -------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Kenney, Jr........................... 1999 209,983(c) 200,000(d) -- 204,294 765,000(e)
Chief Executive Officer WRC Media and
CompassLearning, President, CompassLearning,
Executive Vice President, Weekly Reader
Dr. Therese K. Crane........................... 1999 319,179(f) 148,352(g) -- 150,000 350,000(h)
President, CompassLearning
Peter E. Bergen................................ 1999 250,000 99,264 -- 5,376 10,400(i)
President and Chief Executive Officer, Weekly
Reader
Robert J. Jackson.............................. 1999 30,220(j) 118,998 -- 7,168 14,394(k)
Executive Vice President, Weekly Reader
Lester Rackoff................................. 1999 175,000 59,558 -- 2,688 3,450(l)
Executive Vice President and Chief Financial
Officer, Weekly Reader
Sandra F. Maccarone............................ 1999 182,537(m) 22,446 -- 358 10,185(n)
Senior Vice President and Editor in Chief,
Weekly Reader
Larry J. Rutkowski............................. 1999 260,000 179,150 11,507(o) 8,064 4,800(p)
President and Chief Executive Officer,
American Guidance
Alfred De Seta................................. 1999 173,036(q) 138,000 -- 7,706 10,400(r)
President and Principal Executive Officer,
World Almanac
Terry Bromberg................................. 1999 120,000 34,536 6,378(o) 358 7,501(s)
President, Lifetime Learning Systems, Inc.
Gary Spears.................................... 1999 242,912(t) 33,977 5,755(o) -- 10,400(u)
President and Chief Executive Officer, Gareth
Stevens, Inc.
Gerald G. Adams................................ 1999 180,000 124,027 5,736(o) 717 4,800(p)
Executive Vice President Finance and Chief
Financial Officer, American Guidance
Leigh Ann Price................................ 1999 62,928 -- -- -- 283,388(v)
Director, Client Services, Lifetime Learning
Systems, Inc.
Joyce F. Russell............................... 1999 191,611(w) 50,000 -- 62,500 240,000(x)
Senior Vice President and Chief Financial
Officer, CompassLearning
Michael W. DePasquale.......................... 1999 180,007 25,000(y) -- 62,500 318,168(z)
Group Vice President, Sales and Marketing,
WRC Media
Dr. Nancy G. Lockwood.......................... 1999 178,090(aa) 64,125(bb) -- 62,500 113,168(cc)
Senior Vice President, Product Development,
CompassLearning
</TABLE>
135
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------ -----------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(A) ($) SARS (#)(B) ($)
- --------------------------- -------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
C. Michael Hayes............................... 1999 150,006 -- -- 62,500 209,418(dd)
Senior Divisional Sales Vice President,
CompassLearning
R. Alfred Knechel.............................. 1999 80,003 37,500(y) -- 17,500 288,146(ee)
Regional Vice President, CompassLearning
Edward P. Ponikvar, Jr......................... 1999 53,960 35,073(y) -- 5,000 333,913(ff)
Regional Marketing Executive, CompassLearning
</TABLE>
- ------------------------------
(a) Represent bonuses paid for in fiscal year 1999.
(b) See "--Option/SAR Grants in Last Fiscal Year".
(c) Mr. Kenney earned $151,644 during the period from July 16, 1999 until
November 16, 1999 for services provided to CompassLearning as Chief
Executive Officer based on an annual salary of $450,000. He earned $58,249
during the period from November 16 until December 31, 1999 for services
provided as Chief Executive Officer of WRC Media, as Executive Vice
President of Weekly Reader and as Executive Vice President of
CompassLearning, based on an annual salary of $480,000.
(d) Represents a guaranteed bonus of $200,000.
(e) Represents a consulting fee of $140,000 and transaction fee of $625,000,
$300,000 of which was used to purchase 16,128 shares of WRC Media common
stock, realized in connection with the transactions described under "The
Acquisition and Recapitalization."
(f) Dr. Crane earned $165,000 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $310,000. She earned $153,959
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $330,000.
(g) Represents a guaranteed bonus of $40,000 and an additional bonus payment of
$108,352 based on the realization of performance targets.
(h) Represents a fixed sale bonus of $200,000 realized in connection with the
transactions described under "The Acquisition and Recapitalization" and a
retention bonus of $150,000.
(i) Represents the fiscal year 1999 contribution by Weekly Reader to its 401(k)
plan of $4,800 and to a vested retirement plan of $5,600.
(j) Mr. Jackson began working for Weekly Reader on November 17, 1999, at an
annual salary of $250,000.
(k) Represents the contribution by Weekly Reader to PRIMEDIA's 401(k) plan of
$4,800 to PRIMEDIA's vested retirement plan of $5,600 and to PRIMEDIA's
Supplemental Employee Retirement Plan of $3,994.
(l) Represents the contributions by Weekly Reader to its 401(k) plan of $1,615
and to a vested retirement plan of $1,885.
(m) Ms. Maccarone earned $107,677 during the period from January 1, 1999 until
August 9, 1999 based on an annual salary of $177,100. She earned $74,860
during the period from August 10, 1999 until December 31, 1999 based on an
annual salary of $190,000.
(n) Represents the contributions by Weekly Reader to its 401(k) plan of $4,585
and to a vested retirement plan of $5,600.
(o) Represents an auto allowance.
(p) Represents the contribution by American Guidance to its 401(k) plan.
(q) Mr. De Seta earned $144,602 during the period from January 1, 1999 until
November 16, 1999 based on an annual salary of $165,000. He earned $28,434
during the period from November 17, 1999 until December 31, 1999, based on
an annual salary of $230,000.
(r) Represents contributions by World Almanac to its 401(k) plan of $4,800 and
to a vested retirement plan of $5,600.
(s) Represents the contributions by Weekly Reader to its 401(k) plan of $3,462
and to a vested retirement plan of $4,039.
(t) Mr. Spears earned $23,489 during the period from January 1, 1999 until
February 7, 1999 based on an annual salary of $225,000. He earned $219,423
during the period from February 8, 1999 until December 31, 1999 based on an
annual salary of $245,000.
(u) Represents the contributions by Gareth Stevens, Inc. to its 401(k) plan of
$4,800 and to a vested retirement plan of $5,600.
(v) Represents commissions paid by Weekly Reader.
136
<PAGE>
(w) Ms. Russell earned $98,332 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $184,500. She earned $93,279
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $200,000.
(x) Represents a fixed sale bonus of $120,000 realized in connection with the
transaction described under "The Acquisition and Recapitalization" and a
retention bonus of $120,000.
(y) Represents a bonus based on realization of quarterly performance targets.
(z) Represents estimated total commissions of 240,000 due for sales in 1999 a
fixed sale bonus of $75,000 and the contribution by CompassLearning to its
401(k) plan of $3,168. Some commissions will actually be paid in fiscal
2000.
(aa) Dr. Lockwood earned $89,539 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $168,000. She earned $88,736
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $190,000.
(bb) Represents a guaranteed bonus of $18,000 and an estimated additional bonus
payment of $46,125 based on the realization of performance targets still
subject to calculation.
(cc) Represents a fixed sale bonus of $50,000 realized in connection with the
transactions described under "The Acquisition and Recapitalization," a
retention bonus of $60,000 and the contribution by CompassLearning to its
401(k) plan of $3,168.
(dd) Represents estimated total commissions of $131,250 due for sales in 1999, a
fixed sale bonus of $75,000 realized in connection with the transactions
described under "The Acquisition and Recapitalization" and the contribution
by CompassLearning to its 401(k) plan of $3,168.
(ee) Represents estimated total commissions of $260,100 due for sales in 1999, a
fixed sale bonus of $25,000 and the contribution by CompassLearning to its
401(k) plan of $3,046. Some commissions will actually be paid in fiscal
2000.
(ff) Represents estimated total commissions of $330,745 due for sales in 1999 as
well as the contribution by CompassLearning to its 401(k) plan of $3,168.
Some commissions will actually be paid in fiscal 2000.
137
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZED
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (A)
- ------------------------------------------------------------------------------------------------------- ---------------------
(1) (2) (3) (4) (5) (6) (7)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------- ------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Kenney, Jr............................ 204,294(b)(c) 67.7% 18.60065 --(a) 1,049,870 2,319,939
Chief Executive Officer, WRC Media and
CompassLearning; President, CompassLearning;
Executive Vice President, Weekly Reader
Dr. Therese K. Crane............................ 150,000(d) 14.8% 4.0 --(e) (f) (f)
President, CompassLearning
Peter E. Bergen................................. 5,376(b)(g) 1.8% 18.60065 --(a) 27,627 61,049
President and Chief Executive Officer, Weekly
Reader
Robert J. Jackson............................... 7,168(b)(g) 2.4% 18.60065 --(a) 36,836 81,399
Executive Vice President, Weekly Reader
Lester Rackoff.................................. 2,688(b)(g) 0.9% 18.60065 --(a) 13,814 30,525
Executive Vice President and Chief Financial
Officer, Weekly Reader
Sandra F. Maccarone............................. 358(b)(g) 0.1% 18.60065 --(a) 1,840 4,065
Senior Vice President and Editor in Chief
Weekly Reader
Larry J. Rutkowski.............................. 8,064(b)(g) 2.7% 18.60065 --(a) 41,441 91,574
President and Chief Executive Officer,
American Guidance
Alfred De Seta.................................. 7,706(b)(g) 2.6% 18.60065 --(a) 39,601 87,508
President and Principal Executive Officer,
World Almanac
Terry Bromberg.................................. 358(b)(g) 0.1% 18.60065 --(a) 1,840 4,065
President, Lifetime Learning Systems, Inc.
Gary Spears..................................... -- -- -- -- -- --
President and Chief Executive Officer, Gareth
Stevens Inc.
Gerald G. Adams................................. 717(b)(g) 0.2% 18.60065 12/31/01(a) 3,685 8,142
Executive Vice President Finance and Chief
Financial Officer, American Guidance
Leigh Ann Price................................. -- -- -- -- -- --
Director, Client Services, Lifetime Learning
Systems, Inc.
Joyce F. Russell................................ 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Vice President and Chief Financial
Officer, CompassLearning
</TABLE>
138
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZED
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (A)
- ------------------------------------------------------------------------------------------------------- ---------------------
(1) (2) (3) (4) (5) (6) (7)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------- ------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael W. DePasquale........................... 62,500(d) 6.2% 4.0 --(e) (f) (f)
Group Vice President, Sales and Marketing, WRC
Media
Dr. Nancy G. Lockwood........................... 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Vice President, Product Development,
CompassLearning
C. Michael Hayes................................ 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Divisional Sales Vice President,
CompassLearning
R. Alfred Knechel............................... 17,500(d) 1.7% 4.0 --(e) (f) (f)
Regional Vice President, CompassLearning
Edward P. Ponikvar, Jr.......................... 5,000(d) 0.5% 4.0 --(e) (f) (f)
Regional Marketing Executive, CompassLearning
</TABLE>
- ------------------------------
(a) The options expire only if the employee's employment is terminated or his
employment contract is not renewed. However, for ease of calculation, under
columns (6) and (7) above we have assumed that the expiration date of the
options and the SARs is five years from the time of grant.
(b) Represents options which are exercisable for WRC Media common stock. There
were a total of 301,724 options to purchase WRC Media common stock granted
in the fiscal year 1999. The percent of options granted to each employee is
based on the total aggregate amount of WRC Media options granted.
(c) Mr. Kenney was granted, subject to cancelation if Mr. Kenney's employment is
terminated for good cause as defined in his employment agreement, the option
to acquire 204,294 shares of WRC Media common stock, of which 33% vested on
November 17, 1999. The remainder will vest 33% on December 31, 2000 and 34%
on December 31, 2001, unless deemed fully vested on a prior date due to the
occurrence of a change in control as defined in the employment agreement.
See "Employment Agreements--WRC Media Agreement with Martin E. Kenney, Jr."
(d) Represents SARs (Stock Appreciation Rights) of CompassLearning. There were a
total of 1,013,500 SARs of CompassLearning granted in the fiscal year 1999.
The percent of SARs granted to each employee is based on the total aggregate
amount of CompassLearning SARs granted. The SARs were exercised on
November 15, 1999.
(e) There are no expiration dates for these SARs because they have already been
exercised.
(f) Because the SARs for these individuals have already been exercised, there is
no "Potential Realized Value" and columns (6) and (7) above are
inapplicable.
(g) 33% of these options vested on December 31, 1999. Unless deemed fully vested
on a prior date due to the occurrence of a change in control as defined in
the employment agreements, an additional 33% will vest on December 31, 2000
and, if their employment is renewed for an additional year ending
December 31, 2002, as described under "Employment Agreements," the final 34%
will vest on December 31, 2001. See "Employment Agreements."
139
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT OPTIONS/SAR'S AT
FY- FY-
SHARES ACQUIRED END(#)EXERCISABLE/ END($) EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Martin E. Kenney, Jr............ 0 0 67,417/136,877 0/0
Chief Executive Officer, WRC
Media and CompassLearning;
President, CompassLearning;
Executive Vice President,
Weekly Reader
Dr. Therese K. Crane............ 150,000 165,750.00(a) 0/0 0/0
President, CompassLearning
Peter E. Bergen................. 0 0 1,774/3,602 0/0
President and Chief Executive
Officer, Weekly Reader
Robert J. Jackson............... 0 0 2,365/4,803 0/0
Executive Vice President,
Weekly Reader
Lester Rackoff.................. 0 0 887/1,801 0/0
Executive Vice President and
Chief Financial Officer,
Weekly Reader
Sandra F. Maccarone............. 0 0 118/240 0/0
Senior Vice President and
Editor in Chief Weekly Reader
Larry J. Rutkowski.............. 0 0 2,661/5,403 0/0
President and Chief Executive
Officer, American Guidance
Alfred De Seta.................. 0 0 2,543/5,163 0/0
President and Principal
Executive Officer, World
Almanac
Terry Bromberg.................. 0 0 118/240 0/0
President, Lifetime Learning
Systems, Inc.
Gary Spears..................... 0 0 0 0
President and Chief Executive
Officer, Gareth Stevens Inc.
Gerald G. Adams................. 0 0 237/480 0/0
Executive Vice President
Finance and Chief Financial
Officer, American Guidance
Leigh Ann Price................. 0 0 0 0
Director, Client Services,
Lifetime Learning Systems,
Inc.
Joyce F. Russell................ 62,500 69,062.50(b) 0/0 0/0
Senior Vice President and
Chief Financial Officer,
CompassLearning
Michael DePasquale.............. 62,500 69,062.50(c) 0/0 0/0
Group Vice President, Sales
and Marketing, WRC Media
Dr. Nancy Lockwood.............. 62,500 69,062.50(c) 0/0 0/0
Senior Vice President, Product
Development, CompassLearning
</TABLE>
140
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT OPTIONS/SAR'S AT
FY- FY-
SHARES ACQUIRED END(#)EXERCISABLE/ END($) EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
C. Michael Hayes................ 62,500 69,062.50(c) 0/0 0/0
Senior Divisional Sales Vice
President, CompassLearning
R. Alfred Knechel............... 17,500 19,337.50(c) 0/0 0/0
Regional Vice President,
CompassLearning
Edward P. Ponikvar, Jr.......... 5,000 5,525.00(d) 0/0 0/0
Regional Marketing Executive,
CompassLearning
</TABLE>
- ------------------------------
(a) Although Dr. Crane exercised all 150,000 SARs at $1.50, upon exercise she
received only $165,750. The remaining $59,250.00 realized will remain in
escrow to satisfy potential unasserted claims against CompassLearning and
will be released July 14, 2000.
(b) Although Ms. Russell exercised all 62,500 SARs at $1.50, upon exercise she
received only $69,062.50. The remaining $24,687.50 realized will remain in
escrow to satisfy potential unasserted claims against CompassLearning and
will be released July 14, 2000.
(c) Although Mr. DePasquale, Dr. Lockwood, Mr. Hayes and Mr. Knechel each
exercised all 62,500 SARs at $1.50, upon exercise they each received only
$69,062.50. The remaining $24,687.50 that each realized will remain in
escrow to satisfy potential unasserted claims against CompassLearning and
will be released July 14, 2000.
(d) Although Mr. Ponikvar exercised all 5,000 SARs, upon exercise he received
only $5,525. The remaining $1,975.00 realized will remain in escrow to
satisfy potential unasserted claims against CompassLearning and will be
released July 14, 2000.
141
<PAGE>
DIRECTOR COMPENSATION
Our directors do not receive compensation, except as officers or employees.
However, WRC Media has entered into a letter agreement with Mr. Caulo, the
Non-Executive Vice-Chairman of WRC Media providing terms for a consulting
agreement beginning on January 1, 2000 through December 31, 2002. Under this
arrangement, Mr. Caulo will be paid, among other compensation, an annual salary
of $200,000 by WRC Media and $150,000 by Ripplewood Holdings L.L.C. for services
in connection with the identification, evaluation and completion of new
investment opportunities. See "Material Relationships and Related
Transactions--Other Transactions."
EMPLOYMENT AGREEMENTS
The following summary of the material provisions of the employment
agreements for the executives listed under "Executive Compensation" is qualified
in its entirety by reference to the agreements.
WRC MEDIA AND COMPASSLEARNING AGREEMENT WITH MARTIN E. KENNEY, JR. On
November 17, 1999, WRC Media and CompassLearning entered into an employment
agreement with Martin E. Kenney, Jr. This agreement will remain in effect until
December 31, 2002 unless earlier terminated by either party upon 90 days' prior
written notice. Mr. Kenney shall receive a minimum annual base salary of
$480,000, subject to increase after an annual review, as well as a bonus of up
to 156% of his annual base salary based on the achievement of annual performance
objectives. Mr. Kenney is guaranteed to receive an annual bonus of at least
$200,000, regardless of whether any performance objectives are achieved.
Mr. Kenney was granted, subject to cancelation if Mr. Kenney's employment is
terminated for good cause as defined in the agreement, the option to acquire
193,546.23 shares of WRC Media common stock, of which 33% vested on
November 17, 1999. The remainder will vest 33% on December 31, 2000 and 34% on
December 31, 2001, unless deemed fully vested on a prior date due to the
occurrence of a change in control as defined in the agreement. In addition,
Mr. Kenney shall receive, upon achievement of performance objectives in fiscal
year 2000, bonus stock options, valued up to $400,000, which shall be fully
vested upon grant. In the event of an initial public offering of WRC Media
common stock, Mr. Kenney shall participate in a stock option plan commensurate
with industry standards. If his employment is terminated due to death or
disability or without cause, Mr. Kenney shall receive his base salary and
guaranteed bonus for the balance of his term or eighteen months, whichever is
longer. In the event Mr. Kenney elects to receive the severance payment as
salary continuation payments for eighteen months rather than as a lump sum, he
shall continue to receive medical, dental and vision coverage for that period.
If Mr. Kenney's employment is terminated for any reason, WRC Media shall have an
option to purchase all or any portion of his shares of common stock of WRC Media
(including any shares obtained or obtainable through the exercise of any option)
at fair market value. If Mr. Kenney's employment is terminated without cause, he
shall have the option to sell to WRC Media all of his 16,128 shares of WRC Media
common stock purchased on November 17, 1999, then held at fair market value. In
addition, Mr. Kenney is subject to customary non-competition, non-solicitation
of employees and confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH THERESE K. CRANE. On July 14, 1999,
CompassLearning entered into an employment agreement with Therese K. Crane. This
agreement will remain in effect until terminated by either party upon 30 days'
prior written notice. Dr. Crane shall receive a minimum annual base salary of
$330,000, subject to increase after annual review, as well as an annual bonus of
up to 121.0% of her base salary based on the achievement of annual performance
objectives. In the event of an initial public offering of CompassLearning common
stock, Dr. Crane shall participate in a stock option plan commensurate with
industry standards. If her employment is terminated because of death or
disability or without cause, Dr. Crane shall receive, among other things, as a
lump sum payment her base salary for eighteen months less the term of her
employment since execution of the agreement or one year, whichever is greater.
If Dr. Crane elects to receive the severance payment as
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salary continuation payments for that period used to calculate that payment
rather than as a lump sum, she shall receive medical, dental and vision coverage
for the period. In addition, Dr. Crane is subject to customary non-solicitation
of employees and confidentiality provisions.
WEEKLY READER AGREEMENT WITH PETER E. BERGEN. On November 17, 1999, Weekly
Reader entered into an employment agreement with Peter E. Bergen. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Bergen received an annual base salary of $250,000 until January 1, 2000. He
shall receive a minimum annual base salary for the duration of his employment of
$275,000, subject to increase after annual review, as well as an annual bonus of
up to 52.5%% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Bergen shall
receive, among other things, as a lump sum payment his base salary for the
balance of his term or one year, whichever is longer, and, if his bonus
objectives have been achieved, a prorated portion of his bonus for the portion
of the year worked during the year of termination. In addition, Mr. Bergen is
subject to customary non-solicitation of customers and employees and
confidentiality provisions.
WEEKLY READER AGREEMENT WITH ROBERT J. JACKSON. On November 17, 1999,
Weekly Reader entered into an employment agreement with Robert Jackson. This
agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Jackson shall receive a minimum annual base salary of $250,000, subject to
increase after annual review, as well as an annual bonus of up to 52.5% of his
base salary based on the achievement of annual performance objectives. If his
employment is terminated without cause, Mr. Jackson shall receive, among other
things, as a lump sum payment his base salary for the balance of his term or one
year, whichever is longer, and, if his bonus objectives have been achieved, a
prorated portion of his bonus for the portion of the year worked during the year
of termination. In addition, Mr. Jackson is subject to customary
non-solicitation of customers and employees and confidentiality provisions.
WEEKLY READER AGREEMENT WITH LESTER RACKOFF. On November 17, 1999, Weekly
Reader entered into an employment agreement with Lester Rackoff. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Rackoff received an annual base salary of $175,000 until January 1, 2000. He
shall receive a minimum annual base salary of $210,000 for the duration of his
employment, subject to increase after annual review, as well as an annual bonus
of up to 45% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Rackoff shall
receive, among other things, as a lump sum payment his base salary and, if his
bonus objectives have been achieved and termination occurs more that six months
after the beginning of the calender year, a prorated portion of his bonus for
the portion of the year worked during the year of termination. In addition,
Mr. Rackoff is subject to customary non-solicitation of customers and employees
and confidentiality provisions.
WEEKLY READER AGREEMENT WITH SANDY MACCARONE. On November 17, 1999, Weekly
Reader entered into an employment agreement with Sandy Maccarone. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Ms. Maccarone shall receive a minimum annual base salary of $190,000, subject to
increase after annual review, as well as an annual bonus of up to 37.5% of her
base salary based on the achievement of annual performance objectives. If her
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employment is terminated without cause, Ms. Maccarone shall receive, among other
things, as a lump sum payment her base salary and, if her bonus objectives have
been achieved and termination occurs more that six months after the beginning of
the calender year, a prorated portion of her bonus for the portion of the year
worked during the year of termination. In addition, Ms. Maccarone is subject to
customary non-solicitation of employees and confidentiality provisions.
AMERICAN GUIDANCE AGREEMENT WITH LARRY RUTKOWSKI. On November 17, 1999,
American Guidance entered into an employment agreement with Larry Rutkowski.
This agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Rutkowski shall receive a minimum annual base salary of $260,000, subject to
increase after review on February 28, 2000 and annually thereafter, as well as
an annual bonus of up to 75.0% of his base salary based on the achievement of
annual performance objectives. If his employment is terminated without cause,
Mr. Rutkowski shall receive, among other things, as a lump sum payment his base
salary for the balance of his term, one year or eighteen months, whichever is
longer, and, if his bonus objectives have been achieved, a prorated portion of
his bonus for the portion of the year worked during the year of termination. The
payment of his base salary as a lump sum is contingent upon the satisfaction of
the conditions described in the agreement. If Mr. Rutkowski's employment is
terminated for good cause, as defined in the agreement, he or his beneficiary
may under specific circumstances described in the agreement, be eligible to
receive, among other compensation, his salary then in effect for a 120 day
period following his termination. In addition, Mr. Rutkowski is subject to
customary non-solicitation of customers and employees and confidentiality
provisions.
PRIMEDIA REFERENCE INC. AGREEMENT WITH AL DE SETA. On November 17, 1999,
PRIMEDIA Reference Inc. entered into an employment agreement with Al De Seta.
This agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date. Mr. De
Seta shall receive a minimum annual base salary of $230,000 until January 1,
2000 and $255,000 thereafter, subject to increase after annual review, as well
as an annual bonus of up to 60.0% of his base salary based on the achievement of
annual performance objectives. If his employment is terminated without cause,
Mr. De Seta shall receive, among other things, as a lump sum payment his base
salary for the balance of his term or one year, whichever is longer, and, if his
bonus objectives have been achieved, a prorated portion of his bonus for the
portion of the year worked during the year of termination. In addition, Mr. De
Seta is subject to customary non-solicitation of customers and employees and
confidentiality provisions.
WEEKLY READER AGREEMENT WITH TERRY BROMBERG. On November 17, 1999, Weekly
Reader entered into an employment agreement with Terry Bromberg. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Bromberg received an annual base salary of $120,000 until January 1, 2000.
He shall receive a minimum annual base salary of $150,000 for the duration of
his employment, subject to increase after annual review, as well as an annual
bonus of up to 30% of his base salary based on the achievement of annual
performance objectives. If his employment is terminated without cause,
Mr. Bromberg shall receive, among other things, as a lump sum payment his base
salary and, if his bonus objectives have been achieved and termination occurs
more that six months after the beginning of the calender year, a prorated
portion of his bonus for the portion of the year worked during the year of
termination. In addition, Mr. Bromberg is subject to customary non-solicitation
of customers and employees and confidentiality provisions.
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AMERICAN GUIDANCE AGREEMENT WITH GERALD ADAMS. On November 17, 1999,
American Guidance entered into an employment agreement with Gerald Adams. This
agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Adams received an annual base salary of $180,000 until January 1, 2000. He
shall receive a minimum annual base salary of $195,000 for the duration of his
employment, subject to increase after annual review, as well as an annual bonus
of up to 75% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Adams shall
receive, among other things, as a lump sum payment his base salary for the year
in which termination occurs or eighteen months and, if his bonus objectives have
been achieved and termination occurs more than six months after the beginning of
the calender year, a prorated portion of his bonus for the portion of the year
worked during the year of termination. The payment of his base salary as a lump
sum is contingent upon the satisfaction of the conditions described in the
agreement. If Mr. Adams's employment is terminated for good cause, as defined in
the agreement, he or his beneficiary may under specific circumstances described
in the agreement, be eligible to receive, among other compensation, his salary
then in effect for a 120 day period following his termination. In addition,
Mr. Adams is subject to customary non-solicitation of customers and employees
and confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH JOYCE F. RUSSELL. On November 17, 1999,
CompassLearning entered into an employment agreement with Joyce F. Russell. This
agreement will remain in effect unless terminated by either party upon 30 days'
prior written notice. Ms. Russell shall receive a minimum annual base salary of
$200,000, subject to increase after annual review, as well as an annual bonus of
up to 100.0% of her base salary based on the achievement of annual performance
objectives. In the event of an initial public offering of CompassLearning common
stock, Ms. Russell shall participate in a stock option plan commensurate with
industry standards. If her employment is terminated because of death or total
disability or without cause, Ms. Russell shall receive, among other things, as a
lump sum payment her base salary. If Ms. Russell elects to receive the severance
payment as salary continuation payments for twelve months rather than as a lump
sum, she shall receive medical, dental and vision coverage for that period. In
addition, Ms. Russell is subject to customary non-solicitation of employees and
confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH NANCY LOCKWOOD. On July 14, 1999,
CompassLearning entered into an employment agreement with Dr. Nancy Lockwood.
This agreement will remain in effect until terminated by either party upon
30 days' prior written notice. Dr. Lockwood shall receive a minimum annual base
salary of $190,000, subject to increase after annual review, as well as an
annual bonus of up to 95.0% of her base salary based on the achievement of
annual performance objectives. In the event of an initial public offering of
CompassLearning common stock, Dr. Lockwood shall participate in a stock option
plan commensurate with industry standards. If her employment is terminated
because of death or total disability or without cause, Dr. Lockwood shall
receive, among other things, as a lump sum payment her base salary. If
Dr. Lockwood elects to receive the severance payment as salary continuation
payments for the period used to calculate the payment rather than as a lump sum,
she shall receive medical, dental and vision coverage for that period. In
addition, Dr. Lockwood is subject to customary non-solicitation of employees and
confidentiality provisions.
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MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
In connection with the acquisition of CompassLearning, CompassLearning
entered into a management agreement with Ripplewood Holdings L.L.C., and after
the completion of the transactions described under "The Acquisition and
Recapitalization," Weekly Reader entered into a management agreement with
Ripplewood Holdings L.L.C. The following summary of the material provisions of
these management agreements is qualified in its entirety by reference to the
management agreements as entered into or amended as of the date of this
prospectus.
Under the terms of the CompassLearning management agreement with Ripplewood
Holdings L.L.C., and since the date of the acquisition of CompassLearning,
Ripplewood Holdings L.L.C. has been providing to CompassLearning management
consulting and financial advisory services, and CompassLearning has been paying
to Ripplewood Holdings L.L.C. an annual management fee of $150,000, payable in
quarterly installments, and has reimbursed Ripplewood Holdings L.L.C. for its
reasonable out-of-pocket costs and expenses incurred in connection with the
performance of its services. On November 17, 1999, CompassLearning and
Ripplewood Holdings L.L.C. amended the terms of the CompassLearning management
agreement with Ripplewood Holdings L.L.C. to relieve CompassLearning of its
obligation to pay management fees to Ripplewood Holdings L.L.C. until 2001.
Under the terms of the Weekly Reader management agreement with Ripplewood
Holdings L.L.C., Ripplewood Holdings L.L.C. provides to Weekly Reader management
consulting and financial advisory services. As a result of the Weekly Reader
management agreement and the amendment of the CompassLearning management
agreement, CompassLearning and Weekly Reader will reimburse Ripplewood Holdings
L.L.C. for its reasonable out-of-pocket costs and expenses incurred in
connection with the performance of its services and, beginning in the first
quarter of 2001, will be obligated to pay to Ripplewood Holdings L.L.C. annual
aggregate management fees for services to both CompassLearning and Weekly Reader
totaling $950,000, payable quarterly. In connection with the transactions
described under "The Acquisition and Recapitalization," Ripplewood Holdings
L.L.C. also received an advisory fee customary for transactions of this nature.
Under these management agreements, Weekly Reader and CompassLearning are
obligated to indemnify, defend and hold harmless Ripplewood Holdings L.L.C., its
affiliates and each of their respective directors, stockholders, advisory
directors, officers, members, employees and agents from any damages related to
the performance by Ripplewood Holdings L.L.C. of its obligations under these
management agreements. Ripplewood Holdings L.L.C. may terminate these management
agreements at any time on five days' prior written notice to Weekly Reader or
CompassLearning, as applicable.
MANAGEMENT SHAREHOLDER AGREEMENTS
Simultaneously with the closing of the transactions described under "The
Acquisition and Recapitalization," and under the terms of their respective
employment agreements with Weekly Reader and CompassLearning some executives of
WRC Media, Weekly Reader, and CompassLearning purchased shares of WRC Media
common stock and entered into management shareholder agreements with WRC Media
and EAC III with respect to the WRC Media common stock held by these executives.
The following summary of the material provisions of these management shareholder
agreements is qualified in its entirety by reference to the management
shareholder agreements.
VOTING AGREEMENT. Each executive who is a party to a management shareholder
agreement with WRC Media and EAC III with respect to WRC Media common stock will
grant to EAC III an irrevocable proxy to vote the WRC Media common stock held by
the executive as well as all WRC Media common stock thereafter acquired by the
executive on all matters except for any matter that would both adversely affect
and treat the executive differently from other holders of WRC Media
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common stock. This proxy shall terminate upon any transfer of these shares to a
third party after or upon completion of an initial public offering of WRC Media
common stock and the expiration of any "lock-up" period agreed upon by the
executives and the underwriters in connection with the initial public offering.
TRANSFER RESTRICTIONS. Each management shareholder agreement with WRC Media
and EAC III with respect to WRC Media common stock restricts the right of an
executive to transfer the WRC Media common stock the executive holds without the
prior written consent of EAC III to any person other than a permitted transferee
of the executive. With respect to each executive who is a party to a management
shareholder agreement, permitted transferees will include EAC III, another
executive, the executive's spouse or lineal descendants or any trust the
beneficiaries of which include only the executive's spouse or lineal
descendants. Each executive may also transfer, without restriction, the WRC
Media common stock that the executive holds after the completion of an initial
public offering of WRC Media common stock.
OPTIONS. Executives listed under "Ownership of Stock," among others, who
are parties to a management shareholder agreement with WRC Media and EAC III
with respect to WRC Media common stock were also granted options to purchase a
specified number of shares of WRC Media common stock. With respect to each of
these executives, to the extent that the executive remains employed with Weekly
Reader or CompassLearning, as applicable, 33% of the options will vest on
December 31, 1999, a further 33% on December 31, 2000 and the remaining 34% on
December 31, 2001. If the executive's employment with Weekly Reader or
CompassLearning, as applicable, is terminated for any reason other than those
specified in the applicable management shareholder agreement, these options will
vest immediately.
TAG-ALONG RIGHTS. The management shareholder agreements with WRC Media and
EAC III with respect to WRC Media common stock provide that, if EAC III
determines to sell in excess of 5% of its WRC Media common stock to a third
party other than a permitted transferee and, after giving effect to the sale,
EAC III will have transferred in excess of 35% of its WRC Media common stock to
a third party other than a permitted transferee, the executives who are party to
the management shareholder agreements will have the right to sell a
proportionate amount of their WRC Media common stock in the transaction at the
same price per share and on the same terms and conditions as apply to the sale
of WRC Media common stock by EAC III.
DRAG-ALONG RIGHTS. In the event that EAC III determines to sell all or any
portion in excess of 35% of its WRC Media common stock to any third party, EAC
III will have the right to cause the executives who are party to the management
shareholder agreements with WRC Media and EAC III to sell a proportionate amount
of their WRC Media common stock in the transaction, all at the same price per
share and on the same terms and conditions as apply to the sale of WRC Media
common stock by EAC III.
OPTION UPON TERMINATION. In the event that the employment of an executive
who is party to a management shareholder agreement with WRC Media and EAC III
with respect to WRC Media common stock is terminated for any reason, EAC III has
the option to purchase all or any portion of the WRC Media common stock held by
the executive at fair market value as determined under the terms of the
management shareholder agreement. In addition, in the event that an executive's
employment is terminated other than for good cause, as defined in the
executive's employment agreement, or because of a notice of non-renewal given by
the executive's employer, in the event of financial hardship as determined by
the Board of Directors of WRC Media or because of death, the executive or the
executive's estate will have the right to require WRC Media to purchase any or
all of
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the executive's WRC Media common stock, subject to exceptions and customary
limitations, including but not limited to:
- our financial ability to finance the purchase with cash; or
- our ability to obtain third party financing on reasonable terms.
TRANSITION SERVICES AGREEMENT
As part of the recapitalization, PRIMEDIA, Weekly Reader and WRC Media
entered into a transition services agreement under which PRIMEDIA and Weekly
Reader will each provide various services, including, but not limited to those
described below, following the completion of the transactions described under
"The Acquisition and Recapitalization" to the other and will each pay the other
for these services at rates determined under the transition services agreement.
The following summary of the material provisions of the transition services
agreement is qualified in its entirety by reference to the transition services
agreement. PRIMEDIA will:
- make available to all the employees of Weekly Reader, together with its
subsidiaries that are participating in the relevant plan as of the
completion of the transactions described under "The Acquisition and
Recapitalization," participation in each of the employee benefit plans
sponsored by PRIMEDIA;
- continue to make available office space currently occupied by Robert J.
Jackson and Kenneth Slivken, among others, who have become our employees
upon completion of the transactions described under "The Acquisition and
Recapitalization," and
- provide related services such as security, cleaning and access to
administrative and secretarial services at a monthly rental fee of
approximately $8,500, plus any incremental direct costs associated with
these services.
Weekly Reader will continue to provide some computer services to PRIMEDIA until
March 31, 2000, including maintenance of some hardware and software systems, and
PRIMEDIA will pay incremental costs reasonably incurred by Weekly Reader in
connection with these services.
OTHER TRANSACTIONS
WEEKLY READER
Weekly Reader, with PRIMEDIA's other domestic wholly-owned subsidiaries,
guaranteed PRIMEDIA's bank credit facilities and senior notes until
November 17, 1999. Since completion of the transactions described under "The
Acquisition and Recapitalization," Weekly Reader no longer guarantees PRIMEDIA's
bank credit facilities and senior notes.
WRC MEDIA
WRC Media, Ripplewood Holdings L.L.C. and Mr. Ralph D. Caulo, whom we expect
to appoint the Vice-Chairman of WRC Media, were party to a letter agreement
providing terms for consulting agreements beginning on January 1, 2000 through
December 31, 2002. Under these agreements, Mr. Caulo will be paid, among other
compensation, an annual salary of $200,000 by WRC Media and $150,000 by
Ripplewood Holdings L.L.C. for services in connection with the identification,
evaluation and completion of new investment opportunities.
As additional consideration for his consulting services to WRC Media, WRC
Media will also pay Mr. Caulo a transaction fee of $250,000 and grant him 53,762
options to purchase common stock of WRC Media at an exercise price of $18.60065.
Subject to termination for "good cause" as defined in this agreement, 33% of the
options will vest upon signing, 34% on December 31, 2000 and 33% on
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December 31, 2001 and will expire only if Mr. Caulo's contract is not renewed or
is terminated. These options represent a potential realized value:
- of $276,284 at an assumed annual stock price appreciation rate of 5% over
five years; and
- of $610,515 at an assumed annual stock price appreciation rate of 5% over
ten years.
Under Mr. Caulo's agreement with Ripplewood Holdings L.L.C., Ripplewood
Holdings L.L.C. will also grant him stock options based upon the size of each
transaction for which he provides services.
Although not yet determined as of the date of this prospectus, Mr. Caulo may
receive additional compensation under these agreements as well.
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OWNERSHIP OF STOCK
As used in the three sections below describing the beneficial ownership of
WRC Media, Weekly Reader and CompassLearning, "beneficial ownership" means the
sole or shared power to vote, or direct the voting of, a security, or the sole
or shared investment power with respect to a security. An example is the power
to dispose of, or direct the disposition of, a security. A person is deemed as
of any date to have "beneficial ownership" of any security that the person has
the right to acquire within 60 days after that date. For purposes of computing
the percentages of outstanding shares held by each person named in the three
sections below, any security that the person has the right to acquire within
60 days of the date of calculation is deemed to be outstanding, although this
security is not deemed to be outstanding for purposes of calculating the
percentage ownership of any other person.
BENEFICIAL OWNERSHIP OF WRC MEDIA
The following tables list, as of the date of this prospectus, information
known to us regarding the beneficial ownership of WRC Media common stock by:
- each person known by WRC Media to be the beneficial owner of more than 5%
of the outstanding WRC Media common stock;
- each of the directors and the executive officers listed under
"Management--Executive Compensation;" and
- all directors and the executive officers listed under
"Management--Executive Compensation," as a group.
As of the date of this prospectus, the total number of outstanding shares of
WRC Media common stock was 6,855,853. Except as otherwise noted, the persons
named in the tables have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 6,855,853 shares of common stock have been issued and
are outstanding.
WRC MEDIA COMMON STOCK
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------
NAME AND ADDRESS SHARES(A) PERCENT OF CLASS(A)
- ---------------- ---------- -------------------
<S> <C> <C>
EAC III
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 5,037,985(b) 73.3%
SGC Partners II LLC
1221 Avenue of the Americas
New York, NY 10020........................................ 1,694,039 24.7%
EAC IV, L.L.C.
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 5,037,985(c) 73.3%
Martin E. Kenney, Jr........................................ 83,545(d) 1.2%
Timothy C. Collins.......................................... *5,096,327(e) 74.3%
</TABLE>
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<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------
NAME AND ADDRESS SHARES(A) PERCENT OF CLASS(A)
- ---------------- ---------- -------------------
<S> <C> <C>
Charles L. Laurey........................................... 1,636(f) *
Robert S. Lynch............................................. *5,043,268(g) 73.5%
D. Ronald Daniel............................................ *5,037,985(h) 73.3%
William F. Dawson........................................... -- *
James N. Lane............................................... *1,694,039(i) 24.7%
Dr. Therese K. Crane........................................ 4,032(f) *
Alfred De Seta.............................................. 14,102(j) *
Larry J. Rutkowski.......................................... 14,757(k) *
Ralph D. Caulo.............................................. 17,741(l) *
Robert J. Jackson........................................... 13,118(m) *
Peter E. Bergen............................................. 9,838(n) *
Joyce F. Russell............................................ -- *
Michael W. DePasquale....................................... -- *
Nancy G. Lockwood........................................... -- *
Edward P. Ponikvar, Jr...................................... -- *
Lester Rackoff.............................................. 4,919(o) *
Sandra F. Maccarone......................................... 656(p) *
Terry Bromberg.............................................. 656(p) *
Gary Spears................................................. -- *
Gerald G. Adams............................................. 1,312(q) *
Leigh Ann Price............................................. -- *
All directors of WRC Media and the executive officers listed
under "Management" as a group............................. 6,969,728 100.0%
</TABLE>
- ------------------------
* Represents holdings of less than 1%.
(a) Calculated excluding all shares issuable pursuant to options except, as to
each person, the shares issuable to that person pursuant to options
immediately exercisable or exercisable within 60 days from the date of this
prospectus.
(b) Represents 4,870,494 shares held directly and 167,491 shares held indirectly
through its rights granted to it under the management shareholder agreements
entered into by some executives of WRC Media, Weekly Reader and
CompassLearning. For a description of these agreements, see "Material
Relationships and Related Transactions--Management Shareholder Agreements."
Each of EAC IV L.L.C., Co-Investment Partners, L.P., The Northwestern Mutual
Life Insurance Company, Jackson National Life Insurance Company and Blue
Ridge Investments, L.L.C., an affiliate of Bank of America, N.A. owns 66.4%,
16.6%, 10.9%, 5.5% and 0.6%, respectively, of the membership interests in
EAC III.
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(c) Represents the beneficial ownership of shares through its ownership of 66.4%
of the membership interests of EAC III and the rights granted to EAC III
under the management shareholder agreements entered into by some executives
of WRC Media, Weekly Reader and CompassLearning and the limited liability
company agreement of EAC III. EAC IV L.L.C. is controlled by Ripplewood
Partners, L.P., an affiliate of Ripplewood Holdings L.L.C. For more
information regarding the possible consequences of beneficial ownership of
our common stock by Ripplewood Holdings L.L.C., see "Risk Factors--Ownership
of WRC Media and its Subsidiaries."
(d) Represents 16,128 shares held directly and 67,417 shares issuable upon
exercise of options granted under his employment agreement. For a summary of
the material provisions of Martin E. Kenney Jr.'s employment agreement, see
"Management--Employment Agreements--WRC Media and CompassLearning Agreement
with Martin E. Kenney Jr."
(e) Represents 58,342 shares held directly and 5,037,985 shares beneficially
owned through Mr. Collins' position as Senior Managing Director and Chief
Executive Officer of Ripplewood Holdings L.L.C. which is the general partner
of Ripplewood Partners, L.P. which controls EAC III.
(f) Represents shares held directly.
(g) Represents 5,283 shares held directly and 5,037,985 shares beneficially
owned through Mr. Lynch's position as the Chief Financial Officer of
Ripplewood L.L.C. which is the general partner of Ripplewood Partners, L.P.,
which controls EAC III.
(h) Represents beneficial ownership of 5,037,985 shares through Mr. Daniel's
position as the Non-executive chairman of Ripplewood Holdings L.L.C. which
is the general partner of Ripplewood Partners, L.P., which controls EAC III.
(i) Represents beneficial ownership of 1,694,039 shares through Mr. Lane's
position as President and Chief Executive Officer of SG Capital partners LLC
which is the general partner of SG Merchant Banking Fund L.P. which controls
SGC Partners II LLC.
(j) Represents 11,559 shares held directly and 2,543 shares issuable upon
exercise of options granted under a management shareholder agreement. For a
summary of the material terms of the options granted by the management
shareholder agreement, see "Material Relationships and Related
Transactions--Management Shareholder Agreements--Options."
(k) Represents 12,096 shares held directly and 2,661 shares issuable upon
exercise of options granted under a management shareholder agreement. For a
summary of the material terms of the options granted by the management
shareholder agreement, see "Material Relationships and Related
Transactions--Management Shareholder Agreements--Options."
(l) Represents 17,741 shares issuable upon exercise of options to be granted
under Mr. Caulo's consulting agreement with WRC Media. For a summary of the
material terms of the options granted by the consulting agreement, see
"Material Relationships and Related Party Transactions--Other Transactions."
(m) Represents 10,752 shares held directly and 2,366 shares issuable upon
exercise of options granted under a management shareholder agreement. For a
summary of the material terms of the options granted by the management
shareholder agreement, see "Material Relationships and Related
Transactions--Management Shareholder Agreements--Options."
(n) Represents 8,064 shares held directly and 1,774 shares issuable upon
exercise of options granted under a management shareholder agreement. For a
summary of the material terms of the options granted by the management
shareholder agreement, see "Material Relationships and Related
Transactions--Management Shareholder Agreement--Options."
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(o) Represents 4,032 shares held directly and 887 shares issuable upon exercise
of options granted under a management shareholder agreement. For a summary
of the material terms of the options granted by the management shareholder
agreement, see "Material Relationships and Related Transactions--Management
Shareholder Agreement--Options."
(p) Represents 538 shares held directly and 118 shares issuable upon exercise of
options granted under a management shareholder agreement. For a summary of
the material terms of the options granted by the management shareholder
agreement, see "Material Relationships and Related Transactions--Management
Shareholder Agreement--Options."
(q) Represents 1,075 shares held directly and 237 shares issuable upon exercise
of options granted under a management shareholder agreement. For a summary
of the material terms of the options granted by the management shareholder
agreement, see "Material Relationships and Related Transactions--Management
Shareholder Agreement--Options."
BENEFICIAL OWNERSHIP OF WEEKLY READER COMMON STOCK
The following table lists, as of the date of this prospectus, information
known to us regarding the beneficial ownership of Weekly Reader common stock,
which consists of Weekly Reader's Class A and Class B non-voting common stock
and Weekly Reader voting common stock, by:
- each person known by Weekly Reader to be the beneficial owner of more than
5% of the outstanding Weekly Reader common stock;
- each of the directors and the executive officers listed under
"Management--Executive Compensation;" and
- all directors and the executive officers listed under "Management" as a
group.
As of the date of this prospectus, no shares of Weekly Reader's class A and
class B non-voting common stock are outstanding.
As of the date of this prospectus, the total number of outstanding shares of
Weekly Reader voting common stock was 2,830,000. Except as otherwise noted, the
persons named in the table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 2,830,000 shares of voting common stock have been issued
and are outstanding.
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WEEKLY READER VOTING COMMON STOCK
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME AND ADDRESS SHARES PERCENT OF CLASS
- ---------------- --------- ----------------
<S> <C> <C>
WRC Media
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 2,685,670 94.9%
PRIMEDIA, Inc.
745 Fifth Avenue
New York, NY 10151........................................ 144,330 5.1%
DLJ Merchant Banking Partners II, L.P. and affiliates (a)
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172........................................ 310,109 9.9%
All directors and the executive officers listed under
"Management" as a group................................... 0 *
</TABLE>
- ------------------------
* Represents holdings of less than 1%.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of 159,828
warrants to purchase Weekly Reader common stock; ownership by DLJ Merchant
Banking Partners II-A, L.P. of 6,365 warrants to purchase Weekly Reader
common stock; ownership by DLJ Offshore Partners II, C.V. of 7,860 warrants
to purchase Weekly Reader common stock; ownership by DLJ Diversified
Partners, L.P. of 9,344 warrants to purchase Weekly Reader common stock;
ownership by DLJ Diversified Partners-A, L.P. of 3,470 warrants to purchase
Weekly Reader common stock; ownership by DLJMB Funding II, Inc. of 32,605
warrants to purchase Weekly Reader common stock; ownership by DLJ Millennium
Partners, L.P. of 2,584 warrants to purchase Weekly Reader common stock;
ownership by DLJ Millennium Partners-A, L.P. of 504 warrants to purchase
Weekly Reader common stock; ownership by DLJ EAB Partners, L.P. of 718
warrants to purchase Weekly Reader common stock; ownership by DLJ ESC II,
L.P. of 34,182 warrants to purchase Weekly Reader common stock; ownership by
DLJ First ESC, L.P. of 308 warrants to purchase Weekly Reader common stock;
ownership by DLJ Investment Partners II, L.P. of 32,041 warrants to purchase
Weekly Reader common stock; ownership by DLJ Investment Partners, L.P. of
14,238 warrants to purchase Weekly Reader common stock; and ownership by DLJ
Investment Funding II, Inc. of 6,062 warrants to purchase Weekly Reader
common stock. Because these funds are under common control, each fund may be
deemed to, for Federal securities law purposes, beneficially own the shares
underlying the warrants held by all the other funds.
BENEFICIAL OWNERSHIP OF COMPASSLEARNING COMMON STOCK
The following table lists, as of the date of this prospectus, information
known to us regarding the beneficial ownership of CompassLearning common stock
by:
- each person known by WRC Media to be the beneficial owner of more than 5%
of the outstanding WRC Media common stock;
- each of the directors and the executive officers listed under
"Management--Executive Compensation," and
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- all directors and executive officers listed under "Management" as a group.
As of the date of this prospectus, the total number of outstanding shares of
CompassLearning common stock was 10,000. Except as otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 10,000 shares of common stock have been issued and are
outstanding.
COMPASSLEARNING COMMON STOCK
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NAME AND ADDRESS SHARES PERCENT OF CLASS
- ---------------- -------- ----------------
<S> <C> <C>
WRC Media
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 10,000 100%
DLJ Merchant Banking Partners II, L.P. and affiliates (a)
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172........................................ 1,098 9.9%
All directors and the executive officers listed under
"Management" as a
group..................................................... 0 *
</TABLE>
- ------------------------
* Represents holdings of less than 1%.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of 566
warrants to purchase CompassLearning common stock; ownership by DLJ Merchant
Banking Partners II-A, L.P. of 23 warrants to purchase CompassLearning
common stock; ownership by DLJ Offshore Partners II, C.V. of 28 warrants to
purchase CompassLearning common stock; ownership by DLJ Diversified
Partners, L.P. of 33 warrants to purchase CompassLearning common stock;
ownership by DLJ Diversified Partners-A, L.P. of 12 warrants to purchase
CompassLearning common stock; ownership by DLJMB Funding II, Inc. of 115
warrants to purchase CompassLearning common stock; ownership by DLJ
Millennium Partners, L.P. of 9 warrants to purchase CompassLearning common
stock; ownership by DLJ Millennium Partners-A, L.P. of 2 warrants to
purchase CompassLearning common stock; ownership by DLJ EAB Partners, L.P.
of 3 warrants to purchase CompassLearning common stock; ownership by DLJ ESC
II, L.P. of 121 warrants to purchase CompassLearning common stock; ownership
by DLJ First ESC, L.P. of 1 warrant to purchase CompassLearning common
stock; ownership by DLJ Investment Partners II, L.P. of 114 warrants to
purchase CompassLearning common stock; ownership by DLJ Investment Partners,
L.P. of 50 warrants to purchase CompassLearning common stock; and ownership
by DLJ Investment Funding II, Inc. of 21 warrants to purchase
CompassLearning common stock. Because these funds are under common control,
each fund may be deemed, for Federal securities law purposes, to
beneficially own the shares underlying the warrants held by all the other
funds.
PRIMEDIA SHAREHOLDER AGREEMENT
WRC Media owns 2,685,070 shares, or 94.9% of the voting common stock of
Weekly Reader. In connection with the completion of the transactions described
under "The Acquisition and Recapitalization," WRC Media, PRIMEDIA and Weekly
Reader entered into a shareholder agreement
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relating to registration rights, transfers of Weekly Reader voting common stock
and other matters. The PRIMEDIA shareholder agreement will terminate, other than
with respect to the demand registration rights described below, upon an initial
public offering of the Weekly Reader voting common stock or WRC Media common
stock. The following summary of the material provisions of the PRIMEDIA
shareholder agreement is qualified in its entirety by reference to the PRIMEDIA
shareholder agreement.
TRANSFER RESTRICTIONS. The PRIMEDIA shareholder agreement restricts
PRIMEDIA's right to transfer Weekly Reader voting common stock held by PRIMEDIA
without the prior written consent of the board of directors of Weekly Reader to
any person other than a wholly-owned subsidiary of PRIMEDIA.
REGISTRATION RIGHTS. Under the PRIMEDIA shareholder agreement, after the
occurrence of an initial public offering of Weekly Reader voting common stock,
PRIMEDIA will have one demand registration right to require Weekly Reader to
register the Weekly Reader voting common stock held by PRIMEDIA under the
Securities Act of 1933. In addition, PRIMEDIA will have "piggyback" registration
rights on a proportional basis in any public offering that includes shares of
Weekly Reader voting common stock owned by WRC Media. Weekly Reader will pay
expenses related to registration, including, without limitation, filing fees and
the fees and expenses of counsel for PRIMEDIA, and will provide customary
indemnities in connection with the registration.
TAG-ALONG RIGHTS. The PRIMEDIA shareholder agreement provides that, if WRC
Media determines to sell all or any portion in excess of 35% of its Weekly
Reader voting common stock to any third party other than a permitted transferee
or that EAC III determines to sell all or any portion in excess of 35% of its
WRC Media common stock to any third party other than a permitted transferee,
subject to customary exceptions, PRIMEDIA will have the right to participate
proportionately in the transaction as a seller on the same terms and conditions
as apply to WRC Media's sale of Weekly Reader voting common stock or, in the
case of EAC III's sale of WRC Media common stock, at a price to be determined in
good faith by the board of directors of Weekly Reader, which will, as nearly as
reasonably practicable, provide PRIMEDIA economic treatment comparable to that
which it would have received as a holder of WRC Media common stock. With respect
to WRC Media and EAC III, a permitted transferee is an affiliate, shareholder,
partner, member or employee of Ripplewood Partners, L.P. or an employee of
Weekly Reader. The PRIMEDIA shareholder agreement also provides that, in the
event that an initial public offering of WRC Media common stock shall occur,
PRIMEDIA will have the right to exchange all or any portion of its Weekly Reader
voting common stock for shares of WRC Media common stock having an equivalent
fair market value.
DRAG-ALONG RIGHTS. In the event that WRC Media determines to sell all or
any portion in excess of 35% of its Weekly Reader voting common stock to any
third party or that EAC III determines to sell all or any portion in excess of
35% of its WRC Media common stock to any third party, subject to customary
exceptions, WRC Media will have the right to require PRIMEDIA to sell its shares
of Weekly Reader voting common stock in the transaction, all at the same price
per share and on the same terms and conditions as apply to the sale of Weekly
Reader voting common stock held by WRC Media or, in the case of EAC III's sale
of WRC Media common stock, at a price to be determined in good faith by the
board of directors of Weekly Reader, which will, as nearly as reasonably
practicable, provide PRIMEDIA economic treatment comparable to that which it
would have received as a holder of WRC Media common stock.
STOCKHOLDERS AGREEMENT
On November 17, 1999, WRC Media and EAC III entered into a stockholders
agreement with SGC Partners II LLC as purchaser concerning the relative rights
and relationships of SGC Partners II LLC and the other parties to the agreement
with respect to WRC Media common stock. The following
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summary of the material provisions of this stockholders agreement is qualified
in its entirety by reference to the stockholders agreement with SGC Partners II
LLC.
TAG-ALONG RIGHTS. The stockholders agreement with SGC Partners II LLC as
purchaser provides that if EAC III determines to sell all or any portion in
excess of 20% of its WRC Media common stock or Ripplewood Partners, L.P.
determines to sell in excess of 10% of its membership interests in EAC III to
any third party, SGC Partners II LLC will have the right to participate
proportionately in the transactions as a seller on the same terms and conditions
as apply to EAC III's sale of WRC Media common stock provided, among other
conditions, that EAC III has not decided to sell the common stock to Ripplewood
Partners, L.P. or any affiliates of EAC III or Ripplewood Partners, L.P. The
stockholders agreement also provides that if Ripplewood Partners, L.P.
determines to sell its membership interests in EAC III, SGC Partners II LLC will
have the right to participate at a price to be determined in good faith by the
Board of Directors of WRC Media which will, as nearly as reasonably practicable,
provide SGC Partners II LLC economic treatment comparable to that which it would
have received had the sale been of WRC Media common stock in lieu of membership
interests in EAC III.
DRAG-ALONG RIGHTS. This stockholders agreement with SGC Partners II LLC as
purchaser provides that, in the event that EAC III decides to enter into an
agreement for the sale of 90% or more of the WRC Media common stock in a
transaction satisfying conditions specified in the stockholders agreement, EAC
III will have the right to require SGC Partners II LLC to sell the same
percentage of its WRC Media common stock in the transaction, at the same price
per share and on the same terms and conditions as apply to EAC III's sale of WRC
Media common stock.
INFORMATION AND OBSERVATION RIGHTS. Under the agreement, WRC Media will be
obligated to provide financial and business information to SGC Partners II LLC,
such as quarterly and annual financial statements, filings made with the
Securities and Exchange Commission and other reports or information that may be
reasonably requested by SGC Partners II LLC.
CORPORATE GOVERNANCE. Under the agreement, SGC Partners II LLC will be
entitled to appoint one person to the board of directors of WRC Media, or two
persons, if the board of directors consists of ten or more directors, as long as
SGC Partners II LLC continues to hold at least 50% of the WRC Media common stock
it purchased in connection with the recapitalization of PRIMEDIA's Supplemental
Education Group and the acquisition of CompassLearning.
TRANSFER RIGHTS AND RESTRICTIONS; RIGHT OF FIRST OFFER. Other than in a
public offering, WRC Media will not issue any shares of WRC Media common stock
to any person, unless the person acknowledges that it has notice of the
provisions of this agreement. No shares of WRC Media common stock shall be
transferred by EAC III or SGC Partners II LLC to any third party unless the
third party assumes in writing all of the obligations of its transferor under
the stockholders agreement. In addition, in the event that SGC Partners II LLC
wishes to transfer its shares of WRC Media common stock to any third party,
other than one or more of its affiliates, it must first offer to sell its shares
to EAC III.
REGISTRATION RIGHTS. Under the stockholders agreement with SGC Partners II
LLC as purchaser, both SGC Partners II LLC and EAC III will be entitled to
require WRC Media to effect registration of its WRC Media common stock under the
Securities Act of 1933. SGC Partners II LLC will be entitled to make one demand
registration and EAC III will be entitled to make any number of demand
registrations after the earlier to occur of an initial public offering of WRC
Media common stock or July 13, 2004. Notwithstanding the foregoing, WRC Media
will not be required to effect a registration unless the gross aggregate
offering price of all securities to be included in the registration exceeds
$30.0 million or the requested registration includes all the registrable
securities of SGC Partners II L.L.C. In addition, if WRC Media proposes to
register any WRC Media common stock for sale in a public offering, including an
initial public offering, each of SGC Partners II LLC and EAC III will have
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"piggy-back" registration rights with respect to the WRC Media common stock it
owns. WRC Media will bear the costs and expenses of registration, including the
costs and expenses of one counsel for SGC Partners II LLC or EAC III, and will
provide customary indemnities in connection therewith.
SENIOR PREFERRED STOCKHOLDERS AGREEMENT
On November 17, 1999, WRC Media, CompassLearning, Weekly Reader, the senior
preferred stockholders, SGC Partners II LLC and EAC III entered into a
stockholders agreement concerning the relative rights and relationships of the
senior preferred stockholders and the other parties to the agreement with
respect to the senior preferred stock and the preferred stockholder warrants.
SGC Partners II LLC, however, entered into the stockholders agreement only with
respect to those provisions regarding, among others:
- restrictions on any amendments to the certificate of incorporation of any
of the registrants designed to avoid any obligations under the agreement;
- voting for the DLJMB Investors' or their permitted transferees' nominee
for WRC Media's board of directors, as described below;
- equitable remedies for the breach of rights granted to the DLJMB Investors
and their transferees; and
- restrictions on the transfer of WRC Media common stock.
The following summary of the material provisions of the senior preferred
stockholders agreement is qualified in its entirety by reference to the senior
preferred stockholders agreement.
CORPORATE GOVERNANCE. The DLJMB Investors and their permitted transferees
have the right, for so long as any of them owns senior preferred stock,
preferred stockholder warrants or any securities of WRC Media, Weekly Reader or
CompassLearning into which the senior preferred stock or preferred stockholder
warrants are convertible or exchangeable, to nominate one director to the boards
of directors of WRC Media, Weekly Reader and CompassLearning. In addition, EAC
III and SGC Partners II LLC are required to vote their shares of WRC Media
common stock, and EAC III will cause WRC Media to vote its shares of Weekly
Reader voting common stock and CompassLearning's voting common stock, in favor
of the election of the nominee designated by the DLJMB Investors and their
permitted transferees.
TRANSFER RIGHTS AND RESTRICTIONS. The senior preferred stockholders
agreement restricts the right of the senior preferred stockholders to transfer
the senior preferred stock and the preferred stockholder warrants to adverse
parties including, without limitation, to our competitors, and require
transferees to become party to and be bound by the senior preferred stockholders
agreement to the same extent as the transferor. Transfers of the senior
preferred stock and the preferred stockholder warrants and any other securities
of WRC Media, Weekly Reader or CompassLearning into which the senior preferred
stock and preferred stockholder warrants are convertible or exchangeable, are
otherwise unrestricted, subject to compliance with the securities laws.
TAG-ALONG RIGHTS. The senior preferred stockholders agreement provides for
"tag-along" rights in situations, including but not limited to, in connection
with the proposed sale of at least 25% of the outstanding common stock of WRC
Media, Weekly Reader or CompassLearning.
DRAG-ALONG RIGHTS. The senior preferred stockholders agreement provides for
"drag-along" rights in specified situations, including but not limited to, where
WRC Media (1) holds or is entitled to vote a majority of the voting stock of
Weekly Reader or CompassLearning and (2) proposes the sale of at least 90% of
the outstanding common stock of WRC Media, Weekly Reader or CompassLearning.
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REGISTRATION RIGHTS. Under the senior preferred stockholders agreement, the
DLJMB Investors and their permitted transferees are entitled to require WRC
Media, Weekly Reader or CompassLearning, as applicable, to register under the
Securities Act of 1933:
- the old senior preferred stock and any other securities into which the old
senior preferred stock is exchangeable on two separate occasions; and
- on two separate occasions, the new senior preferred stock, the preferred
stockholder warrants and the shares of Weekly Reader's Class A and
Class B non-voting common stock and Weekly Reader voting common stock or
the common stock of CompassLearning, into which the preferred stockholder
warrants are exchangeable.
In addition, the senior preferred stockholders are entitled to "piggy back"
registration rights with respect to the old senior preferred stock, the new
senior preferred stock, preferred stockholder warrants and any securities of WRC
Media, Weekly Reader or CompassLearning into which the old senior preferred
stock, new senior preferred stock or preferred stockholder warrants are
convertible or exchangeable. WRC Media, Weekly Reader or CompassLearning, as
applicable, will bear the costs and expenses of registration, including the
costs and expenses of one counsel for the DLJMB Investors, and will provide
customary indemnities in connection therewith.
See "Description of Capital Stock."
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DESCRIPTION OF SENIOR CREDIT FACILITIES
This description is qualified in its entirety by reference to the agreements
which define the principal terms and conditions of the senior credit facilities.
As part of the financing for the recapitalization and the related
transactions, Weekly Reader and CompassLearning obtained the senior credit
facilities pursuant to a credit agreement among WRC Media as parent and
guarantor, Weekly Reader and CompassLearning as borrowers, the other direct and
indirect domestic subsidiaries of WRC Media as guarantors, DLJ Capital Funding
as the lead arranger, sole book manager and syndication agent, Bank of America,
N.A. as administrative agent, and a syndicate of banks and other financial
institutions as the lenders. The senior credit facilities are comprised of a
$30.0 million revolving credit facility, which includes a letter of credit
subfacility, maturing in six years, the $31.0 million term loan A facility
maturing in six years and the $100.0 million term loan B facility maturing in
seven years, with the term loan A facility and the term loan B facility to
amortize in quarterly installments beginning on December 31, 1999 based upon the
annual amounts shown below:
<TABLE>
<CAPTION>
TERM LOAN A TERM LOAN B
FACILITY FACILITY
TWELVE MONTHS ENDING SEPTEMBER 30 (IN THOUSANDS) (IN THOUSANDS)
- --------------------------------- -------------- --------------
<S> <C> <C>
2000.............................................. $ 1,550 $ 1,000
2001.............................................. 3,100 1,000
2002.............................................. 4,650 1,000
2003.............................................. 6,200 1,000
2004.............................................. 7,750 1,000
2005.............................................. 6,200 1,000
2006.............................................. -- 75,200
FINAL PAYMENT
- --------------------------------------------------
November 2005..................................... 1,550 --
November 2006..................................... -- 18,800
------- --------
$31,000 $100,000
</TABLE>
Loans under the senior credit facilities bear interest at a rate per annum
equal to:
(1) for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25%, subject to
performance-based step downs; and
(2) for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
In addition to paying interest on outstanding loans under the senior credit
facilities, we are required to pay a commitment fee to the lenders under the
revolving credit facility in respect of the unused commitments thereunder at a
rate of 0.5% per annum subject to performance-based step downs.
The senior credit facilities are subject to mandatory prepayments with:
- the proceeds of the incurrence of indebtedness except for specified
exceptions, including indebtedness incurred in connection with the senior
credit facilities and unsecured indebtedness incurred in the ordinary
course of business;
- the proceeds of asset sales or other dispositions, including those
resulting from casualty or condemnation, not used to replace the assets
sold or damaged or acquire assets necessary or useful in permitted
business activities;
- the proceeds of issuances of equity offerings of WRC Media, Weekly Reader,
CompassLearning and their respective subsidiaries except for the offerings
specifically excluded under the senior
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credit agreement including, but not limited to, the issuance of common
stock by CompassLearning or Weekly Reader upon the exercise of warrants
held by DLJ Merchant Banking Partners II, L.P. and other investors to
acquire the common stock of CompassLearning and WRC Media; and
- annually beginning in 2000, 50% of the borrowers' excess cash flow, as
defined in the credit agreement, from the prior year.
Weekly Reader's and CompassLearning's obligations under the senior credit
facilities are guaranteed by WRC Media and the borrowers' domestic subsidiaries.
The senior credit facilities are secured by a first priority security interest
in substantially all assets of WRC Media, the borrowers and their domestic
subsidiaries. These assets include all of the capital stock, other than the
warrants, and warrant shares issued in connection with them, and the shares of
preferred and common stock specifically excluded under the security and pledge
agreement entered into in connection with the senior credit facilities, of the
borrowers and their domestic subsidiaries, and up to 65% of the capital stock of
foreign subsidiaries that are direct subsidiaries of their domestic
subsidiaries.
The senior credit facilities contain covenants that, among other things,
restrict the ability of WRC Media, the borrowers and their subsidiaries to:
- borrow money or incur liens;
- guarantee indebtedness of others;
- pay dividends or make other distributions;
- make investments or acquisitions;
- make capital expenditures;
- use assets as security in other transactions;
- sell specified assets including accounts receivables and equity securities
of subsidiaries or merge with or into other companies;
- enter into sale and leaseback transactions; and
- enter into transactions with affiliates.
The senior credit facilities also contain financial covenants, including a
leverage ratio and a fixed charge coverage ratio, and customary events of
default.
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DESCRIPTION OF CAPITAL STOCK
Each of the following summaries of the capital stock of WRC Media, Weekly
Reader and CompassLearning and related agreements is qualified in its entirety
by reference to the instruments and agreements to which each summary relates.
Copies of the instruments and agreements are available upon request to us.
CAPITAL STOCK OF WRC MEDIA
WRC MEDIA COMMON STOCK
GENERAL. WRC Media has authorized the issuance of an aggregate of
20,000,000 shares of voting common stock, par value $.01 per share, of which
6,855,853 is outstanding, excluding shares that will be reserved for issuance of
options. In connection with the transactions described under "The Acquisition
and Recapitalization," WRC Media granted to members of management, including,
but not limited to, persons listed under "Ownership of Stock," options to
purchase 301,724 shares of WRC Media common stock. The following is a summary of
the material rights and privileges pertaining to the WRC Media common stock. For
a full description of WRC Media's capital stock, reference is made to WRC
Media's certificate of incorporation then in effect, a copy of which is
available from WRC Media.
VOTING RIGHTS. The holders of WRC Media common stock are entitled to one
vote per share on all matters submitted for action by the shareholders. There is
no provision for cumulative voting with respect to the election of directors.
Accordingly, the holders of more than 50% of the shares of WRC Media common
stock can, if they choose to do so, elect the board of directors of WRC Media
and determine most matters on which stockholders are entitled to vote. See
"Ownership of Stock."
DIVIDEND RIGHTS. Holders of the WRC Media common stock are entitled to
share equally, share for share, if dividends are declared on WRC Media common
stock, whether payable in cash, property or securities of WRC Media.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of WRC Media, after payment has been made
from the funds available therefor to the holders of the senior preferred stock,
if any, for the full amount to which they are entitled, the holders of the
shares of WRC Media common stock are entitled to share equally, share for share,
in the assets available for distribution. Holders of common stock issued as part
of the units issued on November 17, 1999 have no redemption, preemptive or
conversion rights except for the conversion rights provided in the shareholders
agreement relating to these units.
WRC MEDIA PREFERRED STOCK
WRC Media's certificate of incorporation allows the issuance, without
stockholder approval, of preferred stock having rights senior to those of our
common stock. The board of directors of WRC Media is authorized, without further
stockholder approval, to issue up to 20,000,000 shares of preferred stock in one
or more series and to fix and designate the rights, preferences, privileges and
restrictions of the preferred stock, including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption; and
- liquidation preferences.
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The board of directors of WRC Media may fix the number of shares
constituting any series and the designations of these series. See "Description
of New Senior Preferred Stock."
CAPITAL STOCK OF WEEKLY READER
WEEKLY READER COMMON STOCK
GENERAL. Weekly Reader has authorized the issuance of:
- 20,000,000 shares of preferred stock; and
- 22,000,000 shares of Weekly Reader common stock, par value $0.01 per
share, which consist of:
-- 20,000,000 shares of Weekly Reader voting common stock,
-- 1,000,000 shares of Weekly Reader Class A non-voting common stock,
and
-- 1,000,000 shares of Weekly Reader Class B non-voting common stock.
Except with regard to voting rights, the three designations of Weekly Reader
common stock have the same rights, powers and limitations. The Weekly Reader
Class A non-voting common stock will automatically convert into Weekly Reader
voting common stock upon an initial public offering of Weekly Reader. The Weekly
Reader Class B non-voting common stock shall automatically convert upon transfer
to any party other than a DLJMB Investor or any affiliate of a DLJMB investor.
VOTING RIGHTS. The holders of Weekly Reader voting common stock are
entitled to one vote per share on all matters submitted for action by the
shareholders. There is no provision for cumulative voting with respect to the
election of directors. Accordingly, the holders of more than 50% of the shares
of Weekly Reader voting common stock can, if they choose to do so, elect the
board of directors of Weekly Reader and determine most matters on which
stockholders are entitled to vote.
DIVIDEND RIGHTS. Holders of the Weekly Reader common stock are entitled to
share equally, share for share, if dividends are declared on Weekly Reader
common stock, whether payable in cash, property or securities of Weekly Reader.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Weekly Reader, after payment has been
made from the funds available therefor to the holders of Weekly Reader's
preferred stock, if any, for the full amount to which they are entitled, the
holders of the shares of Weekly Reader common stock are entitled to share
equally, share for share, in the assets available for distribution. Holders of
Weekly Reader common stock have no conversion, redemption or preemptive rights.
WEEKLY READER PREFERRED STOCKHOLDER WARRANTS
In connection with the sale of the old senior preferred stock to the senior
preferred stockholders, Weekly Reader issued to the senior preferred
stockholders preferred stockholder warrants to acquire 422,874 shares of Weekly
Reader voting common stock, representing 13% of its common stock on a fully
diluted basis, at an exercise price of $0.01 per share; PROVIDED, HOWEVER, for
so long as any of these warrants are held by any of the DLJMB Investors or any
of their affiliates, they shall be warrants to acquire Weekly Reader Class B
non-voting common stock. All of these warrants that are held by the DLJMB
Investors or any of their affiliates shall automatically convert into warrants
to acquire, and all shares of Weekly Reader Class B non-voting common stock held
by the DLJMB Investors or any of their affiliates shall automatically convert
into shares of, Weekly Reader voting common stock upon their transfer of these
warrants or common stock to a party other than a DLJMB Investor or any affiliate
of a DLJMB investor. The preferred stockholder warrants issued by Weekly Reader
are not exercisable after the twelfth anniversary of the issuance date and
contain antidilution provisions. The
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preferred stockholder warrants issued by Weekly Reader also include the right to
share ratably in stock splits, stock dividends, mergers and rights offerings to
existing holders of Weekly Reader common stock, and are freely transferable,
other than to adverse parties listed in the senior preferred stockholders
agreement and so long as transferees become party to and bound by the senior
preferred stockholders agreement. For a summary of the material provisions of
the preferred stockholders warrants, see "Ownership of Stock--Senior Preferred
Stockholders Agreement."
COMPASSLEARNING PREFERRED STOCKHOLDER WARRANTS
In connection with the sale of the old senior preferred stock to the senior
preferred stockholders, CompassLearning issued to the WRC Media senior preferred
stockholders preferred stockholder warrants to acquire 1,495 shares of
CompassLearning common stock representing 13% of its common stock on a fully
diluted basis, at an exercise price of $0.01 per share. The preferred
stockholder warrants issued by CompassLearning are not exercisable after the
twelfth anniversary of the issuance date and contain antidilution provisions.
The preferred stockholder warrants issued by CompassLearning also include the
right to share ratably in stock splits, stock dividends, mergers and rights
offerings to existing holders of CompassLearning common stock, and is freely
transferable other than to adverse parties listed in the senior preferred
stockholders agreement and so long as transferees become party to and bound by
the senior preferred stockholders agreement. For a summary of the material
provisions of the preferred stockholders warrants, see "Ownership of
Stock--Senior Preferred Stockholders Agreement."
EQUITY SPONSORS
As part of the transactions described under "The Acquisition and
Recapitalization", funds managed by an investor group led by Ripplewood
Partners, L.P. and including SGC Partners II LLC, Co-Investment Partners, L.P.,
The Northwestern Mutual Life Insurance Company, Jackson National Life Insurance
Company and DLJ Merchant Banking Partners II, L.P., among other investors,
together with management, will have invested, directly and indirectly, an
aggregate of approximately $198.7 million in common and preferred equity of WRC
Media to finance the transactions described under "The Acquisition and
Recapitalization." Ripplewood Partners, L.P. is managed by Ripplewood Holdings
L.L.C., its general partner, which was founded in 1995. Ripplewood Partners,
L.P. makes direct investments in select leveraged acquisitions, which provide
opportunities for significant growth, consolidation and high rates of return.
Together with its industrial partners, Ripplewood Partners, L.P. typically buys
platform companies as core holdings, then pursues predefined strategies to
support the operating management and enhance the value of these businesses.
Ripplewood Holdings L.L.C. manages approximately $430 million of committed
capital and currently has seven "partnerships" in the automotive retail (Albury
Automotive Group), food manufacturing (Lighthouse Holdings), technology (Leeward
Technology Group), industrial manufacturing (McClintock Industries), chemicals
(Resolute Partners), financial services (New LTCB Partners) and media (WRC
Media) industries. WRC Media is Ripplewood Holdings L.L.C.'s partnership with
Martin E. Kenney, Jr., an experienced print and electronic media executive.
Ripplewood Holdings L.L.C. will provide us management services described in the
management agreement described under "Material Relationships and Related
Transactions." Our investors separately manage several private equity funds
which aggregate over $6.5 billion of committed capital.
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DESCRIPTION OF NEW NOTES
You can find the definitions of capitalized terms used in this description
under "--Definitions." In this description, the word "issuers" refers only to
WRC Media, Weekly Reader and CompassLearning collectively, and not to any of
their subsidiaries. For purposes of this section, WRC Media refers only to WRC
Media and not to any of its subsidiaries.
The issuers issued the old notes and will issue the new notes as joint and
several obligations under the notes indenture among the issuers, the Note
Guarantors and Bankers Trust Company as trustee, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part. The
terms of the new notes will be substantially identical to the terms of the old
notes, except that the new notes will not contain terms with respect to transfer
restrictions and will not require the issuers to complete a registered exchange
offer. Except as described in the previous sentence, the new notes will evidence
the same debt as the old notes and will be entitled to the same benefits under
the notes indenture as the old notes. Accordingly, unless specifically stated to
the contrary, the following description applies equally to the old notes and the
new notes. The terms of the notes include those stated in the notes indenture
and those made part of the notes indenture by reference to the Trust Indenture
Act of 1939, as amended. The notes are subject to all of these terms, and
prospective investors are referred to the notes indenture and the Trust
Indenture Act.
The following description is a summary of the material provisions of the
notes indenture. It does not restate the agreement in its entirety. We urge you
to read the notes indenture because it, and not this description, define your
rights as holders of the new notes. Copies of the notes indenture are available
as described under "Where You Can Find More Information."
BRIEF DESCRIPTION OF THE NOTES AND THE NOTE GUARANTEES
THE NOTES
The notes:
- are general unsecured obligations of the issuers;
- are subordinated in right of payment to all existing and future Senior
Debt of the issuers;
- are equal in right of payment with any future senior subordinated
Indebtedness of the issuers;
- are senior in right of payment to any future subordinated Indebtedness of
the issuers;
- are effectively subordinated to all existing and future secured
Indebtedness of the issuers to the extent of the value of the assets
securing the Indebtedness; and
- are unconditionally guaranteed by the Note Guarantors.
THE NOTE GUARANTEES
The notes are guaranteed by all existing and future Domestic Subsidiaries of
WRC Media, other than Weekly Reader and CompassLearning.
Each Note Guarantee of the notes:
- is a general unsecured obligation of the Note Guarantor;
- is subordinated in right of payment to all existing and future Senior Debt
of the Note Guarantor;
- is equal in right of payment with any future senior subordinated
Indebtedness of the Note Guarantor;
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- is effectively subordinated to all existing and future secured
Indebtedness of the Note Guarantor to the extent of the value of the
assets securing the Indebtedness; and
- is senior in right of payment to any future subordinated Indebtedness of
the Note Guarantor.
As of March 31, 2000, the issuers and the Note Guarantors had total Senior
Debt of approximately $131.7 million. As indicated above and as discussed in
detail below under the subheading "--Subordination," payments on the notes and
the Note Guarantees will be subordinated to the payment of Senior Debt. The
notes indenture will permit us and the Note Guarantors to incur additional
Senior Debt. As of the date of this prospectus, neither we nor the note
guarantors have any PARI PASSU Indebtedness outstanding. We and the note
guarantors may incur unlimited additional Senior Debt and unlimited additional
Indebtedness that are PARI PASSU with the notes, if the then applicable ratio
set forth under "--Material Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock" is satisfied. Even if the ratios described in the previous
sentence are not satisfied, we may still incur additional Senior Debt or PARI
PASSU Indebtedness under the circumstances described under "--Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" as
"Permitted Debt."
As of the date of the notes indenture, all existing Subsidiaries of WRC
Media became restricted subsidiaries. These restricted subsidiaries include
Weekly Reader and CompassLearning. However, under the circumstances described
below under the subheading "--Material Covenants--Designation of Restricted and
Unrestricted Subsidiaries," WRC Media will be permitted to designate as
"Unrestricted Subsidiaries" some of its subsidiaries qualifying as restricted
subsidiaries. The Unrestricted Subsidiaries will not be subject to any of the
restrictive covenants in the notes indenture. The Unrestricted Subsidiaries will
not guarantee the notes, and Weekly Reader and CompassLearning will not
guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
The issuers may issue notes with a maximum aggregate principal amount of
$250.0 million, of which $152.0 million was issued pursuant to the offering of
the old notes. The Issuers may issue additional notes from time to time. Any
offering of Additional Notes is subject to the covenant described below under
the caption "--Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock." The old notes, the new notes and any Additional Notes
subsequently issued under the notes indenture would be treated as a single class
for all purposes under the notes indenture, including, without limitation,
waivers, amendments, redemptions and offers to purchase. The Issuers issued old
notes in denominations of $1,000 and integral multiples of $1,000. The notes
will mature on November 15, 2009.
Interest on the notes is payable semi-annually in arrears on November 15 and
May 15, commencing on May 15, 2000 for the old notes and, if the exchange offer
is completed prior to November 1, 2000, November 15, 2000 for the new notes. The
issuers will make each interest payment to the note holders of record on the
immediately preceding November 1 and May 1.
Interest on the notes accrues from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a note holder has given wire transfer instructions to the issuers, the
issuers will pay all:
- principal:
- interest;
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- premium; and
- Liquidated Damages, if any,
on that note holder's notes in accordance with those instructions. All other
payments on notes will be made at the office or agency of the Paying Agent, as
defined in the notes indenture, and Registrar, as defined in the notes
indenture, within the City and State of New York unless the Issuers elect to
make interest payments by check mailed to the note holders at their addresses
set forth in the register of the note holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as Paying Agent and Registrar. The issuers
may change the Paying Agent or Registrar without prior notice to the note
holders, and WRC Media or any of its restricted subsidiaries may act as Paying
Agent or Registrar.
TRANSFER AND EXCHANGE
A note holder may transfer or exchange notes in accordance with the notes
indenture. The Registrar and the trustee may require a note holder, among other
things, to furnish appropriate endorsements and transfer documents, and the
issuers may require a note holder to pay any taxes and fees required by law or
permitted by the notes indenture. The issuers are not required to transfer or
exchange any note selected for redemption. Also, the issuers are not required to
transfer or exchange any note for a period of 15 days before a selection of
notes to be redeemed.
The registered note holder will be treated as the owner of it for all
purposes.
NOTE GUARANTEES
The Note Guarantors will jointly and severally fully and unconditionally
guarantee the issuers' obligations under the notes. Each Note Guarantee will be
subordinated to the prior payment in full in cash or cash equivalents of all
Senior Debt of that Note Guarantor, including that Note Guarantor's Guarantee of
the Credit Agreement, to the same extent that the notes are subordinated to the
Senior Debt of the issuers. The obligations of each Note Guarantor under its
Note Guarantee will be limited as necessary to prevent that Note Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors--Fraudulent Conveyance Matters."
If a Note Guarantee were to be rendered voidable, it could be subordinated
to all other indebtedness, including Guarantees and contingent liabilities, of
the applicable guarantor, and, depending on the amount of the Indebtedness, a
Note Guarantor's liability in respect of its Note Guarantee could be rendered to
zero. Each Note Guarantor that makes a payment under its Note Guarantee will be
entitled to a contribution in an amount equal to the other Note Guarantor's pro
rata portion of the payment based on the respective net assets of all Note
Guarantors at the time of that payment, as determined in accordance with GAAP.
A Note Guarantor may not sell or otherwise dispose of all or substantially
all of its assets to, or consolidate with or merge with or into, another Person,
other than WRC Media or another Note Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or Event of
Default exists; and
(2) either the circumstances in (a) or (b) arise.
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(a) The Person acquiring the property in the sale or disposition or the
Person formed by or surviving the consolidation or merger is:
- a Domestic Subsidiary of WRC Media and assumes all the obligations of
that Note Guarantor under the notes indenture, its Note Guarantee and
the registration rights agreement, dated as of November 17, 1999 by and
among the issuers and other relevant parties pursuant to a supplemental
indenture satisfactory to the trustee; or
- a Wholly Owned Restricted Subsidiary that is not a Domestic Subsidiary;
or
(b) the Net Proceeds of the sale or other disposition are applied in
accordance with the covenant described under "--Repurchase at the Option
of Holders--Asset Sales."
The Note Guarantee of a Note Guarantor will be released:
(1) in connection with any sale or other disposition of all or substantially all
of the assets of that Note Guarantor to a Person that is not a restricted
subsidiary of WRC Media, if the Note Guarantor applies the Net Proceeds of
that sale or other disposition in accordance with the covenant described
under "--Repurchase at the Option of Holders--Asset Sales;"
(2) in connection with any sale of all of the Capital Stock of a Note Guarantor
to a Person that is not a restricted subsidiary of WRC Media if no Default
or Event of Default has occurred and is continuing;
(3) if WRC Media properly designates any restricted subsidiary that is a Note
Guarantor as an Unrestricted Subsidiary; or
(4) with respect to any Note Guarantor, upon the release or discharge of all
Guarantees by the Note Guarantor, including all pledges of property or
assets securing and all direct and indirect credit support of, all other
Indebtedness of WRC Media and the Note Guarantors; PROVIDED that no Default
or Event of Default shall have occurred and be continuing.
See "--Repurchase at the Option of Holders--Asset Sales."
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated to the
prior payment in full in cash or cash equivalents of all Senior Debt, including
Senior Debt incurred after the date of the notes indenture. However, payment
from the money or the proceeds of U.S. government obligations held in any
defeasance trust described below under "--Legal Defeasance and Covenant
Defeasance" will not be subordinated to any Senior Debt or subject to the
restrictions described in that section.
The holders of Senior Debt will be entitled to receive payment in full in
cash or cash equivalents of all Obligations due in respect of Senior Debt before
the note holders will be entitled to receive any payment with respect to the
Subordinated Note Obligations. Also, until all Obligations with respect to
Senior Debt are paid in full in cash or cash equivalents, any distribution to
which the note holders would be entitled shall be made to the holders of Senior
Debt, except that note holders may receive and retain Permitted Junior
Securities and payments made from the trust described under "--Legal Defeasance
and Covenant Defeasance", in the event of any distribution to creditors of any
issuer:
(1) in a liquidation or dissolution of the issuer;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the issuer or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the issuer's assets and liabilities.
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The issuers also may not make any payment in respect of the notes, except in
Permitted Junior Securities or from the trust described under "--Legal
Defeasance and Covenant Defeasance", if:
(1) a default of the following payments relating to Designated Senior Debt
occurs:
(a) principal;
(b) premium;
(c) interest;
(d) commitment;
(e) letter of credit; or
(f) administrative fees
and is continuing beyond any applicable period of grace; or
(2) any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior Debt as
to which that default relates to accelerate its maturity and the Trustee
receives a notice of the default (a "Payment Blockage Notice") from the
Issuers or the holders of any Designated Senior Debt.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which the default is
cured or waived; and
(2) in case of a nonpayment default, the earlier of:
(a) the date on which the nonpayment default is cured or waived; or
(b) 179 days after the date on which the applicable Payment Blockage Notice
is received
unless the maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the delivery of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the trustee shall be the basis for a
subsequent Payment Blockage Notice unless the default shall have been cured or
waived for a period of not less than 90 days.
If the trustee or any note holder receives a payment in respect of the
notes, except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance", when the payment is prohibited by
these subordination provisions, the trustee or the note holder shall promptly
turn over the payment to the holders of Senior Debt or their proper
representative. Until the trustee or the note holder shall have so turned over
the payment, the trustee or the note holder shall be deemed to have held the
payment in trust for the benefit of the holders of Senior Debt.
The issuers and the trustee must promptly notify holders of Senior Debt, or
their representative, if payment of the notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of any issuer, note holders may
recover less ratably than creditors of the issuers who are holders of Senior
Debt. See "Risk Factors--Ranking of the Notes."
OPTIONAL REDEMPTION
At any time prior to November 15, 2002, the issuers may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the notes indenture. The percentage of
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the aggregate principal amount of notes is calculated giving effect to any
issuance of any Additional Notes. The issuers may redeem the notes at a
redemption price of 112.75% of the principal amount, plus accrued and unpaid
interest and Liquidated Damages, if any, to the redemption date, with the net
cash proceeds of one or more Equity Offerings; PROVIDED that:
(1) at least 65% of the aggregate principal amount of notes, calculated giving
effect to any issuance of Additional Notes, issued under the notes indenture
remains outstanding immediately after the occurrence of the redemption
(excluding notes held by WRC Media and its Subsidiaries); and
(2) the redemption must occur within 45 days of the date of the closing of the
Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at the issuers' option prior to November 15, 2004.
On or after November 15, 2004, the issuers may redeem all or a part of the
notes. The issuer must give not less than 30 nor more than 60 days' prior
notice. Upon redemption, we will pay the redemption prices, expressed as
percentages of principal amount, set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on November 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ 106.375%
2005........................................................ 104.250%
2006........................................................ 102.125%
2007 and thereafter......................................... 100.000%
</TABLE>
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of note holders,"
the issuers are not required to make mandatory redemption or sinking fund
payments with respect to the notes.
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REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, unless the issuers have given notice of
redemption of the notes pursuant to the provisions described above under the
caption "--Optional Redemption," each note holder will have the right to require
the issuers to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that note holder's notes pursuant to an offer (the
"Change of Control Offer") on the terms set forth in the notes indenture. In the
Change of Control Offer, the issuers will offer a payment in cash (the "Change
of Control Payment") equal to 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase. This offer is subject to the right of note holders of
record on the relevant record date to receive interest due on the relevant
interest payment date. Within thirty days following any Change of Control, the
issuers will mail a notice to each note holder:
(1) which describes the transaction or transactions that constitute the Change
of Control; and
(2) which offers to repurchase notes on the date specified in the notice (the
"Change of Control Payment Date").
The Change of Control Payment Date shall be no earlier than 30 days and no later
than 60 days from the date the notice is mailed, pursuant to the procedures
required by the notes indenture and described in the notice. The issuers will
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations under the Exchange Act in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the notes indenture, the issuers will:
(1) comply with the applicable securities laws and regulations; and
(2) not be deemed to have breached its obligations under the Change of Control
provisions of the notes indenture by virtue of the conflict.
On the Change of Control Payment Date, the issuers will, to the extent
lawful:
(1) accept for payment all notes or portions of the notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions of the notes so tendered; and
(3) deliver or cause to be delivered to the trustee for cancelation the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions of the notes being purchased by the
issuers.
The Paying Agent will promptly mail to each note holder the Change of
Control Payment for the tendered notes. The trustee will promptly:
(1) authenticate and mail; or
(2) cause to be transferred by book entry
to each note holder, a newly issued note equal in principal amount to any
unpurchased portion of the notes surrendered; PROVIDED that each of the newly
issued notes will be in a principal amount of $1,000 or an integral multiple of
$1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, the
issuers will either repay all outstanding Senior Debt; or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of notes required by this covenant. The issuers will
publicly announce the
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results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The provisions described above that require the issuers to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the notes indenture are applicable. Except as
described above with respect to a Change of Control, the notes indenture does
not contain provisions that permit the note holders to require that the issuers
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
Upon a Change of Control, the issuers will not be required to make a Change
of Control Offer if a third party:
(1) makes the Change of Control Offer in compliance with the requirements set
forth in the notes indenture applicable to a Change of Control Offer made by
the issuers; and
(2) purchases all notes validly tendered and not withdrawn under the Change of
Control Offer.
The issuers' ability to pay cash to the note holders upon a repurchase may
be limited by the issuers' then existing financial resources. The provisions
under the notes indenture relating to the issuers' obligation to make an offer
to repurchase the notes as a result of a Change of Control may be waived or
modified with the written consent of the note holders of a majority in principal
amount of the notes.
The existence of a note holder's right to require the issuers to repurchase
a note holder's notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the issuers in a transaction that would
constitute a Change of Control.
The definition of Change of Control includes a phrase relating to the direct
or indirect:
(1) sale;
(2) lease;
(3) transfer;
(4) conveyance; or
other disposition of "all or substantially all" of the properties or assets of
WRC Media and its Subsidiaries taken as a whole. Although there is a limited
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a note holder to require the issuers to repurchase the notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of WRC Media and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
ASSET SALES
WRC Media will not, and will not permit any of its restricted subsidiaries
to, complete an Asset Sale unless:
(1) WRC Media or the restricted subsidiary receives consideration at the time of
the Asset Sale at least equal to the fair market value of the assets or
Equity Interests issued or sold or otherwise disposed of;
(2) the fair market value is determined by WRC Media's Board of Directors and
evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by WRC Media or the
restricted subsidiary is in the form of:
(a) Cash Equivalents; or
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(b) Qualified Proceeds
PROVIDED that the aggregate fair market value of Qualified Proceeds, other than
Cash Equivalents, which may be received in consideration for Asset Sales
pursuant to this clause (3)(b) shall not exceed $20.0 million since the date of
the notes indenture. For purposes of this provision, each of the following shall
be deemed to be cash:
(a) any liabilities (as shown on WRC Media's or the restricted subsidiary's
most recent balance sheet) of WRC Media or any restricted subsidiary, but
not including contingent liabilities and liabilities that are by their
terms subordinated to the notes or any Note Guarantee, that are assumed
by the transferee of any of the assets pursuant to a customary novation
agreement that releases WRC Media or the restricted subsidiary from
further liability; and
(b) any securities, notes or other obligations received by WRC Media or any
restricted subsidiary from the transferee that are contemporaneously
converted by WRC Media or the restricted subsidiary into cash, to the
extent of the cash received in that conversion.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
WRC Media may apply the Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with respect to it;
(2) to acquire all or substantially all of the assets of, or a majority of the
Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a Permitted
Business.
Pending the final application of any of the Net Proceeds, WRC Media may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the notes indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the issuers will make
an Asset Sale Offer, as defined in the notes indenture, to all note holders and
all holders of other Indebtedness that is:
(1) PARI PASSU with the notes containing provisions similar to those set forth
in the notes indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal amount of
notes (including Additional Notes); and
(2) such other PARI PASSU Indebtedness that may be purchased out of the Excess
Proceeds.
As long as the ratios discussed under "--Incurrence of Indebtedness and Issuance
of Preferred Stock" are satisfied, the issuers and the Note Guarantors may incur
unlimited additional Indebtedness PARI PASSU with or subordinated to the notes.
The Unrestricted Subsidiaries may incur unlimited Indebtedness PARI PASSU and
are not subject to the restrictions imposed upon the issuers and the Note
Guarantors. The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after completion of an Asset Sale Offer, the issuers may use the
Excess Proceeds for any purpose not otherwise prohibited by the notes indenture.
If the aggregate principal amount of notes and the other PARI PASSU Indebtedness
tendered into the Asset Sale Offer exceeds the amount of Excess Proceeds, the
trustee shall select the notes and the other PARI PASSU Indebtedness to be
purchased on a pro rata basis based on:
(1) the principal amount of notes; and
(2) the other PARI PASSU Indebtedness tendered.
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Upon completion of each Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations in connection with
each repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sales
provisions of the notes indenture, the issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the notes indenture by virtue of
this conflict.
The agreements governing the issuers' outstanding Senior Debt currently
prohibit the issuers from purchasing any notes. They also provide that specified
change of control or asset sale events with respect to WRC Media would
constitute a default under these agreements. Any future credit agreements or
other agreements relating to Senior Debt to which the issuers become a party may
contain similar restrictions and provisions. In the event a Change of Control or
Asset Sale occurs at a time when the issuers are prohibited from purchasing
notes, the issuers could:
(1) seek the consent of their senior lenders to the Purchase of notes; or
(2) attempt to refinance the borrowings that contain the prohibition.
If the issuers do not obtain this consent or repay the borrowings, the issuers
will remain prohibited from purchasing notes. In that case, the issuers' failure
to purchase tendered notes would constitute an Event of Default under the notes
indenture which would constitute a default under the Senior Debt. Under these
circumstances, the subordination provisions in the notes indenture would likely
restrict payments to the note holders.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not listed, on a pro rata basis, by lot or by a method as
the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each note holder to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount of the note
to be redeemed. A newly issued note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the note holder upon
cancelation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
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MATERIAL COVENANTS
Set forth below are covenants from the notes indenture which we believe are
material to us. Note holders may decide other covenants not included below are
material. Therefore, we urge note holders to read the notes indenture in its
entirety. In this description, senior preferred stock refers to the
$75.0 million in initial liquidation preference of senior accreting preferred
stock of WRC Media issued on the date of the notes indenture, including any
preferred stock of any issuer issued in exchange in accordance with the relevant
terms and agreements.
RESTRICTED PAYMENTS
WRC Media will not, and will not permit any of its restricted subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of WRC Media's or any of its restricted subsidiaries' Equity
Interests or to the direct or indirect holders of WRC Media's or any of
its restricted subsidiaries' Equity Interests except:
(a) dividends or distributions payable in Equity Interests other than
those paid on Disqualified Stock and dividends or distributions
payable through accretion to the liquidation preference of the
senior preferred stock or in options, warrants or other rights to
purchase these Equity Interests of WRC Media;
(b) for WRC Media or a restricted subsidiary of WRC Media; or
(c) pursuant to the exercise of warrants to purchase common stock of an
issuer;
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the issuers or any direct or indirect parent of the
issuers;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Note Guarantees, except a payment of
interest or principal at the Stated Maturity or any scheduled repayment
of Indebtedness other than:
(a) Indebtedness permitted under clause (6) of the covenant described
under "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; or
(b) the purchase, repurchase or other acquisition of subordinated
Indebtedness purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or
acquisition; or
(4) make any Restricted Investment (all of these payments and other actions
set forth in clauses (1) through (4) above being collectively referred
to as "Restricted Payments"),
unless, at the time of and after giving effect to the Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a result of the Restricted Payment;
(2) WRC Media would, at the time of the Restricted Payment and after giving
pro forma effect to the Restricted Payment as if that Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt to EBITDA Ratio described below under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock;" and
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(3) the Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by WRC Media and its restricted subsidiaries
after the date of the notes indenture, excluding Restricted Payments
permitted by clauses (2) through (10) and clauses (12) and (13) of the
next succeeding paragraph, is less than the sum, without duplication,
of:
(a) 50% of the Consolidated Net Income of WRC Media for the period
(taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the notes indenture to
the end of WRC Media's most recently ended fiscal quarter for which
internal financial statements are available at the time of that
Restricted Payment (or, if the Consolidated Net Income for the
period is a deficit, minus 100% of the deficit), PLUS
(b) 100% of the aggregate net cash proceeds and the fair market value of
Cash Equivalents and Qualified Proceeds received by the issuers
since the date of the notes indenture as a contribution to their
common equity capital or from the issue or sale of Equity Interests
of the issuers (other than Disqualified Stock and Excluded
Contributions) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of the issuers that have been converted into or exchanged
for these Equity Interests. These Equity Interests do not include
Equity Interests or Disqualified Stock or debt securities and
Excluded Contributions sold to a Subsidiary of WRC Media or WRC
Media. PLUS,
(c) to the extent that any Restricted Investment that was made after the
date of the notes indenture is sold for cash, Cash Equivalents or
Qualified Proceeds or is otherwise liquidated or repaid for cash,
Cash Equivalents or Qualified Proceeds, the lesser of:
- the return of capital with respect to the Restricted Investment
minus the cost of disposition, if any; and
- the initial amount of the Restricted Investment, PLUS
(d) the aggregate amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from:
- dividends, distributions, return of capital, repayments of
investments or other transfers of assets to WRC Media or any
restricted subsidiary from any Unrestricted Subsidiary, or the sale
of any interest in any Unrestricted Subsidiary, in each case in the
form of cash, Cash Equivalents or Qualified Proceeds, or
- the redesignation of any Unrestricted Subsidiary as a restricted
subsidiary not to exceed in the case of an Unrestricted Subsidiary
the fair market value of the Investment in the Unrestricted
Subsidiary at the time of the reduction in Investment, after
deducting any Indebtedness associated with the Unrestricted
Subsidiary; PROVIDED that the amount of the net reduction in
Investment in the Unrestricted Subsidiary shall be excluded from
Consolidated Net Income for purposes of calculating clause 3(a)
above.
So long as no Default has occurred and is continuing or would be caused by
the Restricted Payment, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
of that dividend, if at the date of declaration the dividend would have
complied with the provisions of the notes indenture;
(2)(a) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the issuers or any
restricted subsidiary or of any Equity
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Interests of the issuers ("Retired Capital Stock") in exchange for,
or out of the net cash proceeds of the substantially concurrent sale
(other than to a restricted subsidiary of WRC Media or to WRC Media)
of, Equity Interests of any of the issuers (other than Disqualified
Stock) ("Refunding Capital Stock"); PROVIDED that the amount of the
net cash proceeds that are utilized for the redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from
clause (3)(b) of the preceding paragraph; and
(b) the declaration and payment of dividends on the Refunding Capital
Stock in an aggregate amount per year no greater than the aggregate
amount of dividends per annum that was declarable and payable on the
Retired Capital Stock in a manner not in violation of the notes
indenture immediately prior to the retirement;
(3) the defeasance, redemption, repurchase or other acquisition or
retirement of subordinated Indebtedness of WRC Media or any restricted
subsidiary with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) the payment of any dividend by a restricted subsidiary of WRC Media,
other than Weekly Reader or CompassLearning, to the holders of its
common Equity Interests on a pro rata basis; and
(5) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of
(a) WRC Media or any restricted subsidiary of WRC Media;
(b) any direct or indirect parent of WRC Media held by any future,
present or former member of WRC Media's (or any of its restricted
subsidiaries') management; or
(c) any director, employee or consultant of WRC Media or any of its
restricted subsidiaries pursuant to any management equity plan or
stock option plan or any other management or employee benefit plan
or agreement;
PROVIDED that the aggregate price paid for all repurchased, redeemed,
acquired or retired Equity Interests shall not exceed in any calendar
year $1.0 million unless unused amounts from succeeding years are carried
over in which case the maximum shall be $2.0 million; PROVIDED FURTHER
that the amount in any calendar year may be increased by an amount not to
exceed:
(a) the cash proceeds from the sale of Equity Interests of WRC Media to
members of management of WRC Media and its Subsidiaries that occurs
after the date of the notes indenture (to the extent the cash
proceeds from the sale of the Equity Interests have not otherwise
been applied to the payment of Restricted Payments by virtue of
clause (3)(b) of the preceding paragraph); plus
(b) the cash proceeds of key man life insurance policies received by WRC
Media and its restricted subsidiaries after the date of the notes
indenture minus
(c) the amount of any Restricted Payments previously made pursuant to
this proviso;
(6) repurchases of Equity Interests deemed to occur upon exercise of stock
options if the Equity Interests represent a portion of the exercise
price of the options;
(7) the retirement of any shares of Disqualified Stock of WRC Media by
conversion into, or by exchange for, shares of Disqualified Stock of WRC
Media, or out of the Net Proceeds of the
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substantially concurrent sale (other than to a Subsidiary of WRC Media)
of other shares of Disqualified Stock of WRC Media; PROVIDED that:
(a) the amount of the Disqualified Stock does not exceed the amount of
the Disqualified Stock so converted or exchanged or concurrently
retired plus the amount of all fees, commissions, discounts, costs
and expenses incurred in connection with the conversion, exchange or
retirement; and
(b) either
- the Disqualified Stock is redeemable at the option of the holder of
the Disqualified Stock, in whole or in part, later than the final
maturity date or date that the Disqualified Stock being converted
or exchanged is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise or at the option of the holder of the
Disqualified Stock, in whole or in part, or
- all scheduled payments on or in respect of the Disqualified Stock
(other than dividends) shall be at least 91 days following the
final scheduled maturity of the notes;
(8) Investments that are made with Excluded Contributions;
(9) other Restricted Payments in an aggregate amount not to exceed
$10.0 million;
(10) cash dividends and other payments required to be made under the
Recapitalization Agreement;
(11) the payment of dividends on the common stock of an issuer following the
first public offering of the issuer's common stock after the date of the
notes indenture, of up to an aggregate of 6% per annum of the net cash
proceeds received by the issuer in all its public offerings of common
stock, other than public offerings with respect to common stock of an
issuer registered on Form S-8; PROVIDED that the amount of any net cash
proceeds that are utilized for any of these payments shall be excluded
from clause 3(b) of the preceding paragraph;
(12) advances to employees (including guarantees of loans made to employees)
not in excess of $7.5 million outstanding at any one time in the
aggregate; and
(13) the payment to any direct or indirect parent of WRC Media of amounts
required for the parent to pay franchise taxes and other fees and
operating costs reasonably required to maintain its corporate existence,
together with any amounts permitted to be paid pursuant to clause (8) of
the covenant described below under the caption "--Transactions with
Affiliates."
In addition, this covenant will not prohibit the exchange of senior
preferred stock into preferred stock of Weekly Reader and/or CompassLearning,
pursuant to the terms of the certificate of designations or the stockholders
agreement, as in effect on the date of the notes indenture or the exchange of
Unit Common Stock for Exchange Common Stock pursuant to the stockholders
agreement, as in effect on the date of the notes indenture.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by WRC Media or a restricted
subsidiary pursuant to the Restricted Payment. The fair market value of any
assets or securities that are required to be valued by this covenant shall be
determined by the Board of Directors. The Board of Directors' determination must
be based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if the fair market value exceeds
$5.0 million.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
WRC Media will not, and will not permit any of its restricted subsidiaries
to, directly or indirectly:
(1) create;
(2) incur;
(3) issue;
(4) assume;
(5) guarantee; or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness (including Acquired Debt),
and the issuers and the Note Guarantors will not issue any Disqualified Stock
and WRC Media will not permit any restricted subsidiary that is not an issuer or
a Note Guarantor to issue any shares of preferred stock; PROVIDED, HOWEVER, that
the issuers and the Note Guarantors may incur Indebtedness (including Acquired
Debt) or issue Disqualified Stock if WRC Media's Debt to EBITDA Ratio for its
four full fiscal quarters ending immediately prior to the date the additional
Indebtedness is Incurred would have been no greater than (x) 6.5 to 1.0 with
respect to any four-quarter period ending on or prior to November 15, 2001 and
(y) 6.0 to 1.0 with respect to any four-quarter period ending thereafter.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1)(a) the incurrence by WRC Media and its restricted subsidiaries of
additional Indebtedness and letters of credit under Credit
Facilities in an aggregate principal amount at any one time
outstanding under this clause (1) (with letters of credit being
deemed to have a principal amount equal to the maximum potential
liability of WRC Media and its restricted subsidiaries thereunder)
not to exceed $170.0 million outstanding at any one time, MINUS
(b) the aggregate amount of all Net Proceeds of Asset Sales that have
been applied by WRC Media or any of its restricted subsidiaries
since the date of the notes indenture to repay any Indebtedness
under a Credit Facility pursuant to the covenant described above
under the caption "--Repurchase at the Option of Holders--Asset
Sales;"
(2) Existing Indebtedness of WRC Media and its restricted subsidiaries;
(3) the incurrence by the issuers and the Note Guarantors of Indebtedness
represented by the notes and the related Note Guarantees to be issued on
the date of the notes indenture and the new notes and the related Note
Guarantees to be issued pursuant to the registration rights agreement;
(4) the incurrence by WRC Media or any of its restricted subsidiaries of
Indebtedness represented by:
(a) Capital Lease Obligations;
(b) mortgage financings; or
(c) purchase money obligations,
in each case, incurred for the purpose of directly or indirectly
financing all or any part of the:
(a) purchase price or cost of construction or improvement of property;
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(b) plant or equipment used in the business of WRC Media or that
restricted subsidiary
in an aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (4), not to exceed 6% of Total Tangible
Assets at any time outstanding;
(5) the incurrence by WRC Media or any of its restricted subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other
than intercompany Indebtedness) incurred under the first paragraph of
this covenant or clauses (2), (3), (4), (5) or (10) of this paragraph;
(6) the incurrence by WRC Media or any of its restricted subsidiaries of
intercompany Indebtedness between or among WRC Media and any of its
restricted subsidiaries; PROVIDED, HOWEVER:
(a) that if the issuers or any Note Guarantor is the obligor on the
Indebtedness and the obligee with respect to the Indebtedness is not
an Issuer or a Note Guarantor, the Indebtedness must be expressly
subordinated to all Obligations with respect to the notes, in the
case of the issuers, or the Note Guarantee, in the case of a Note
Guarantor; and
(b) that:
- any subsequent issuance or transfer of Equity Interests that
results in the Indebtedness being held by a Person other than WRC
Media or a restricted subsidiary of WRC Media; and
- any sale or other transfer of the Indebtedness to a Person that is
not either WRC Media or a restricted subsidiary of WRC Media
shall be deemed, in each case, to constitute an incurrence of the
Indebtedness by WRC Media or its restricted subsidiary that was not
permitted by this clause (6);
(7) the incurrence by WRC Media or any of its restricted subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging:
(a) interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the notes indenture to be
outstanding,
(b) the value of foreign currencies purchased or received by WRC Media
and its restricted subsidiaries in the ordinary course of business
or
(c) commodity prices with respect to commodities used in the ordinary
course of business;
(8) the Guarantees by the issuers or any of the Note Guarantors of
Indebtedness or any other obligations of WRC Media or a restricted
subsidiary of WRC Media that is permitted to be incurred by another
provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the
same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of
this covenant; PROVIDED, that the amount, in each case, is included in
Consolidated Indebtedness of WRC Media as accrued;
(10) the incurrence by WRC Media or any of its restricted subsidiaries of
additional Indebtedness in an aggregate principal amount, or accreted
value, as applicable, at any time outstanding,
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including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this
clause (10), not to exceed $10.0 million;
(11) the incurrence by WRC Media or any of its restricted subsidiaries of
Indebtedness constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business;
(12) the incurrence by WRC Media or any of its restricted subsidiaries of
Indebtedness arising from agreements of WRC Media or the restricted
subsidiary providing for indemnification, adjustment of purchase price
or similar obligations incurred or assumed in connection with the
disposition of any business, assets or Capital Stock of a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring
all or any portion of the business, assets or a Subsidiary for the
purpose of financing the acquisition; PROVIDED that the maximum
assumable liability in respect of all the Indebtedness shall at no time
exceed the gross proceeds including noncash proceeds consisting of Cash
Equivalents or Qualified Proceeds, measured at the time received,
actually received by WRC Media and its restricted subsidiaries in
connection with the disposition;
(13) the issuance of preferred stock by any of WRC Media's restricted
subsidiaries issued to WRC Media or another restricted subsidiary;
PROVIDED that any subsequent issuance or transfer of any Equity
Interests or any other event that results in any of the restricted
subsidiary ceasing to be a restricted subsidiary or any other subsequent
transfer of any shares of preferred stock (except to WRC Media or
another restricted subsidiary) shall be deemed, in each case, to be an
issuance of those shares of preferred stock; and
(14) the incurrence by WRC Media or any of its restricted subsidiaries of
obligations in respect of performance and surety bonds and completion
guarantees provided by WRC Media or the restricted subsidiary in the
ordinary course of business.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of proposed
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (14) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, WRC Media will be permitted to
classify the item of Indebtedness on the date of its incurrence, or later
reclassify all or a portion of the item of Indebtedness, in any manner that
complies with this covenant. Indebtedness under Credit Facilities outstanding on
the date on which notes are first issued and authenticated under the notes
indenture shall be deemed to have been incurred on that date in reliance on the
exception provided by clause (1) of the definition of Permitted Debt.
NO SENIOR SUBORDINATED DEBT
The issuers will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Indebtedness of the issuers and senior in any respect in right of
payment to the notes. No Note Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Indebtedness of that Note Guarantor and senior
in any respect in right of payment to that Note Guarantor's Note Guarantee. This
provision is designed to protect the relative priority of the notes by limiting
the issuers' and the Note Guarantors' ability to incur any subordinated debt
that is senior to the notes. The issuers and the Note Guarantors may only incur
additional debt that is contractually subordinated to any Indebtedness if that
debt is PARI PASSU with the notes or is subordinated to the notes.
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LIENS
If all payments due under the notes indenture and the notes are secured on
an equal and ratable basis with any obligation to be secured by a Lien, we, and
any of WRC Media's restricted subsidiaries, may incur, assume or permit Liens.
Otherwise, WRC Media will not, and will not permit any of its restricted
subsidiaries to, create, incur, assume or permit to exist any Lien of any kind
securing Indebtedness (other than Permitted Liens) upon any of their property or
assets, now owned or later acquired.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
WRC Media will not, and will not permit any of its restricted subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on its ability to:
(1) pay dividends or make any other distributions on its Capital Stock to
WRC Media or any of its restricted subsidiaries or with respect to any
other interest or participation in, or measured by, its profits;
(2) pay any indebtedness owed to WRC Media or any of its restricted
subsidiaries;
(3) make loans or advances to WRC Media or any of its restricted
subsidiaries; or
(4) transfer any of its properties or assets to WRC Media or any of its
restricted subsidiaries.
The preceding restrictions will not apply to:
(1) contractual encumbrances or restrictions in effect on the date of the
notes indenture, PROVIDED that any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement
or refinancings are, in the good faith judgment of WRC Media's Board of
Directors, no more restrictive in any material respect, taken as a
whole, than the restrictions contained in the original encumbrance in
effect on the date of the notes indenture;
(2) contractual encumbrances or restrictions in any preferred stock of any
issuer issued in exchange for the senior preferred stock; PROVIDED that
these encumbrances or restrictions are, in the good faith judgment of
WRC Media's Board of Directors, no more restrictive in any material
respect, taken as a whole, than the restrictions contained in the senior
preferred stock in effect on the date of the notes indenture;
(3) the notes indenture, the notes and the Note Guarantees;
(4) applicable law or any applicable rule, regulation or order;
(5) any existing instrument governing Indebtedness or Capital Stock of a
Person acquired by WRC Media or any of its restricted subsidiaries
except Indebtedness incurred in connection with the acquisition that
only applies to the Person or assets acquired, so long as the
Indebtedness could have been incurred under the notes indenture;
(6) customary non-assignment provisions in leases entered into in the
ordinary course of business;
(7) purchase money obligations for property acquired in the ordinary course
of business that restrict the transfer of the property to WRC Media or
any of its restricted subsidiaries;
(8) any agreement for the sale or other disposition of all or substantially
all of the Capital Stock or assets of a Subsidiary that restricts
distributions by that Subsidiary pending its sale or other
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disposition. Agreements with respect to a sale of less than all of the
assets of a restricted subsidiary, however, may only encumber the assets
subject to that sale.
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to the Lien;
(10) the disposition or distribution of assets or property in joint venture
agreements, assets sale agreements, stock sale agreements and other
similar agreements entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; and
(12) any encumbrances or restrictions imposed by any amendments or
restatements of any contract referred to in clauses (1) through (11) or
any Permitted Refinancing Indebtedness, if these amendments or
restatements or Permitted Refinancing Indebtedness are, in the good
faith judgment of WRC Media's Board of Directors, no more restrictive in
any material respect, taken as a whole, than the restrictions in
existence prior to the amendment or restatements.
MERGER, CONSOLIDATION OR SALE OF ASSETS
An issuer may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not this issuer is the surviving corporation);
or (2) sell, assign, transfer, convey, lease or otherwise dispose of all or
substantially all of the properties or assets of the issuer and its restricted
subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) an issuer is the surviving corporation; or (b) the Person
formed by or surviving the consolidation or merger (if other than an
issuer) or to which such sale, assignment, transfer, conveyance, lease
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia (this issuer or Person, as the case may be, being
herein referred to as the "Successor Company");
(2) the Successor Company (if other than any of the issuers) expressly
assumes all the obligations of the issuer under the notes, the notes
indenture and the registration rights agreement dated as of
November 17, 1999 by and among the issuers and other relevant parties,
pursuant to agreements reasonably satisfactory to the trustee;
(3) immediately after the transaction no Default or Event of Default exists;
and
(4) such issuer or the Person formed by or surviving the consolidation or
merger (if other than any of the issuers), or to which the sale,
assignment, transfer, conveyance, lease or other disposition shall have
been made, and its restricted subsidiaries will, on the date of such
transaction after giving pro forma effect to the transaction and any
related financing transactions as if they had occurred at the beginning
of the applicable four-quarter period, have a Debt to EBITDA Ratio equal
to or less than the Debt to EBITDA Ratio for WRC Media and its
restricted subsidiaries immediately prior to the transaction.
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In addition, no issuer may, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to transfers between the issuers and any Note
Guarantor.
Notwithstanding the foregoing, so long as at least one issuer remains
organized under the laws of the United States, any issuer may:
(1) merge with an Affiliate incorporated or organized solely to reorganize
that issuer in another jurisdiction to realize tax or other benefits; and
(2) may become a limited liability company.
TRANSACTIONS WITH AFFILIATES
WRC Media will not, and will not permit any of its restricted subsidiaries
to:
(1) make any payment to;
(2) sell, lease, transfer or otherwise dispose of any of its properties or
assets to;
(3) purchase any property or assets from; or
(4) enter into or amend any transaction, agreement or guarantee with, or for
the benefit of,
any Affiliate, involving aggregate payments or consideration in excess of
$1.0 million. Notwithstanding the foregoing sentence, WRC Media and its
restricted subsidiaries may enter into any of these transactions if the terms
are not materially less favorable than they would have been had WRC Media or the
relevant restricted subsidiary transacted with an unrelated third party in an
arm's length transaction; PROVIDED that WRC Media obtains:
(1) in a transaction or series of transactions involving aggregate
consideration in excess of $2.0 million, an Officers' Certificate
certifying:
(a) that the transaction or transactions are not materially less
favorable than they would have been in an arm's length transaction
with an unrelated third party, and
(b) that the Board of Directors in good faith approved the transaction;
and
(2) in a transaction or series of transactions involving aggregate
consideration in excess of $5.0 million, an opinion from an accounting,
appraisal or investment banking firm of national standing regarding the
fairness of the transaction or transactions to the note holders.
The following agreements and transactions will not be subject to the
provisions of the prior paragraph:
(1) any employment agreement or other compensation plan or arrangement
entered into in the ordinary course of business by WRC Media or any of
its restricted subsidiaries;
(2) transactions between or among WRC Media and/or its restricted
subsidiaries;
(3) payment of reasonable fees and the provision of reasonable indemnities
to directors, officers or employees of WRC Media or any of its restricted
subsidiaries as determined in good faith by WRC Media's Board of
Directors;
(4) sales of Equity Interests (other than Disqualified Stock) to Affiliates
of WRC Media;
(5) payment of customary management, consulting and advisory fees and
related expenses under any investment banking arrangement or financial
advisory, financing, underwriting or placement agreement if the
arrangement or agreement is approved by WRC Media's or the restricted
subsidiary's Board of Directors;
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(6) Restricted Payments that are permitted under the notes indenture
described under "--Restricted Payments;"
(7) any agreement, or transaction contemplated in the agreement, in effect
as of the date of the notes indenture or any amendment to the agreement
unless the amendment is materially disadvantageous to the note holders in
any material respect;
(8) payments under the tax sharing agreement between the issuers and their
subsidiaries in effect on the date of the notes indenture or any
amendment to the agreement unless the amendment is disadvantageous to the
note holders in any material respect;
(9) any stockholders agreement or related registration rights or purchase
agreement existing as of the date of the notes indenture, and any
amendment to these agreements or similar agreements signed after the date
of the notes indenture unless the amendments or new agreements are
disadvantageous to the note holders in any material respect; and
(10) transactions in the ordinary course of business and compliant with the
notes indenture which are:
(a) on terms at least as favorable as they would have been in an arm's
length transaction with an unaffiliated party, or
(b) fair to WRC Media or its restricted subsidiaries as reasonably
determined by WRC Media's or the restricted subsidiary's Board of
Directors or senior management.
ADDITIONAL NOTE GUARANTEES
If WRC Media or any of its restricted subsidiaries acquires or creates
another Domestic Subsidiary after the date of the notes indenture, this Domestic
Subsidiary must become a Note Guarantor, execute a supplemental indenture and
deliver an Opinion of Counsel to the trustee within ten days from its
acquisition or creation that are not legal holidays. Notwithstanding, no
Unrestricted Subsidiary under the notes indenture shall become a Note Guarantor
as long as it remains an Unrestricted Subsidiary.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any restricted subsidiary of WRC Media
except Weekly Reader and CompassLearning to be an Unrestricted Subsidiary if
that designation would not cause a Default. If a restricted subsidiary of WRC
Media is designated as an Unrestricted Subsidiary, the aggregate fair market
value of all outstanding Investments owned by WRC Media and its restricted
subsidiaries in the Subsidiary so designated will be deemed to be an Investment
made as of the time of the designation and will, as determined by WRC Media,
either:
(1) reduce the amount available for Restricted Payments under the first
paragraph of the covenant described under "--Restricted Payments ;" or
(2) reduce the amount available for future Investments under the definition
of Permitted Investments.
A Subsidiary may be designated an Unrestricted Subsidiary only if the Investment
would be permitted at that time and if the restricted subsidiary otherwise meets
the definition of Unrestricted Subsidiary. The Board of Directors may
redesignate any Unrestricted Subsidiary to be a restricted subsidiary if the
redesignation would not cause a Default.
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BUSINESS ACTIVITIES
WRC Media will not, and will not permit any restricted subsidiary to, engage
in any business other than Permitted Businesses unless immaterial to WRC Media
and its restricted subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
WRC Media will not, and will not permit any of its restricted subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or for
the benefit of any note holder for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the notes indenture or the notes
unless that consideration is offered to be paid or is paid to all note holders
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to that consent, waiver or agreement.
REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, the issuers will furnish to the note holders,
within the time periods specified in the Securities and Exchange Commission's
rules and regulations:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if WRC Media were required to file these Forms,
including "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by WRC Media's
certified independent accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if WRC Media were required
to file these reports.
In addition, following the completion of the exchange offer contemplated by
the registration rights agreement, dated as of November 17, 1999 by and among
the issuers and other relevant parties, the issuers will:
(1) file a copy of all of the information and reports referred to in clauses
(1) and (2) above with the Securities and Exchange Commission for public
availability within the time periods specified in the Securities and
Exchange Commission's rules and regulations provided that the Securities
and Exchange Commission will allow this filing; and
(2) make that information available to securities analysts and prospective
investors upon request.
In addition, the issuers and the Note Guarantors have agreed that, for so
long as any notes remain outstanding, they will furnish to the note holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act of 1933.
If WRC Media has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes, and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, of the
financial condition and results of operations of WRC Media and its restricted
subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of WRC Media.
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes, whether or not prohibited
by the subordination provisions of the notes indenture;
(2) default in payment when due of the principal of, or premium, if any, on
the notes, whether or not prohibited by the subordination provisions of
the notes indenture;
(3) failure by WRC Media or any of its Subsidiaries to comply for 30 days
after written notice by the trustee or note holders of at least 25% in
principal amount of the notes then outstanding with the provisions
described under the captions "--Repurchase at the Option of Holders--
Change of Control," "--Repurchase at the Option of Holders--Asset Sales,"
"--Material Covenants--Restricted Payments," "--Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" or
"--Material Covenants--Merger, Consolidation or Sale of Assets;"
(4) failure by WRC Media or any of its Subsidiaries to comply with any of
the other agreements in the notes indenture for 60 days after written
notice given by the trustee or the note holders of at least 25% in
principal amount of the notes then outstanding;
(5) default under any mortgage, indenture or instrument under which there is
issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by WRC Media or any of its restricted subsidiaries or the
payment of which is guaranteed by WRC Media or any of its restricted
subsidiaries, other than Indebtedness owed to WRC Media or one of its
restricted subsidiaries, whether that Indebtedness or guarantee now
exists, or is created after the date of the notes indenture, if that
default:
(a) is caused by a failure to pay any of that Indebtedness at its stated
final maturity after giving effect to any applicable grace period
provided in the Indebtedness (a "Payment Default"); or
(b) results in the acceleration of that Indebtedness prior to its stated
final maturity,
and, in each case, the principal amount of that Indebtedness, together with the
principal amount of any other Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates
$5.5 million or more;
(6) failure by WRC Media or any of its restricted subsidiaries to pay final
non-appealable judgments, net of any amounts with respect to which a
reputable and creditworthy insurance company has acknowledged liability
in writing, aggregating in excess of $5.5 million, which judgments have
not been paid, discharged or stayed for a period of 60 days after having
been rendered;
(7) except as permitted by the notes indenture, any Note Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Note
Guarantor, or any Person acting on behalf of any Note Guarantor, shall
deny or disaffirm its obligations under its Note Guarantee; and
(8) specific events of bankruptcy or insolvency with respect to the issuers
or any of their restricted subsidiaries.
In the case of an Event of Default arising from specific events of
bankruptcy or insolvency, with respect to an issuer or any restricted subsidiary
that is a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
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Default occurs and is continuing, the trustee or the note holders of at least
25% in principal amount of the then outstanding notes may declare all the notes
to be due and payable immediately. However, so long as any Indebtedness
permitted to be incurred pursuant to the Credit Agreement shall be outstanding,
that acceleration shall not be effective until the earlier of:
(1) an acceleration of that Indebtedness under the Credit Agreement; or
(2) five business days after receipt by the issuers and the administrative
agent under the Credit Agreement of written notice of that acceleration.
Note holders may not enforce the notes indenture or the notes except as
provided in the notes indenture. Subject to limitations, note holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
note holders notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest or
Liquidated Damages) if it determines that withholding notice is in their
interest. In addition, the trustee shall have no obligation to accelerate the
notes if the acceleration does not result from a payment default and in the best
judgment of the trustee acceleration is not in the best interests of the note
holders.
The note holders of a majority in aggregate principal amount of the notes
then outstanding may, on behalf of the note holders of all of the notes, by
notice to the trustee, waive any existing Default or Event of Default and its
consequences under the notes indenture except a continuing Default or Event of
Default in the payment of interest or Liquidated Damages on, or the principal
of, the notes.
The issuers are required to deliver to the trustee an annual statement
regarding compliance with the notes indenture. Upon becoming aware of any
Default or Event of Default, the issuers are required to deliver to the trustee,
a statement specifying that Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of any of the
issuers, serving in this capacity, or any Note Guarantor shall have any
liability for any obligations of the issuers or the Note Guarantors under the
notes, the notes indenture, the Note Guarantees, or for any claim based on the
obligations or their creation. Each note holder by accepting a note waives and
releases all of this liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the Federal securities laws and it is the view of the
Securities and Exchange Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The issuers may, at their option and at any time, elect to have all of their
obligations discharged with respect to the outstanding notes and all obligations
of the Note Guarantors discharged with respect to their Note Guarantees ("Legal
Defeasance") except for:
(1) the rights of note holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated
Damages, if any, on those notes when the payments are due from the trust
referred to below;
(2) the issuers' obligations with respect to the notes concerning:
(a) issuing temporary notes;
(b) registration of notes;
(c) mutilated, destroyed, lost or stolen notes; and
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(d) the maintenance of an office or agency for payment and money for
security payments held in trust.
(3) the rights, powers, trusts, duties and immunities of the trustee, and
the issuers' and the Note Guarantor's obligations in connection with the
rights, powers, trusts, duties and immunities of the trustee; and
(4) the Legal Defeasance provisions of the notes indenture.
In addition, the issuers may, at their option and at any time, elect to have
the obligations of the issuers and the Note Guarantors released with respect to
covenants that are described in the notes indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, some events, but not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the issuers must irrevocably deposit with the trustee, in trust, for the
benefit of the note holders, cash in U.S. dollars, non-callable
government securities which include direct obligations of, or obligations
guaranteed by, the United States of America, or a combination of them, in
sufficient amounts, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest and
premium and Liquidated Damages on the outstanding notes on the stated
maturity or on the applicable redemption date. The issuers must specify
whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the issuers shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that:
(a) the Internal Revenue Service has published or has delivered to the
issuers a ruling; or
(b) since the date of the notes indenture, there has been a change in the
applicable U.S. Federal income tax law;
and shall confirm that the note holders of the outstanding notes will not
recognize:
(a) income;
(b) gain; or
(c) loss
for U.S. Federal income tax purposes as a result of the Legal Defeasance and
will be subject to U.S. Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if the Legal Defeasance
had not occurred;
(3) in the case of Covenant Defeasance, the issuers shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the note holders of the outstanding notes will not
recognize:
(a) income;
(b) gain; or
(c) loss
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for U.S. Federal income tax purposes as a result of Covenant Defeasance and will
be subject to U.S. Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either:
(a) on the date of the deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to the deposit);
or
(b) insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
(5) that Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument (other than the notes indenture) to which the issuers or Note
Guarantors is a party or by which WRC Media or any of its Subsidiaries is
bound;
(6) 91 days shall have passed between the date of deposit and no intervening
bankruptcy of the issuers shall have occurred under applicable bankruptcy
law;
(7) the issuers shall have delivered to the trustee an Officers'
Certificate, which meets the requirements of section 13.05 of the notes
indenture, stating that the deposit was not made by the issuers with the
intent of preferring the note holders over the other creditors of the
issuers with the intent of:
(a) defeating;
(b) hindering;
(c) delaying; or
(d) defrauding
any creditors of the issuers, Note Guarantors or others; and
(8) each of the issuers shall have delivered to the trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance,
have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the notes
indenture or the notes may be amended or supplemented with the consent of the
note holders of at least a majority in principal amount of the notes then
outstanding, and any existing default or compliance with any provision of the
notes indenture or the notes may be waived with the consent of the note holders
of a majority in principal amount of the then outstanding notes.
Without the consent of each note holder affected, with respect to any notes
held by a non-consenting note holder, an amendment or waiver may not:
(1) reduce the principal amount of notes whose note holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other
than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders";
(3) reduce the rate of or change the time for payment of interest on any
note;
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(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the notes (except
a rescission of acceleration of the notes by the note holders of at least
a majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from the acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the notes indenture relating to
waivers of past Defaults or the rights of note holders to receive
payments of principal of, or interest or premium or Liquidated Damages,
if any, on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders";
(8) impair the right of any note holder to receive payment of or interest on
the note holder's notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to
the note holder's notes;
(9) release any Note Guarantor from any of its obligations under its Note
Guarantee or the notes indenture, except in accordance with the terms of
the notes indenture; or
(10) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the notes
indenture relating to subordination that adversely affects the rights of the
note holders will require the consent of the note holders of at least 75% in
aggregate principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any note holder, the
issuers, the Note Guarantors and the trustee may amend or supplement the notes
indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of any issuer's or any Note Guarantor's
obligations to note holders under the notes indenture;
(4) to make any change that would provide any additional rights or benefits
to the note holders or that does not adversely affect the legal rights
under the notes indenture of any note holder;
(5) to evidence and provide for the acceptance and appointment under the
notes indenture of a successor trustee;
(6) to add a Note Guarantor under the notes indenture;
(7) to add to the covenants of the issuers and the Note Guarantors for the
benefit of the note holders or to surrender any right or power conferred
upon the issuers;
(8) to secure the notes;
(9) to make any change in the subordination provisions of the notes
indenture that would limit or terminate the benefits available to any
note holder of Senior Debt of WRC Media or any representative of that
note holder under the subordination provisions; or
(10) to comply with requirements of the Securities and Exchange Commission
in order to effect or maintain the qualification of the notes indenture
under the Trust Indenture Act of 1939 as amended.
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SATISFACTION AND DISCHARGE
The notes indenture will be discharged and will cease to be of further
effect as to all notes issued by it, when either:
(1) all notes that have been authenticated and delivered have been delivered
to the trustee for cancelation; or
(2) (a) all notes that have not been delivered to the trustee for
cancelation:
- have become due and payable by reason of the making of a notice of
redemption or otherwise; or
- will become due and payable within one year; and
- the issuers have or any Note Guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust funds in trust
solely for the benefit of the note holders, cash in U.S. dollars,
non-callable government securities which include direct obligations
of, or obligations guaranteed by, the United States of America, or
a combination of them, in the amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge
the entire indebtedness on the notes not delivered to the trustee
for cancelation for principal, premium and Liquidated Damages, if
any, and accrued interest to the date of maturity or redemption;
(b) no Default or Event of Default shall have occurred and be continuing
on the date of the deposit or shall occur as a result of the deposit
and the deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the issuers
or any Note Guarantor is a party or by which the issuers or any Note
Guarantor is bound;
(c) the issuers and the Note Guarantors have paid all sums payable by
them under the notes indenture; and
(d) the issuers have delivered irrevocable instructions to the trustee
under the notes indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date.
In addition, the issuers must deliver an Officers' Certificate and an
Opinion of Counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of any issuer or Note Guarantor, the notes
indenture limits its right to obtain payment of claims in some cases, or to
realize on property in some cases received in respect of these claims as
security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
that conflict within 90 days, apply to the Securities and Exchange Commission
for permission to continue or resign.
The note holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
exceptions. In the case in which an Event of Default shall occur and be
continuing, the trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to these provisions, the trustee will be under no obligation to exercise any of
its rights or powers under the notes indenture at the request of any note
holders, unless that note holder shall have offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
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GOVERNING LAW
The internal law of the state of New York shall govern and be used to
construe the notes indenture, the notes and the Note Guarantees without giving
effect to applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required by the
principles of conflicts of law.
DEFINITIONS
Listed below are the defined terms used in the notes indenture which are
used in this "Description of New Notes." Reference is made to the notes
indenture for a full disclosure of all the terms. For purposes of the notes
indenture, unless otherwise specifically indicated, the term "consolidated" with
respect to any person refers, to that person consolidated with its restricted
subsidiaries, and excludes from that consolidation any Unrestricted Subsidiary
as if that Unrestricted Subsidiary were not an Affiliate of that Person.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time the other Person
is merged with or into or became a restricted subsidiary of the specified
Person, whether or not the Indebtedness is incurred in connection with,
or in contemplation of, the other Person merging with or into, or
becoming a restricted subsidiary of, the specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by the
specified Person.
"ADDITIONAL NOTES" means up to $100.0 million aggregate principal amount of
notes (other than the notes) issued under the notes indenture in accordance with
sections 2.02 and 4.09 of the notes indenture, as part of the same series as the
notes.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the Person, whether through the ownership of voting securities, by
agreement or otherwise; PROVIDED that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control.
"ASSET SALE" means:
(1) the sale, lease, conveyance, transfer or other disposition of any assets
or rights, other than sales of inventory in the ordinary course of
business; PROVIDED that the sale, conveyance or other disposition of all
or substantially all of the assets of WRC Media and its Subsidiaries
taken as a whole will be governed by the provisions of the notes
indenture described above under the caption "--Repurchase at the Option
of Holders--Change of Control" and/or the provisions described above
under the caption "--Material Covenants--Merger, Consolidation or Sale of
Assets" and not by the provisions of the covenant described under
"--Repurchase at Option of Holders--Asset Sales;" and
(2) the issuance of Equity Interests in any of WRC Media's restricted
subsidiaries (other than Weekly Reader or CompassLearning) or the sale of
Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among the issuers and their restricted
subsidiaries;
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(3) an issuance of Equity Interests by a restricted subsidiary to an issuer
or to another restricted subsidiary;
(4) the sale or lease of equipment, accounts receivable or other real or
personal property in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Material
Covenants--Restricted Payments;"
(7) any sale of Equity Interests in, or Indebtedness or other securities of,
an Unrestricted Subsidiary;
(8) the exchange of the senior preferred stock for preferred stock of any
issuer issued in exchange for the senior preferred stock in accordance
with the terms of the exchange and the related terms of the stockholders
agreement, the exchange of Unit Common Stock for Exchange Common Stock in
accordance with the related terms of the stockholders agreement and the
issuance of common stock of an issuer pursuant to the exercise of
warrants to purchase the common stock as these warrants are in effect on
the date of the notes indenture; and
(9) foreclosures on assets.
"BENEFICIAL OWNER" has the meaning assigned to the term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), the "person" shall be deemed to have beneficial ownership
of all securities that the "person" has the right to acquire by conversion or
exercise of other securities, whether the right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition.
"BOARD OF DIRECTORS" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of the Person
serving a similar function.
"CAPITAL LEASE OBLIGATION" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all:
(a) shares;
(b) interests;
(c) participations;
(d) rights or other equivalents, however designated, of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
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(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any relevant agency or instrumentality
(PROVIDED that the full faith and credit of the United States is pledged
in support of the instrument) having maturities of not more than one year
from the date of acquisition;
(3) certificates of deposit and Eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year, and overnight bank deposits, in each
case, with any lender party to the Credit Agreement or with any domestic
commercial bank having capital and surplus in excess of $500.0 million
and a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and
(3) above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within one year after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the properties or
assets of WRC Media and its restricted subsidiaries (other than
CompassLearning) taken as a whole to any "person" (as that term is used
in Section 13(d)(3) of the Exchange Act) other than a Principal or a
Related Party of a Principal;
(2) the adoption of a plan of liquidation or dissolution of WRC Media or
Weekly Reader;
(3) the completion of any transaction the result of which is that any
"person", as defined above, other than the Principals and their Related
Parties, becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the Voting Stock of either of WRC Media or Weekly Reader,
measured by voting power rather than number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of WRC Media or Weekly Reader are not Continuing Directors.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any specified Person for
any date of determination, the sum, without duplication, of:
(1) the total amount of Indebtedness of the Person and its restricted
subsidiaries, PLUS
(2) the total amount of Indebtedness of any other Person, to the extent that
the Indebtedness has been guaranteed by the specified Person or one or
more of its restricted subsidiaries, PLUS
(3) the aggregate liquidation value of all Disqualified Stock of the Person
and its restricted subsidiaries and all the preferred stock of the
restricted subsidiaries of the Person (other than the issuers), in each
case, determined on a consolidated basis and in accordance with GAAP.
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"CONSOLIDATED NET INCOME" means, with respect to any specified Person for
any period, the aggregate of the Net Income of the Person and its restricted
subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP; PROVIDED that:
(1) the Net Income of any Person that is not a restricted subsidiary or that
is accounted for by the equity method of accounting shall be excluded
except that:
(a) WRC Media's equity in the net income of any Person for the period
shall be included in the Consolidated Net Income up to the aggregate
amount of cash actually distributed by the Person during the period
to WRC Media or a restricted subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
distribution made to a restricted subsidiary, to the limitations
contained in clause (2) below) and
(b) WRC Media's equity in a net loss of that Person for the period shall
be included in determining the Consolidated Net Income;
(2) the Net Income of any restricted subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that restricted subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that restricted subsidiary or its stockholders except that:
(a) WRC Media's equity in the net income of any restricted subsidiary for
the period shall be included in the Consolidated Net Income up to the
aggregate amount of cash actually distributed by the restricted
subsidiary during the period to WRC Media or another restricted
subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution made to another restricted
subsidiary, to the limitation contained in this clause) and
(b) WRC Media's equity in a net loss of any restricted subsidiary for the
period shall be included in determining the Consolidated Net Income;
(3) unrealized gains or losses due solely to fluctuations in currency values
and the related tax effects according to GAAP shall be excluded;
(4) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of that acquisition shall be
excluded;
(5) one-time noncash charges recorded in accordance with GAAP resulting from
any merger, recapitalization or acquisition transaction shall be
excluded; and
(6) the cumulative effect of a change in accounting principles shall be
excluded.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of WRC Media who:
(1) was a member of the Board of Directors on the date of the notes
indenture; or
(2) was nominated for election or elected to the Board of Directors with the
approval of a majority of the Continuing Directors who were members of
the Board at the time of the nomination or election.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of November 17,
1999, by and among CompassLearning, Weekly Reader, WRC Media as guarantor and
the various financial institutions that were parties to the Credit Agreement
from time to time, DLJ Capital Funding, Inc., as syndication agent for the
financial institutions, lead arranger and sole book running manager, Bank of
America, N.A., as administrative agent for the financial institutions, including
any related notes, guarantees, collateral documents, instruments and agreements
executed in connection with it. Without limiting the generality of the
foregoing, the term "Credit Agreement" shall include any amendment, amendment
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and restatement, supplement or other modification to the Credit Agreement and
ancillary documents and all renewals, extensions, refundings, replacements and
refinancings related to it.
"CREDIT FACILITIES" means, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders or indentures
providing for revolving credit loans, term loans, receivables financing, letters
of credit or other long-term Indebtedness, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time.
"DEBT TO EBITDA RATIO" means, with respect to any Person as of the date of
determination (the "Calculation Date"), the ratio of the Consolidated
Indebtedness of WRC Media as of the date to the EBITDA of WRC Media for the most
recent full Reference Period ending immediately prior to the date for which
internal financial statements are available, determined on a pro forma basis
after giving effect to all acquisitions or dispositions of assets made by WRC
Media and its restricted subsidiaries from the beginning of the Reference Period
through and including the date of determination (including any financing
transactions in connection with the acquisitions or dispositions) as if the
acquisitions and dispositions had occurred at the beginning of that quarter. In
addition, for the purposes of making the computation referred to above, the
following shall be excluded:
(1) acquisitions that have been made by WRC Media or any of its restricted
subsidiaries, including through mergers or consolidations and including
any related financing transactions, during the reference period or
subsequent to the reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the reference
period, and EBITDA for the reference period shall be calculated without
giving effect to clause (4) of the proviso set forth in the definition of
Consolidated Net Income, and
(2) the EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations of businesses disposed of prior to
the Calculation Date.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of related income or earnings and the
amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection with the acquisition of assets, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of WRC Media.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means:
(1) any Indebtedness outstanding under the Credit Agreement; and
(2) any other Senior Debt permitted under the notes indenture the principal
amount of which is $25.0 million or more and that has been designated by
WRC Media as "Designated Senior Debt."
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible, or for which it is exchangeable, in each case at the option of the
holder thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder, in whole or in part, on or prior to the date that is
91 days after the date on which the notes mature. Notwithstanding the preceding
sentence:
(1) any Capital Stock that would constitute Disqualified Stock solely
because the holders have the right to require WRC Media to repurchase the
Capital Stock upon the occurrence of a change of control or an asset sale
shall not constitute Disqualified Stock if the terms of the Capital Stock
provide that WRC Media may not repurchase or redeem any Capital Stock
pursuant to the provisions unless the repurchase or redemption complies
with the covenant described above under the caption "--Material
Covenants--Restricted Payments;" and
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(2) any Capital Stock that would constitute Disqualified Stock solely
because the Capital Stock is issued pursuant to any plan for the benefit
of employees of WRC Media or its restricted subsidiaries or by any plan
to the employees and may be required to be repurchased by WRC Media in
order to satisfy applicable statutory or regulatory obligations shall not
constitute Disqualified Stock;
PROVIDED that any amount of Disqualified Stock shall be its mandatory
maximum redemption price or liquidation preference, as applicable, plus accrued
dividends.
"DOMESTIC SUBSIDIARY" means:
(1) any restricted subsidiary that was formed under the laws of the United
States or any state or the District of Columbia; or
(2) any restricted subsidiary, including any restricted subsidiary whose
Note Guarantee was previously released in accordance with the notes
indenture, that guarantees or otherwise provides direct or indirect
credit support for any Indebtedness of any issuer or Note Guarantor.
"EBITDA" means, with respect to any specified Person for any period, the
Consolidated Net Income of the Person for that period PLUS:
(1) an amount equal to any extraordinary loss plus any net loss realized by
the Person or any of its restricted subsidiaries in connection with an
Asset Sale, to the extent the losses were deducted in computing the
Consolidated Net Income; PLUS
(2) provision for taxes based on income or profits of the Person and its
restricted subsidiaries for that period, to the extent that the provision
for taxes was deducted in computing the Consolidated Net Income; PLUS
(3) consolidated interest expense of the Person and its restricted
subsidiaries for that period, whether paid or accrued and whether or not
capitalized, to the extent that any of the expense was deducted in
computing the Consolidated Net Income; PLUS
(4) depreciation, amortization and other noncash expenses, excluding any
noncash expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid cash
expense that was paid in a prior period, of the Person and its restricted
subsidiaries for that period to the extent that the depreciation,
amortization and other noncash expenses were deducted in computing the
Consolidated Net Income; PLUS
(5) any fees, expenses or charges related to any:
(a) Equity Offering;
(b) Permitted Investment;
(c) acquisition;
(d) disposition or recapitalization or Indebtedness permitted to be
incurred by the notes indenture (whether or not successful); and
(e) transactions contemplated by the Recapitalization Agreement
(including fees to the Principals); PLUS
(6) the amount of any minority interest expense of an issuer deducted in
calculating Consolidated Net Income; PLUS
(7) the amount of nonrecurring charges deducted in that period in computing
Consolidated Net Income; MINUS
(8) noncash items or nonrecurring items increasing the Consolidated Net
Income for that period, other than the accrual of revenue in the ordinary
course of business, in each case, on a consolidated basis and determined
in accordance with GAAP.
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Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other noncash expenses
of, a restricted subsidiary of WRC Media that is not an issuer shall be added to
Consolidated Net Income to compute EBITDA of WRC Media only to the extent that a
corresponding amount would be permitted at the date of determination to be
distributed as a dividend to the issuers by the restricted subsidiary without
prior governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that restricted subsidiary or its stockholders.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock. However Equity Interests excludes any debt
security that is convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means any public or private sale of any Equity Interests,
other than Disqualified Stock, of an issuer, other than public offerings with
respect to Equity Interests registered on Form S-8 and any public or private
sale that constitutes an Excluded Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE COMMON STOCK" means shares of common stock of Weekly Reader into
which the Unit Common Stock is exchangeable pursuant to the stockholders
agreement related to the Unit Common Stock as in effect on the date of the notes
indenture.
"EXCLUDED CONTRIBUTION" means net cash proceeds, Cash Equivalents or
Qualified Proceeds, in each case, received by WRC Media from:
(1) contributions to its common equity capital; and
(2) the sale, other than to a Subsidiary or to our management equity plan or
stock option plan or any other management or employee benefit plan or
agreement, of Capital Stock, other than Disqualified Stock, of WRC Media
(other than a public Equity Offering),
in each case designated as Excluded Contributions pursuant to an Officers'
Certificate executed by the principal executive officer and the principal
financial officer of WRC Media on the date the capital contributions are made or
the date the Equity Interests are sold, which are excluded from the calculation
set forth in clause (3) of the first paragraph under "Material
Covenants--Restricted Payments."
"EXISTING INDEBTEDNESS" means Indebtedness of WRC Media and its
Subsidiaries, other than Indebtedness under the Credit Agreement, in existence
on the date of the notes indenture, until the amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in other statements by other entity
as have been approved by a significant segment of the accounting profession,
which are in effect on the date of the notes indenture.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements, of all or any
part of any Indebtedness.
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"HEDGING OBLIGATIONS" means, with respect to any specified Person, the
obligations of the Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect the Person against
fluctuations in interest rates, the value of foreign currencies or
commodity prices.
"INDEBTEDNESS" means, with respect to any specified Person, any indebtedness
of the Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect to them);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except for the balance that constitutes an accrued expense or trade
payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet
(excluding the related footnotes) of the specified Person prepared in accordance
with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of
others secured by a Lien on any asset of the specified Person (whether or not
the Indebtedness is assumed by the specified Person) and, to the extent not
otherwise included, the Guarantee by the specified Person of any indebtedness of
any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value of the Indebtedness, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any interest
that is more than 30 days past due, in the case of any other
Indebtedness.
"INVESTMENTS" means, with respect to any Person, all direct or indirect
investments by the Person in other Persons in the forms of:
(1) loans;
(2) advances or capital contributions (excluding accounts receivable, trade
credit, advances to customers, commission, travel and similar advances to
officers and employees made in the ordinary course of business);
(3) purchases or other acquisitions for consideration of Indebtedness;
(4) Equity Interests or other securities,
together with all items that are or would be classified as investments on a
balance sheet prepared in accordance with GAAP. If WRC Media or any Subsidiary
of WRC Media sells or otherwise disposes of any Equity Interests (other than by
way of a public Equity Offering) of any direct or indirect Subsidiary of WRC
Media in a way that, after giving effect to any of the sale or disposition, the
Person is no longer a Subsidiary of WRC Media, WRC Media shall be deemed to have
made an Investment on the date of any of the sale or disposition equal to the
fair market value of the Equity Interests of the Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "--Material Covenants--Restricted Payments."
The acquisition by WRC Media or any Subsidiary of WRC Media of a Person that
holds an Investment in a third Person shall be deemed to be an Investment by WRC
Media or the Subsidiary in the third Person
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in an amount equal to the fair market value of the Investment held by the
acquired Person in the third Person in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Material
Covenants--Restricted Payments;" PROVIDED that any acquisition will not be
deemed to be an Investment by WRC Media or the Subsidiary in the third Person to
the extent that all the Investments, taken as a whole, are not material to the
Person and all of the Investments were not made in contemplation of the
acquisition.
"LIEN" means, with respect to:
(1) any asset;
(2) any mortgage;
(3) lien;
(4) pledge;
(5) charge;
(6) security interest; or
(7) encumbrance
of any kind in respect of the asset, whether or not filed, recorded or otherwise
perfected under applicable law, including:
(1) any conditional sale or other title retention agreement;
(2) any lease in the nature thereof;
(3) any option or other agreement to sell or give a security interest in;
and
(4) any filing of or agreement to give any financing statement under the
Uniform Commercial Code (or equivalent statutes) of any jurisdiction;
PROVIDED that in no event shall an operating lease be deemed to constitute a
Lien.
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to
section 5 of the registration rights agreement.
"NET INCOME" means, with respect to any specified Person, the net income
(loss) of the Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes on the
gain (or loss), realized in connection with:
(a) any Asset Sale; or
(b) the disposition of any securities by the Person or any of its
restricted subsidiaries or the extinguishment of any Indebtedness of
the Person or any of its restricted subsidiaries; and
(2) any extraordinary gain (or loss), together with any related provision
for taxes on the extraordinary gain (or loss).
"NET PROCEEDS" means the aggregate cash proceeds received by WRC Media or
any of its restricted subsidiaries in respect of any Asset Sale, net of the
direct costs relating to the Asset Sale, including, without limitation:
(1) legal, accounting and investment banking fees, and sales commissions,
and any relocation expenses incurred as a result of the Asset Sale;
(2) taxes paid or payable as a result of the Asset Sale, in each case, after
taking into account any available tax credits or deductions and any tax
sharing arrangements;
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(3) amounts required to be applied to the repayment of Indebtedness, other
than Senior Debt under a Credit Facility, secured by a Lien on the asset
or assets that were the subject of the Asset Sale; and
(4) any deduction of appropriate amounts to be provided by WRC Media as a
reserve in accordance with GAAP against any liabilities associated with
the asset disposed of in the Asset Sale and retained by WRC Media after
the Asset Sale or other disposition, including, without limitation,
pension and other post-employment benefit liabilities and liabilities
related to environmental matters or against any indemnification
obligations associated with the transaction.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither WRC Media nor any of its restricted subsidiaries:
(a) provides credit support of any kind;
(b) is directly or indirectly liable as a guarantor or otherwise; or
(c) constitutes the lender.
(2) no default with respect to which (including any rights that the relevant
holders may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of WRC Media or any of its
restricted subsidiaries to declare a default on the other Indebtedness or
cause the payment to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of WRC Media or any of its
restricted subsidiaries.
"NOTE GUARANTEE" means any Guarantee of the obligations of the issuer under
the notes indenture and the notes in accordance with the provisions of the notes
indenture.
"NOTE GUARANTOR" means each of WRC Media's Domestic Subsidiaries that
executes a Note Guarantee in accordance with the provisions of the notes
indenture, and its respective successors and assigns.
"OBLIGATIONS" means any:
(1) principal;
(2) interest;
(3) penalties;
(4) fees;
(5) indemnifications;
(6) reimbursements;
(7) damages; and
(8) other liabilities payable under the documentation governing any
Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of an issuer
(or, if the context requires, a Note Guarantor) by two officers of the issuer
(or the Note Guarantor, if applicable), one of whom must be:
(1) the principal executive officer;
(2) the principal financial officer;
(3) the treasurer; or
(4) the principal accounting officer
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of the issuer (or the Note Guarantor), that meets the requirements of
section 13.05 of the notes indenture.
"OPINION OF COUNSEL" means an opinion from legal counsel, who is reasonably
acceptable to the trustee, that meets the requirements of section 13.05 of the
notes indenture. The counsel may be an employee of or counsel to WRC Media, any
subsidiary of WRC Media or the trustee.
"PERMITTED BUSINESS" means the business conducted by WRC Media and its
Subsidiaries on the date of the notes indenture and reasonable extensions of the
business and the other business activities that are incidental or related to the
business.
"PERMITTED INVESTMENTS" means:
(1) any Investment in an issuer or in a restricted subsidiary of an issuer;
(2) any Investment in Cash Equivalents;
(3) any Investment by WRC Media or any Subsidiary of WRC Media in a Person,
if as a result of the Investment:
(a) the Person becomes a restricted subsidiary of an issuer; or
(b) the Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, an issuer or a restricted subsidiary of an issuer;
(4) any Investment made as a result of the receipt of noncash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(5) Hedging Obligations;
(6) any Investment existing on the date of the notes indenture;
(7) any Investment acquired by WRC Media or any of its restricted
subsidiaries:
(a) in exchange for any other Investment or accounts receivable held by
WRC Media or any restricted subsidiary in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of the other Investment or accounts receivable; or
(b) as a result of a foreclosure by WRC Media or any of its restricted
subsidiaries with respect to any secured Investment or other transfer
of title with respect to any secured Investment in default;
(8) Investments the payment for which consists solely of Equity Interests of
WRC Media (exclusive of Disqualified Stock); PROVIDED, HOWEVER, that
these Equity Interests will not increase the amount available for
Restricted Payments under clause (3) of the first paragraph of the
"Restricted Payments" covenant;
(9) loans and advances to officers, directors and employees for various
business-related expenses incurred in the ordinary course of business;
(10) Guarantees (including Note Guarantees) of Indebtedness of WRC Media or
a restricted subsidiary which Indebtedness is permitted under the
covenant "Incurrence of Indebtedness and Issuance of Preferred Stock;"
(11) Investments consisting of the licensing or contribution of intellectual
property pursuant to joint marketing arrangements with other Persons made
in the ordinary course of business; and
(12) other Investments in any Person having an aggregate fair market value
(measured on the date each Investment was made and without giving effect
to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (9) not to exceed
$10.0 million.
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"PERMITTED JUNIOR SECURITIES" means:
(1) Equity Interests in WRC Media, an issuer or any Note Guarantor; or
(2) debt securities of WRC Media, an issuer or the relevant Note Guarantor
that are subordinated to all Senior Debt and any debt securities issued
in exchange for Senior Debt to substantially the same extent as, or to a
greater extent than, the notes and the Note Guarantees are subordinated
to Senior Debt under the notes indenture.
"PERMITTED LIENS" means:
(1) Liens of the issuers and any Note Guarantor securing Senior Debt that
was permitted by the terms of the notes indenture to be incurred;
(2) Liens in favor of the issuers or the Note Guarantors;
(3) Liens on property of a Person existing at the time the Person is merged
with or into or consolidated with WRC Media or any restricted subsidiary
of WRC Media; PROVIDED that the Liens were in existence prior to the
contemplation of the merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
WRC Media or the restricted subsidiary;
(4) Liens on property existing at the time of acquisition by WRC Media or
any restricted subsidiary of WRC Media, PROVIDED that the Liens were in
existence prior to the contemplation of the acquisition;
(5) Liens to secure the performance of:
(a) statutory obligations;
(b) surety or appeal bonds, performance bonds or other obligations of a
like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) of the second paragraph of the covenant entitled
"--Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with the Indebtedness
or assets ancillary to the Indebtedness;
(7) Liens existing on the date of the notes indenture;
(8) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
PROVIDED that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) Liens securing:
(a) Indebtedness under the Credit Agreement; and
(b) Hedging Obligations payable to a lender under the Credit Agreement or
an Affiliate of the lender or to a Person that was a lender or an
Affiliate of the Lender at the time the agreement relating to the
Hedging Obligations was entered into to the extent the Hedging
Obligations are secured by Liens on assets also securing Indebtedness
under the Credit Agreement;
(10) Liens securing Permitted Refinancing Indebtedness permitted to be
incurred under the notes indenture to refinance Indebtedness secured by a
Lien permitted under the notes indenture or amendments or renewals of
Liens that were permitted to be incurred, PROVIDED, in each case, that
the Liens do not extend to an additional property or asset of WRC Media
or any restricted subsidiary; and
(11) Liens incurred in the ordinary course of business of WRC Media or any
Subsidiary of WRC Media with respect to obligations that do not exceed
$5.0 million at any one time outstanding.
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"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of WRC Media or
any of its restricted subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of WRC Media or any of its restricted subsidiaries (other than
intercompany Indebtedness); PROVIDED that:
(1) the principal amount (or accreted value, if applicable) of the Permitted
Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so:
(a) extended;
(b) refinanced;
(c) renewed;
(d) replaced;
(e) defeased; or
(f) refunded (plus all accrued interest and the amount of all expenses
and premiums incurred in connection therewith);
(2) the Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being:
(a) extended;
(b) refinanced;
(c) renewed;
(d) replaced;
(e) defeased; or
(f) refunded
is subordinated in right of payment to the notes, the Permitted Refinancing
Indebtedness has a final maturity date equal to or later than the final maturity
date of, and is subordinated in right of payment to, the notes on terms at least
as favorable in all material respects to the note holders as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and
(4) the Indebtedness is incurred by:
(a) an issuer or a Note Guarantor; or
(b) the restricted subsidiary that is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"PRINCIPALS" means Ripplewood Partners, L.P., DLJ Merchant Banking Partners
and any member of management of any of the issuers as of the date of the notes
indenture.
"QUALIFIED PROCEEDS" means assets that are used or useful in, or a majority
of the Voting Stock of any Person engaged in, a Permitted Business; PROVIDED
that the fair market value of any of the assets or Capital Stock shall be
determined by the Board of Directors in good faith, except that in the event the
value of any of the assets or Capital Stock may exceed $5.0 million or more, the
fair value shall be determined in writing by an independent investment banking
firm of nationally recognized standing.
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"RECAPITALIZATION AGREEMENT" means the recapitalization agreement described
under the caption "The Acquisition and Recapitalization."
"REFERENCE PERIOD" means the most recently ended four full fiscal quarters
for which internal financial statements are available.
"RELATED PARTY" means:
(1) any controlling stockholder, majority-owned Subsidiary, or immediate family
member (in the case of an individual) of any Principal; or
(2) any:
(a) trust;
(b) corporation;
(c) partnership or other entity;
(d) the beneficiaries;
(e) stockholders;
(f) partners;
(g) owners or Persons beneficially holding a majority or more controlling
interest which consists of any one or more Principals; and/or
(h) other Persons referred to in the immediately preceding clause (1).
"RESTRICTED INVESTMENT" means any Investment other than a Permitted
Investment.
"SENIOR DEBT" means:
(1) all Obligations of an issuer or any Note Guarantor outstanding under Credit
Facilities and all Hedging Obligations payable to a Person that was a lender
under the Credit Facilities (or an affiliate of a lender under the Credit
Facilities) at the time the agreement relating to these Hedging Obligations
pursuant to which these Obligations are payable was entered into. These
obligations include, in each case, interest accruing subsequent to the
filing of, or which would have accrued but for the filing of, a petition for
bankruptcy, reorganization or similar proceeding, whether or not the
interest is an allowable claim in the proceeding;
(2) any other Indebtedness of an issuer or any Note Guarantor permitted to be
incurred under the terms of the notes indenture, unless the instrument under
which this Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the notes or any Note
Guarantee; and
(3) all Obligations with respect to the items listed in the preceding clauses
(1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for Federal, state, local or other taxes owed or owing by an
issuer;
(2) any Obligations of an issuer to any of its Subsidiaries or other Affiliates;
(3) any trade payables (including Guarantees of trade payables or instruments
evidencing these liabilities);
(4) the portion of any Indebtedness that is incurred in violation of the notes
indenture;
(5) Non-Recourse Debt;
(6) Any Indebtedness, Guarantee or Obligation of the issuers or the Note
Guarantors which is subordinate or junior to any other Indebtedness,
Guarantee or Obligation of the issuers or the Note Guarantors;
(7) Indebtedness evidenced by the notes and the Note Guarantees; and
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(8) Capital Stock of an issuer or a Note Guarantor.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act of 1933, as the Regulation is in effect on the
date of this prospectus.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any of the interest or principal prior to the date
originally scheduled for the payment of the interest or principal.
"SUBORDINATED NOTE OBLIGATIONS" means all Obligations with respect to the
notes, including, without limitation, principal, premium, if any, interest and
liquidated damages, if any, payable pursuant to the terms of the notes, together
with and including, without limitation, any amounts received or receivable upon
the exercise of rights of rescission or other rights of action, including,
without limitation, claims for damages, or otherwise.
"SUBSIDIARY" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than 50%
of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees is at the time owned or controlled, directly
or indirectly, by a Person or one or more of the other Subsidiaries of that
Person (or a combination of them); and
(2) any partnership where:
(a) the sole general partner or the managing general partner of which is the
Person or a Subsidiary of the Person; or
(b) the only general partners of which are the Person, or one or more
Subsidiaries of the Person or any combination of them.
"TOTAL TANGIBLE ASSETS" means the total consolidated assets, excluding
goodwill and other intangible assets, of WRC Media and its restricted
subsidiaries determined in accordance with GAAP, as set forth on WRC Media's
most recent consolidated balance sheet.
"UNIT COMMON STOCK" means the 205,656 shares of common stock of WRC Media
initially offered with the notes as a unit.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of WRC Media (other than
Weekly Reader and CompassLearning) that is designated by the Board of Directors
as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the
extent that the Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with
WRC Media or any restricted subsidiary of WRC Media unless the terms of that
agreement, contract, arrangement or understanding are no less favorable to
WRC Media or the restricted subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of WRC Media;
(3) is a Person with respect to which neither WRC Media nor any of its
restricted subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Equity Interests; or
(b) to maintain or preserve the Person's financial condition or to cause the
Person to achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of WRC Media or any of its restricted
subsidiaries.
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Any designation of a Subsidiary of WRC Media as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the Board Resolution giving effect to the designation and an Officers'
Certificate certifying that the designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"--Material Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the notes indenture and any Indebtedness of the Subsidiary shall be
deemed to be incurred by a restricted subsidiary of WRC Media as of that date
and, if the Indebtedness is not permitted to be incurred as of that date under
the covenant described under the caption "--Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," WRC Media shall be in default of
that covenant. The Board of Directors of WRC Media may at any time designate any
Unrestricted Subsidiary to be a restricted subsidiary; PROVIDED that the
designation shall be deemed to be an incurrence of Indebtedness by a restricted
subsidiary of WRC Media of any outstanding Indebtedness of the Unrestricted
Subsidiary and the designation shall only be permitted if:
(1) the Indebtedness is permitted under the covenant described under the caption
"--Material Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if the designation had occurred
at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following the
designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of the
Person that is at the time entitled to vote in the election of the Board of
Directors of the Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at
final maturity, in respect to each; by
(b) the number of years that will elapse between that date and the making of
the payment; by
(2) the then outstanding principal amount of the Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any specified Person means a
restricted subsidiary of a Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares and shares
of its Capital Stock pursuant to the exercise of warrants outstanding on the
date of the notes indenture) shall at the time be owned by that Person or by one
or more Wholly Owned Restricted Subsidiaries of that Person.
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DESCRIPTION OF NEW SENIOR PREFERRED STOCK
The old senior preferred stock was and the new senior preferred stock will
be issued under a certificate of designations, a copy of which is filed as an
exhibit to the registration statement of which this prospectus constitutes a
part. The following description is a summary of the material provisions of the
certificate of designations and the senior preferred stockholders agreement and
does not restate the certificate of designations and the senior preferred
stockholders agreement in their entirety. We urge you to read the certificate of
designations and the senior preferred stockholders agreement because they, and
not this description, define your rights as holders of the senior preferred
stock. Copies of the certificate of designations and the senior preferred
stockholders agreement are available as stated under "Where You Can Find More
Information." In this description, the terms "we," "our" and "us" refer only to
WRC Media and not to any of its subsidiaries.
The terms of the new senior preferred stock and the old senior preferred
stock are identical except that the new senior preferred stock:
(1) will not contain terms with respect to transfer restrictions; and
(2) will not require us to complete a registered exchange offer.
Except as described in the previous sentence, the new senior preferred stock
will evidence the same rights and obligations as the old senior preferred stock
and will be entitled to the same benefits under the preferred stockholders
agreement and the certificate of designations as the old senior preferred stock.
Senior preferred stockholders whose shares of old senior preferred stock are
accepted for exchange will receive new senior preferred stock having a
liquidation preference equal to that of the surrendered old senior preferred
stock. All old senior preferred stock and new senior preferred stock will be
treated as a single class of securities under the certificate of designations.
GENERAL
The certificate of designations designates 6,400,000 shares of our
authorized preferred stock as 15% senior preferred stock due 2011, the old
senior preferred stock, and 6,400,000 shares of our authorized preferred stock
as 15% series B senior preferred stock, the new senior preferred stock. The old
senior preferred stock has an original liquidation preference of $25.00 per
share. The new senior preferred stock will have an original liquidation
preference per share equal to the sum of $25.00 and the amount of any dividends
accrued and unpaid between November 17, 1999 and the date of issuance of the new
senior preferred stock. The senior preferred stockholders will have no
preemptive rights in connection with the senior preferred stock.
The liquidation preference of the senior preferred stock is not necessarily
indicative of the price at which shares of the senior preferred stock will
actually trade at or after the time of their issuance, and the senior preferred
stock may trade at prices below its liquidation preference. The market price of
the senior preferred stock can be expected to fluctuate with changes in the
financial markets and economic conditions, our financial condition and prospects
and other factors that generally influence the market prices of securities.
All "distributions" with respect to the senior preferred stock, including
the payment of dividends, the accrual of dividends, the exchange of the senior
preferred stock for preferred stock of Weekly Reader and/or CompassLearning,
redemptions, repurchases and distributions upon a liquidation, dissolution or
winding up of WRC Media, are subject to the provisions of the Delaware Business
Corporation Law. These provisions include those which prohibit any
"distributions" if, after giving effect to the distributions, we would be unable
to pay our debts as they become due in the usual course of our business or our
total assets would be less than our total liabilities. See "Risk Factors--
Dividends."
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RANKING
The old senior preferred stock does and the new senior preferred stock will,
with respect to dividend rights and rights on liquidation, winding up and
dissolution of WRC Media, rank:
- senior to all classes or series of our common stock, par value $0.01 per
share, and each other class of capital stock which includes any rights or
options exercisable for or convertible into this capital stock issued by
us the terms of which do not otherwise expressly provide (collectively
referred to as "JUNIOR SECURITIES");
- on a parity with each other class of capital stock which includes any
rights or options exercisable for or convertible into this capital stock
issued by us the terms of which specifically provide that these series
will rank on a parity with the senior preferred stock (collectively
referred to as "PARITY SECURITIES"); and
- junior to each other class of capital stock which includes any rights or
options exercisable for or convertible into this capital stock issued by
us the terms of which specifically provide that these series will rank
senior to the senior preferred stock (collectively referred to as "SENIOR
SECURITIES").
Without the written consent of the holders of a majority of the then
outstanding senior preferred stock or the majority vote of holders of the then
outstanding senior preferred stock at a meeting of the senior preferred
stockholders called for this purpose, we may not authorize, create (by way of
reclassification or otherwise) or issue:
(1) Parity Securities or Senior Securities; or
(2) any obligation or security convertible or exchangeable into, or evidencing a
right to purchase, shares of any class or series of Senior Securities or
Parity Securities.
Notwithstanding the foregoing, we may, without the consent of the senior
preferred stockholders, authorize, create (by way of reclassification or
otherwise) or issue Parity Securities for the purpose of using the proceeds of
these Parity Securities for the redemption of all outstanding shares of senior
preferred stock. See "--Voting Rights."
DIVIDENDS
The new senior preferred stock will accrue dividends at an annual rate of
(1) 15% and (2) 15.5% if we fail to comply with our registration obligations
with respect to the old senior preferred stock. See "Registration Rights--The
Senior Preferred Stock." In addition, if we are unable or fail to discharge our
obligation to redeem all outstanding shares of the senior preferred stock in
connection with a mandatory redemption or a change of control, the dividend rate
will increase by 0.50% each quarter or portion of the quarter following the date
on which this redemption was required to be made. These increases will continue
until the default is cured. However, the aggregate increase in this dividend
rate will not exceed 10%. See "--Redemption of Senior Preferred Stock--Change of
Control" and "--Redemption of Senior Preferred Stock--Mandatory." The board of
directors will declare dividends out of legally available funds. We will pay
dividends on the senior preferred stock quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year, commencing on December 31,
1999 for the old senior preferred stock and, if the exchange offer is completed
prior to the related record date, September 30, 2000 for the new senior
preferred stock.
Prior to December 31, 2004, or an earlier dividend payment date as we may
elect in our sole discretion, dividends will not be payable in cash, but will
accrete to the liquidation preference of the shares of the senior preferred
stock, except as described in the next sentence. Prior to December 31, 2004, at
the request of a majority of the holders of the senior preferred stock, we will
pay dividends in additional fully-paid and nonassessable shares of senior
preferred stock having an aggregate liquidation preference equal to the amount
of the accrued and unpaid cash dividends in lieu of the dividends.
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These dividends will accrete to the liquidation preference of the shares of the
senior preferred stock. After December 31, 2004, we will pay dividends only in
cash on the liquidation preference per share of the senior preferred stock.
Dividends will be payable to holders of record as of a record date preceding
the relevant quarterly dividend payment date, not more than 60 days or less than
10 days preceding the payment of the dividends, as fixed by our board of
directors. Following December 31, 2004, any accrued and unpaid cash dividends
may be declared and paid at any time to holders of record as of that date.
However, these dividends will not be declared and paid more than 45 days
preceding the payment date of these dividends, as may be fixed by our board of
directors.
We do not expect to pay any dividends in cash before December 31, 2004.
Holders of shares of senior preferred stock will not be entitled to any
dividends, whether in cash, property or stock, in excess of the cumulative
dividends payable on the senior preferred stock. No interest or sum of money in
lieu of interest will be payable in respect of any dividend payment on the
senior preferred stock that may be in arrears unless specifically provided for
in the certificate of designations.
Dividends payable on the new senior preferred stock will accrue from the
most recent date to which dividends have been paid on the old senior preferred
stock. If no dividends have been paid on the old senior preferred stock, the
dividends will accrue from November 17, 1999. Dividends will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Accordingly,
registered holders of the new senior preferred stock on the relevant record date
for the first dividend payment date following the completion of the exchange
offer will receive dividends accruing from December 31, 1999, the most recent
date to which dividends have been paid or accreted. All dividends will be
cumulative from the date of issuance of the senior preferred stock, whether or
not in any dividend period we have funds legally available for the payment of
the dividends.
With respect to the old senior preferred stock accepted for exchange, the
holders of the old senior preferred stock will receive new senior preferred
stock having a liquidation preference equal to that of the surrendered old
senior preferred stock. Dividends will cease to accrue in respect of shares of
the old senior preferred stock on the date that the shares are exchanged or on
the date of their earlier redemption or repurchase by us. See "Material U.S.
Federal Tax Considerations." Holders of old senior preferred stock whose old
senior preferred stock is accepted for exchange will not receive any payment in
respect of accrued dividends on the old senior preferred stock.
REDEMPTION OF SENIOR PREFERRED STOCK
OPTIONAL. On or after November 17, 1999, but not including from
November 17, 2002 to November 17, 2004, we may, to the extent we have funds
legally available for redemption, at our option in whole but not in part, at the
redemption prices per share in cash listed in the table below, together with all
accrued and unpaid cash dividends thereon to the date of redemption, without
interest on the redemption price, if redeemed during the 12-month period
beginning on November 17 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR LIQUIDATION VALUE
- ---- -----------------
<S> <C>
1999........................................................ 115.000%
2000........................................................ 115.000
2001........................................................ 115.000
2004........................................................ 107.500
2005........................................................ 105.625
2006........................................................ 103.750
2007........................................................ 101.875
2008 and thereafter......................................... 100.000
</TABLE>
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MANDATORY. To the extent we have funds legally available for payment, on
November 17, 2011, if any shares of the senior preferred stock are outstanding,
we will be required to redeem all outstanding shares of senior preferred stock.
The redemption price will be equal to the aggregate liquidation value of the
shares redeemed, in cash, together with any accrued and unpaid cash dividends,
if any, to the date of redemption, without interest on the redemption price.
CHANGE OF CONTROL. If a change of control occurs, we, to the extent we have
legally available funds for payment and to the extent permitted by the notes
indenture, will offer to redeem the shares of senior preferred stock then
outstanding and will redeem the senior preferred stock of any holder who will
consent to the redemption upon a date that is no later than 30 days following
the change of control. If a later date is required in order to comply with the
federal securities laws, we will offer to redeem the senior preferred stock the
first date thereafter on which the redemption is permitted. We will redeem the
senior preferred stock at the redemption prices per share in cash listed in the
table below, together with accrued and unpaid cash dividends to the date of
redemption, without interest on the redemption price, if redeemed during the
12-month period beginning on November 17 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR LIQUIDATION VALUE
- ---- -----------------
<S> <C>
1999........................................................ 107.5000%
2000........................................................ 107.5000
2001........................................................ 107.5000
2002........................................................ 100.0000
2003........................................................ 100.0000
2004........................................................ 103.7500
2005........................................................ 102.8125
2006........................................................ 101.8750
2007........................................................ 100.9375
2008 and thereafter......................................... 100.0000
</TABLE>
The definition of "change of control" under the certificate of designations
is substantially the same as the definition of the term under the notes
indenture. See "Description of New Notes--Definitions."
EXCHANGE
We may, at our option, but only in connection with a reorganization, as
described below, redeem all, but not less than all, of the shares of the senior
preferred stock then outstanding in exchange for an equivalent number of shares
of preferred stock of Weekly Reader. The shares of preferred stock will be the
identical type and have the same liquidation preference, having identical terms
and conditions as the senior preferred stock, except that the issuer of the
preferred stock shall be Weekly Reader. The shares of preferred stock of Weekly
Reader and the senior preferred stock will have equal amounts of accrued and
unpaid cash dividends.
The DLJMB Investors and their permitted transferees may, under the senior
preferred stockholders agreement, at their option, cause us to exchange all, but
not less than all, outstanding shares of the senior preferred stock for an equal
number of shares of preferred stock of Weekly Reader and/or CompassLearning, of
identical type and liquidation preference. These shares of preferred stock of
Weekly Reader and/or CompassLearning will have substantially identical terms and
conditions as the senior preferred stock, except that the issuer of the
preferred stock shall be Weekly Reader and/or CompassLearning, as applicable.
The shares of preferred stock of Weekly Reader and the senior preferred stock
will have equal amounts of accrued and unpaid cash dividends.
A "reorganization" means a reorganization completed in connection with an
initial public offering, where we will transfer, or cause to be transferred, all
or substantially all of our assets to Weekly Reader
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in exchange for the assumption by Weekly Reader of all or substantially all of
our liabilities, the issuance to us by Weekly Reader of new common stock and a
number of shares of Weekly Reader preferred stock equal to the number of shares
of senior preferred stock then outstanding in exchange for the senior preferred
stock. A transaction will not be considered to be a "reorganization" unless
after giving effect to the reorganization the overall economic position of a
holder of Weekly Reader preferred stock is not worse than the overall economic
position of a holder of the senior preferred stock immediately prior to the
transaction with respect to the investment by the holder in us and relative to
our other creditors, lenders and equity holders.
Under the senior preferred stockholders agreement, the reorganization will
also be conditional upon whether:
(1) the assets and liabilities Weekly Reader immediately subsequent to the
reorganization are substantially identical to our assets and liabilities
prior to the reorganization; and
(2) Weekly Reader delivered to the senior preferred stockholders who are party
to the senior preferred stockholders agreement an opinion of outside counsel
from a firm that is reasonably acceptable to the stockholders that:
(a) the reorganization should qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended; and
(b) there should be no adverse tax consequences to the stockholders or to
Weekly Reader that result from, are caused by, or are incurred by the
stockholder or Weekly Reader in connection with the completion of the
reorganization.
LIQUIDATION RIGHTS
Except as provided in the certificate of designations, the holders of senior
preferred stock will not be entitled to any distribution in the event of
liquidation, dissolution or winding up of WRC Media. In the event of any
voluntary or involuntary liquidation, dissolution or winding up, each holder of
the new senior preferred stock will be entitled to payment, out of our assets
available for distribution, before any payment or distribution is made on any
Junior Securities, including, without limitation, our common stock. We will pay
to each holder of senior preferred stock an amount equal to the liquidation
value per share of senior preferred stock held by the holder, plus accrued and
unpaid cash dividends, if any, to the date fixed for liquidation, dissolution or
winding up.
Liquidation value with respect to shares of senior preferred stock, but not
including those distributed as dividends to the senior preferred stockholders
upon their request in lieu of accretion of interest to the liquidation value as
described under "--Dividends" above means, as of any date, the sum of:
(1) $25.00 per share; and
(2) the aggregate of all dividends accreted on the share until the most recent
dividend payment date upon which an accretion to liquidation value has
occurred. If the date is a dividend payment date upon which an accretion to
liquidation value has occurred, the liquidation value shall be the sum of
(1) and the aggregate of all dividends accreted on the share until that
date.
In the event of an actual liquidation, dissolution or winding up of WRC Media or
the redemption of senior preferred stock, the amount will be calculated by
including dividends to the actual date of the liquidation, dissolution, winding
up or redemption rather than the most recent dividend payment date. In addition,
dividends will in no event accrete beyond the earlier of:
(1) December 31, 2004 or an earlier dividend payment date as we may elect to pay
dividends in cash; and
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(2) the most recent dividend payment date prior to the dividend payment date on
which we begin paying dividends on the new senior preferred stock in
additional shares of senior preferred stock in lieu of accretion of interest
to the liquidation value.
Shares distributed as dividends to the senior preferred stockholders upon their
request in lieu of accretion to the liquidation value will have the liquidation
value of the senior preferred stock outstanding immediately prior to the first
dividend payment date occurring after the senior preferred stockholders request
payment of dividends in additional shares of senior preferred stock.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of our assets, the application of all amounts available for payments with
respect to the senior preferred stock and all other Parity Securities would not
result in payment in full of the preferential amounts on the senior preferred
stock and liquidating payments on any Parity Securities, then holders of the
senior preferred stock and the Parity Securities will share ratably in any
distribution of our assets, or the proceeds of the assets, in proportion to the
full amount payable upon liquidation to which each is entitled. After payment in
full of all amounts to which holders of senior preferred stock are entitled,
these holders will not be entitled to any further participation in any
distribution of our assets. However, neither the voluntary sale, conveyance,
exchange or transfer of all or substantially all of our property or assets nor
the consolidation or merger of WRC Media with one or more corporations will be
deemed to be a voluntary or involuntary liquidation, dissolution or winding up,
unless the sale, conveyance, exchange or transfer shall be in connection with a
liquidation, dissolution or winding up of our business.
The certificate of designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the senior
preferred stock, although this liquidation preference will be substantially in
excess of the par value of the shares of senior preferred stock.
VOTING RIGHTS
Holders of the new senior preferred stock will not have any voting rights
other than:
(1) those required by law; and
(2) those specified in the certificate of designations, including those
described in this prospectus.
Upon our failure to:
(1) pay in full four consecutive or six quarterly cash dividends;
(2) discharge any obligation in connection with a mandatory redemption or a
change of control with respect to the senior preferred stock for any reason
including because there are no funds legally available for a redemption;
(3) give notice required to be given in connection with mandatory redemption
provided for in the certificate of designations; or
(4) comply with our covenants described in the certificate of designations,
the number of directors constituting our board of directors will be increased by
one and the majority holders of the new senior preferred stock, voting together
as a single class with holders of other classes or series of our preferred stock
having similar voting rights, will be entitled to elect one additional member of
our board of directors.
The term of office of any director elected as a result of any of the events
described above will continue until all dividends in arrears on the senior
preferred stock are paid in full and all other similar events or defaults have
been cured or waived, at which time the term of office of these directors shall
terminate and the number of directors constituting our board of directors will
be reduced accordingly.
In addition, as provided above under "--Ranking," we may not authorize,
create (by way of reclassification or otherwise) or issue any Parity Securities
or Senior Securities, or any obligation or
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security convertible into or evidencing the right to purchase Parity Securities
or Senior Securities without the consent of the holders of a majority of the
then outstanding senior preferred stock. However, we may, without the consent of
the senior preferred stockholders, authorize, create (by way of reclassification
or otherwise) or issue Parity Securities for the purpose of using the proceeds
of these Parity Securities for the redemption of all outstanding shares of
senior preferred stock.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment to the certificate of incorporation if the
amendment would:
(1) increase or decrease the par value of the shares of that class of preferred
stock; or
(2) alter or change the powers, preferences or special rights of the shares of
that class of preferred stock in a way that would affect the Holders of that
preferred stock adversely.
COVENANTS
Without the consent of a majority of the then outstanding senior preferred
stock, we may not amend, alter or repeal any provision of our certificate of
incorporation (by merger or otherwise) so as to adversely affect the
preferences, rights or powers of the senior preferred stock, PROVIDED that any
amendment that decreases the dividend payable on or the liquidation value of the
senior preferred stock shall require the affirmative vote of holders of each
share of senior preferred stock at a meeting of senior preferred stockholders
called for this purpose or written consent of each senior preferred stockholder.
PAYMENTS TO PARITY SECURITIES. So long as any shares of the senior
preferred stock are outstanding, except as described in the next paragraph, we
will not:
(1) declare, pay or set apart for payment on any Parity Securities any dividends
or declare or make any other distribution on any Parity Securities;
(2) redeem, purchase or otherwise acquire any Parity Securities for any
consideration, directly, indirectly; or
(3) pay or make available any monies for a sinking for the redemption of any
shares of any Parity Securities.
However, in each case, it is necessary that we declare and pay, or set apart for
payment a sum sufficient for the payment of, full cumulative dividends, to the
extent the dividends on the senior preferred stock are payable in cash, on the
senior preferred stock for all quarterly dividend periods terminating on or
prior to the payment of the dividend on, or the acquisition of, the Parity
Securities.
When dividends, to the extent the dividends on the senior preferred stock
are payable in cash, are not paid in full or a sum sufficient for the payment of
dividends is not set apart as described in the preceding paragraph, all
dividends declared upon the shares of senior preferred stock and all dividends
declared upon any Parity Securities shall, in each case, to the extent payable
in cash, be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the senior preferred stock and accumulated
and unpaid on these Parity Securities.
PAYMENTS TO JUNIOR SECURITIES. So long as any shares of senior preferred
stock are outstanding, we will not:
(1) declare, pay or set apart for payment on any Junior Securities any
dividends, other than pay-in-kind dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of
Junior Securities, or declare or make any other distribution on the Junior
Securities;
(2) redeem, purchase or otherwise acquire any Junior Securities for any
consideration, directly or indirectly except by conversion into or exchange
for Junior Securities; or
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(3) pay or make available any monies for a sinking fund for the redemption of
any Junior Securities, unless, in each case:
(a) the full cumulative dividends to which the holders of senior preferred
stock and any Parity Securities will have been entitled at the time of
these payment to Junior Securities will have been paid or declared; and
(b) a sum of money sufficient for the payment of these dividends for the
current dividend period has been set apart.
The foregoing provisions will not prohibit the redemption, purchase or other
acquisition of any shares of WRC Media common stock for purposes of any of our
or our subsidiaries' employee benefit or incentive plans.
MERGER, CONSOLIDATION AND ASSET SALES. Without the written consent of the
majority of the senior preferred stockholders or the majority vote of the senior
preferred stockholders at a meeting called for this purpose, we may not merge or
consolidate, or sell, exchange or convey all or substantially all of our assets,
property or business unless in the case of a merger or consolidation:
(1) if we are not the surviving corporation, the seniority, rights, powers or
preferences of the senior preferred stock continue unimpaired and on
identical terms after the transaction; and
(2) the surviving corporation has a consolidated net worth, immediately
following the transaction, at least equal to that of WRC Media prior to the
transaction.
For purposes of this covenant, "consolidated net worth" at any date and with
respect to any person is defined in the certificate of designations as:
(1) the consolidated stockholders' equity of a person and its consolidated
subsidiaries, MINUS
(2) their consolidated intangible assets (as defined in the certificate of
designations).
Notwithstanding any of the foregoing, this covenant will not prohibit any
reorganization described under "--Exchange" completed in compliance with the
terms of the senior preferred stock.
REPORTS. So long as any shares of senior preferred stock are outstanding,
we will furnish the senior preferred stockholders with the quarterly and annual
financial reports that we are required to file with the Securities and Exchange
Commission pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 or, if we are not required to file these reports, reports containing
the same information as would be required in these reports.
SENIOR PREFERRED STOCKHOLDERS AGREEMENT
The relative rights and relationships of the senior preferred stockholders
are determined under the senior preferred stockholders agreement. See "Ownership
of Stock--Senior Preferred Stockholders Agreement."
TRANSFER AGENT AND REGISTRAR
We will act as the transfer agent and registrar for the new senior preferred
stock until and unless we select a successor.
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BOOK-ENTRY, DELIVERY AND FORM
THE NEW NOTES
The new notes will be issued in the form of one or more fully registered new
notes in the form of global notes. Global notes are not issued in certificated
form. Instead, global notes are deposited and registered in the name of the
Depository Trust Company. Unlike notes in certificated form where there is an
actual transfer or exchange of a certificated note, transfers and exchanges of
beneficial interests in global notes can only be effected through DTC.
DEPOSITARY PROCEDURES
The global notes will be deposited upon issuance with, or on behalf of, the
Depository Trust Company ("DTC") and registered in the name of DTC or its
nominee. Except as described below, the global notes may be transferred, in
whole and not in part, only to DTC or another nominee of DTC. Investors may hold
their beneficial interests in the global notes directly through DTC if they have
an account with DTC or indirectly through organizations which have accounts with
DTC. Upon the issuance of the global notes, DTC or its nominee will credit, on
its book-entry registration and transfer system, the number of new notes
represented by the global notes to the accounts of institutions that have
accounts with DTC or its nominee ("participants"). The accounts to be credited
shall be designated by the initial purchasers.
Ownership of beneficial interests in the global notes will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the global notes will be shown on, and the transfer
of those ownership interests will be effected only through, records maintained
by DTC or its nominee, with respect to participants' interests, for the global
notes, or by participants or persons that hold interests through participants
with respect to beneficial interests in the global notes of persons other than
participants. The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer or pledge beneficial
interests in the global notes.
So long as DTC, or its nominee, is the registered holder and owner of any
global notes, DTC or the nominee, will be considered the sole legal owner and
holder of the new notes represented by the global notes for all purposes under
the notes indenture. Except as set forth below, owners of beneficial interests
in the global notes will not:
- be entitled to have the global notes or new notes represented by the
global notes registered in their names;
- receive or be entitled to receive physical delivery of certificated notes
in definitive form; and
- be considered to be the owners or holders of the global notes or any new
notes represented by the global notes for any purpose under the notes
indenture.
We understand that under existing industry practice, in the event an owner
of a beneficial interest in a global note desires to take any action that DTC,
as the holder of the global note, is entitled to take, DTC would authorize the
participants to take the action, and that the participants would authorize
beneficial owners owning through these participants to take the action or would
otherwise act upon the instructions of beneficial owners owning through them.
Any payment of principal or interest due on the global notes on any payment
date or at maturity or upon mandatory redemption will be made available by us to
the trustee by that date. As soon as possible thereafter, the trustee will make
the payments to DTC or its nominee, as the registered owner of the global notes
in accordance with existing arrangements between the trustee and DTC.
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We expect that:
- DTC or its nominee, upon receipt of any payment of principal or interest
in respect of the global notes, will credit immediately the accounts of
the related participants with payments in amounts proportionate to their
respective beneficial interests in the global note as shown on the records
of DTC; and
- payments by participants to owners of beneficial interests in the global
notes held through the participants will be governed by standing
instructions and customary practices, as is now the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of these participants.
None of us, the trustee and any payment agent for the global notes will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in any of the global
notes or for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests or for other aspects of the relationship between
DTC and its participants or the relationship between these participants and the
owners of beneficial interests in the global notes owning through these
participants.
As long as the new notes are represented by a global note, DTC's nominee
will be the holder of the new notes and therefore will be the only entity that
can exercise a right to repayment or repurchase of the new notes, including
following a change of control or a tender offer for the new notes. Notice by
participants or by owners of beneficial interests in a global note held through
these participants of the exercise of the option to elect repayment of
beneficial interests in the new notes represented by a global note must be
transmitted to DTC in accordance with its procedures on a form required by DTC
and provided to participants. In order to ensure that DTC's nominee will timely
exercise a right to repayment with respect to a particular new note, the
beneficial owner of the new note must instruct the broker or other participant
to exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their customers, and, accordingly, each beneficial
owner should consult the broker or other participant through which it holds an
interest in a security in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to DTC. We
will not be liable for any delay in delivery of notices of the exercise of the
option to elect repayment.
Unless and until exchanged in whole or in part for certificated notes in
definitive form, the global notes may not be transferred except as a whole by
DTC to a nominee of the DTC or by a nominee of the DTC to the DTC or another
nominee of the DTC.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, it is
under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time. Neither the trustee nor we
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
DTC has advised us that DTC is:
- a limited-purpose trust company organized under the laws of the State of
New York;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- a "clearing agency" registered under the provisions of Section 17A of the
Exchange Act.
DTC was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in the securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
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movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. The securities brokers may include Donaldson, Lufkin & Jenrette
Securities Corporation and Banc of America Securities LLC. Access to DTC's
book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, whether directly or indirectly.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note shall be exchangeable for corresponding certificated notes
registered in the name of persons other than DTC or its nominee only if:
(1) DTC:
- notifies us that it is unwilling or unable to continue as depositary
for the global note; or
- at any time ceases to be a clearing agency registered under the
Securities Exchange Act of 1934 and a successor depositary is not
appointed by us within 90 days;
(2) we in our discretion at any time determine not to have all of the
securities represented by the global notes; or
(3) an Event of Default (as defined in the notes indenture) with respect to
the new notes has occurred and is continuing.
Any new note that is exchangeable under the preceding sentence is exchangeable
for certificated notes issuable in authorized denominations and registered in
the names as DTC shall direct. Subject to the foregoing, the global notes are
not exchangeable, except for global notes of the same aggregate denomination to
be registered in the name of DTC or its nominee.
SAME-DAY PAYMENT
The notes indenture requires that payments in respect of the new notes
including principal, premium and interest be made by wire transfer of
immediately available U.S. dollar funds to the accounts specified by the holders
of the new note, or, if an account is not specified, by mailing a check to each
of the holder's registered address.
THE NEW SENIOR PREFERRED STOCK
Shares of the new senior preferred stock will be issued only in registered,
certificated form. This is non-global form. Shares of the new senior preferred
stock may not be exchanged for beneficial interests in any new senior preferred
stock in global form.
The certificate of designations for the senior preferred stock requires that
cash payments in respect of the new senior preferred stock shall be payable to
holders of record on a date that is not more than 45 days prior to the date of
the payment, as fixed by our board of directors. Any cash payment of dividends
due on the new senior preferred stock on any dividend payment date or upon
mandatory redemption will be made by us directly to the holders of the new
senior preferred stock. We will make any cash payments in respect of the new
senior preferred stock by mailing a check to each holder's registered address.
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REGISTRATION RIGHTS
The following description is a summary of the material provisions of the
registration rights agreement relating to the notes and the senior preferred
stockholders agreement. It does not restate these agreements in their entirety.
We urge you to read the registration rights agreement relating to the notes and
the senior preferred stockholders agreement in their entirety because they, and
not this description, define your registration rights as holders of the new
notes or the new senior preferred stock. Holders of new notes are not entitled
to any registration rights with respect to the new notes except for shelf
registration rights under the circumstances described below. Holders of new
senior preferred stock will have limited demand registration rights, piggy back
registration rights and shelf registration rights as described in this section.
Under the registration rights agreement relating to the notes, we and the
note guarantors agreed to file with the Securities and Exchange Commission an
exchange offer registration statement on the appropriate form under the
Securities Act of 1933 with respect to the old notes. Under the senior preferred
stockholders agreement, WRC Media agreed to file with the Securities and
Exchange Commission an exchange offer registration statement on the appropriate
form under the Securities Act of 1933 with respect to the old senior preferred
stock. The registration statement of which this prospectus is a part constitutes
the exchange offer registration statement for both the old notes and the old
senior preferred stock. The exchange offer being made hereby, if commenced and
completed within the time periods described under "The Exchange
Offer--Expiration Date; Extensions; Amendments," will satisfy these requirements
under the registration rights agreement relating to the notes and the senior
preferred stockholders agreement.
THE NOTES
If:
(1) we and the note guarantors are not permitted to complete the exchange
offer because the exchange offer is not permitted by applicable law or
Securities and Exchange Commission policy; or
(2) any holder of transfer restricted securities notifies us prior to the
20th day following completion of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission policy
from participating in the exchange offer; or
(b) that it may not resell the new notes acquired by it in the exchange
offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is
not appropriate or available for resales; or
(c) that it is a broker-dealer and owns notes acquired directly from us
or our "affiliate" which is defined under Rule 405 of the Securities
Act of 1933,
we and the note guarantors will file with the Securities and Exchange Commission
a shelf registration statement to cover resales of the notes by each holder who
provides the information specified in Item 507 or 508 of Regulation S-K under
the Securities Act of 1933 and any additional information required to be
disclosed in order to make the information previously furnished by the holder
not materially misleading.
We and the note guarantors will use our respective best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Securities and Exchange Commission.
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For purposes of the preceding, "transfer restricted securities" means each
old note until:
(1) the date on which the old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of an
old note for a new note, the date on which the new note is sold to a
purchaser who receives from the broker-dealer on or prior to the date of
the sale a copy of the prospectus contained in the exchange offer
registration statement;
(3) the date on which the old note has been effectively registered under the
Securities Act of 1933 and disposed of in accordance with the shelf
registration statement; or
(4) the date on which the old note is distributed to the public pursuant to
Rule 144 under the Securities Act of 1933.
The registration rights agreement provides that:
(1) we and the note guarantors will file an exchange offer registration
statement with the Securities and Exchange Commission on or prior to
90 days after the closing of the offering of the old notes.
(2) we and the note guarantors will use our respective best efforts to have
the exchange offer registration statement declared effective by the
Securities and Exchange Commission on or prior to 210 days after the
closing of the offering of the old notes.
(3) unless the exchange offer would not be permitted by applicable law or
Securities and Exchange Commission policy, we and the note guarantors
will
(a) commence the exchange offer; and
(b) use respective best efforts to issue on or prior to 30 business days,
or longer, if required by the Federal securities laws, after the date
on which the exchange offer registration statement was declared
effective by the Securities and Exchange Commission, new notes in
exchange for all old notes tendered prior to its effective date in
the exchange offer; and
(4) if obligated to file the shelf registration statement, we and the note
guarantors will use our respective best efforts to file the shelf
registration statement with the Securities and Exchange Commission on or
prior to 45 days after the filing obligation arises and to cause the
shelf registration to be declared effective by the Securities and
Exchange Commission on or prior to 90 days after the obligation arises.
The exchange offer being made hereby, if commenced and completed within the time
periods described in this paragraph, will satisfy the requirements under the
registration rights agreement listed in (1), (2) and (3) of this paragraph.
If:
(1) we and the note guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for the filing; or
(2) any of the registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
its effectiveness; or
(3) we and the note guarantors fail to complete the exchange offer within 30
business days of the date specified for effectiveness with respect to the
exchange offer registration statement; or
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(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer restricted securities
during the periods specified in the registration rights agreement (each
of the event referred to in clauses (1) through (4) above, a
"registration default"),
then we and the note guarantors will pay liquidated damages to each holder of
the old notes, with respect to the first 90-day period immediately following the
occurrence of the first registration default in an amount equal to $0.05 per
week per $1,000 principal amount of the old notes held by the holder.
The amount of the liquidated damages will increase by an additional $0.05
per week per $1,000 principal amount of the old notes with respect to each
subsequent 90-day period until all registration defaults have been cured, up to
a maximum amount of liquidated damages for all registration defaults of $0.50
per week per $1,000 principal amount of the old notes.
All accrued liquidated damages will be paid by us and the note guarantors on
each damages payment date to the global note holder by wire transfer of
immediately available funds or by Federal funds check and to holders of
certificated notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if accounts have not been
specified.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
THE SENIOR PREFERRED STOCK
If:
(1) WRC Media is not permitted to complete the exchange offer because the
exchange offer is not permitted by applicable law or Securities and
Exchange Commission policy; or
(2) any holder of transfer restricted securities notifies WRC Media prior to
the 20th day following completion of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission policy
from participating in the exchange offer; or
(b) that it may not resell the new senior preferred stock acquired by it
in the exchange offer to the public without delivering a prospectus
and the prospectus contained in the exchange offer registration
statement is not appropriate or available for any resales; or
(c) that it is a broker-dealer and owns senior preferred stock acquired
directly from us or our "affiliate" which is defined under Rule 405
of the Securities Act of 1933,
WRC Media will file with the Securities and Exchange Commission a shelf
registration statement to cover resales of the senior preferred stock by each
holder thereof who provides the information specified in Item 507 or 508 of
Regulation S-K under the Securities Act of 1933 and any additional information
required to be disclosed in order to make the information previously furnished
by the holder not materially misleading.
WRC Media will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Securities and
Exchange Commission.
For purposes of the preceding, "transfer restricted securities" means each
share of old senior preferred stock until:
(1) the date on which the share of old senior preferred stock is exchanged
in the exchange offer for a share of new senior preferred stock which is
entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery requirements of the Securities Act
of 1933;
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(2) the date on which the share of old senior preferred stock has been
disposed of in accordance with a shelf registration statement and the
purchasers of the old senior preferred stock have been issued new senior
preferred stock; or
(3) the date on which the share of old senior preferred stock is distributed
to the public pursuant to Rule 144 under the Securities Act of 1933.
The senior preferred stockholders agreement provides that:
(1) WRC Media will file an exchange offer registration statement with the
Securities and Exchange Commission on or prior to 90 days after
November 17, 1999, the closing of the offering of the old senior
preferred stock;
(2) WRC Media will use its best efforts to have the exchange offer
registration statement declared effective by the Securities and Exchange
Commission on or prior to 210 days after the closing of the offering of
the old senior preferred stock;
(3) unless the exchange offer would not be permitted by applicable law or
Securities and Exchange Commission policy, WRC Media will
(a) commence the exchange offer; and
(b) use its best efforts to issue on or prior to 30 business days, or
longer, if required by the Federal securities laws, after the date on
which the exchange offer registration statement was declared
effective by the Securities and Exchange Commission, new senior
preferred stock in exchange for all old senior preferred stock
tendered prior to its effective date thereto in the exchange offer;
and
(4) if obligated to file the shelf registration statement, WRC Media will
use its best efforts to file the shelf registration statement with the
Securities and Exchange Commission on or prior to 45 days after the
filing obligation arises and to cause the shelf registration to be
declared effective by the Securities and Exchange Commission on or prior
to 90 days after the obligation arises.
The exchange offer being made hereby, if commenced and completed within the time
periods described in this paragraph, will satisfy the requirements under the
senior preferred stockholders agreement listed in (1), (2) and (3) of this
paragraph.
If:
(1) WRC Media fails to file any of the registration statements required by
the senior preferred stockholders agreement on or before the date
specified for the filing; or
(2) any of the registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
its effectiveness; or
(3) WRC Media fails to complete the exchange offer within 30 business days
of the date specified for effectiveness with respect to the exchange
offer registration statement; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer restricted securities
during the periods specified in the preferred stockholders agreement
(each of the event referred to in clauses (1) through (4) above, a
"registration default"),
the holders of shares of the senior preferred stock will be entitled to receive
15.5% per annum for each week or portion of the week that the registration
default continues. Notwithstanding anything to the contrary set forth in the
certificate of designations,
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(1) upon filing of the exchange offer registration statement and/or, if
applicable, the shelf registration statement; or
(2) upon the effectiveness of the exchange offer registration statement
and/or, if applicable, the shelf registration statement; or
(3) upon completion of the exchange offer; or
(4) upon the filing of a post-effective amendment to the registration
statement or an additional registration statement that causes the
exchange offer registration statement and/or, if applicable, the shelf
registration statement, to again be declared effective or made usable;
the dividend rate shall return to 15%, before giving effect to any applicable
default dividend.
Even if the exchange offer for the old senior preferred stock is completed,
the remaining old senior preferred stockholders will have the following
additional registration rights with respect to old senior preferred stock. Under
the senior preferred stockholders agreement the DLJMB Investors and their
permitted transferees will be entitled to require WRC Media, Weekly Reader or
CompassLearning, as applicable, to register under the Securities Act of 1933:
(1) the old senior preferred stock and any other securities into which the
old senior preferred stock is exchangeable on two separate occasions; and
(2) the preferred stockholder warrants which are described under "The
Acquisition and Recapitalization," and the shares of the Weekly Reader
common stock or CompassLearning common stock into which the preferred
stockholder warrants are exchangeable on two separate occasions.
In addition, under the senior preferred stockholders agreement, the old
senior preferred stockholders will be entitled to "piggy back" registration
rights with respect to the old senior preferred stock, preferred stockholder
warrants and any securities of WRC Media, Weekly Reader or CompassLearning into
which the old senior preferred stock or preferred stockholder warrants are
convertible or exchangeable. The piggy back registration rights provide that
when WRC Media proposes to register any of its capital stock or rights under the
Securities Act of 1933 for sale in a public offering, including, without
limitation, in connection with its initial public offering, it will give written
notice to the senior preferred stockholders who hold registrable securities.
Upon an old senior preferred stockholder's written request to include its
registrable securities issued by WRC Media, Weekly Reader or CompassLearning
under the registration statement, WRC Media will use its best efforts to
register all of the registrable securities that the old senior preferred
stockholders have requested to be registered.
In addition to the registration rights outlined above, the new senior
preferred stockholders will have the following additional registration rights
with respect to new senior preferred stock. Under the senior preferred
stockholders agreement, the DLJMB Investors and their permitted transferees will
be entitled to require WRC Media, Weekly Reader or CompassLearning, as
applicable, to register under the Securities Act of 1933:
(1) the new senior preferred stock and the securities into which the new
senior preferred stock is exchangeable on two separate occasions; and
(2) the preferred stockholder warrants, described under "The Acquisition and
Recapitalization," and the shares of the Weekly Reader common stock or
CompassLearning common stock into which the preferred stockholder
warrants are exchangeable on two separate occasions.
Also, under the senior preferred stockholders agreement the new senior
preferred stockholders will be entitled to "piggy back" registration rights with
respect to the new senior preferred stock, the preferred stockholder warrants
and any securities of WRC Media, Weekly Reader or CompassLearning
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into which the new senior preferred stock or preferred stockholder warrants are
convertible or exchangeable. The piggy back registration rights provide that
when WRC Media proposes to register any of its capital stock or rights under the
Securities Act of 1933 for sale in a public offering, including, without
limitation, in connection with its initial public offering, it will give written
notice to the senior preferred stockholders who hold registrable securities.
Upon a senior preferred stockholder's written request to include its registrable
securities issued by WRC Media Weekly Reader or CompassLearning under the
registration statement, WRC Media will use its best efforts to register all of
the registrable securities that the senior preferred stockholders have requested
to be registered.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
The following is a discussion of material United States Federal income tax
consequences and other tax consequences of the acquisition, ownership and
disposition of the notes and the senior preferred stock. Unless otherwise
stated, this discussion is limited to the tax consequences to original
beneficial owners of the notes and the senior preferred stock who acquired the
old notes and the old senior preferred stock at their initial issuance and who
hold such notes and senior preferred stock as capital assets. This discussion
does not purport to be a comprehensive description of all tax considerations
that may be relevant to a particular investor and does not address specific tax
consequences that may be relevant to particular persons including, for example,
financial institutions, broker-dealers, insurance companies, tax-exempt
organizations, persons that have a functional currency other than the U.S.
dollar and persons in special situations, such as those who hold the notes or
the senior preferred stock as part of a straddle, hedge, conversion transaction
or other integrated investment. This discussion does not address U.S. Federal
alternative minimum tax consequences, and does not describe any tax consequences
arising under U.S. Federal gift and estate or other Federal tax laws or under
the tax laws of any state, local or foreign jurisdiction. This discussion is
based upon the Internal Revenue Code of 1986, as amended, the Treasury
Department regulations promulgated under the Internal Revenue Code, and
administrative and judicial interpretations of the Internal Revenue Code, all as
of the date hereof and all of which are subject to change, possibly on a
retroactive basis.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE U.S.
FEDERAL INCOME TAX CONSEQUENCES TO THEM, AS A RESULT OF THEIR INDIVIDUAL
CIRCUMSTANCES, FROM THE EXCHANGE OF THE OLD NOTES FOR THE NEW NOTES AND OF THE
OLD SENIOR PREFERRED STOCK FOR THE NEW SENIOR PREFERRED STOCK AND OF THE
OWNERSHIP AND DISPOSITION OF THE NEW NOTES AND THE NEW SENIOR PREFERRED STOCK
RECEIVED IN THE EXCHANGE OFFER, INCLUDING THE APPLICATION OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder that is a citizen or individual resident of
the United States, a U.S. domestic corporation or any other person that is
subject to U.S. Federal income tax on a net income basis in respect of its
investment in the notes or senior preferred stock, as applicable.
EXCHANGE OFFER
The exchange of old notes for new notes and old senior preferred stock for
new senior preferred stock, as applicable, in the exchange offer will not
constitute a taxable event for U.S. holders. A U.S. holder's holding period for
a new note or new senior preferred stock, as applicable, will include the
holding period for the old note or the old senior preferred stock exchanged
pursuant to the exchange offer, and the holder's adjusted basis in a new note or
new senior preferred stock will be the same as the holder's adjusted basis in
the old note or the old senior preferred stock. The new notes will have the same
U.S. Federal income tax characteristics as the old notes. The new senior
preferred stock will have the same U.S. Federal income tax characteristics as
the old senior preferred stock.
STATED INTEREST ON THE NOTES
Stated interest on a note will generally be includible in a U.S. holder's
gross income as ordinary income at the time it is accrued or received in
accordance with the U.S. holder's regular method of accounting for U.S. Federal
income tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE NOTES
A debt obligation that has an issue price that is less than its stated
redemption price at maturity by more than a DE MINIMIS amount will be treated as
issued with original issue discount for U.S. Federal
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income tax purposes. The stated redemption price at maturity of a debt
obligation is the sum of all payments to be made on the debt obligation that are
not "qualified stated interest" payments. "Qualified stated interest" generally
means stated interest that is unconditionally payable at least annually at a
single fixed rate or under a single formula. The semi-annual interest payments
on the notes should constitute qualified stated interest. Accordingly, the
stated redemption price at maturity of the notes should equal their principal
amount.
The issue price of a debt obligation is less than its stated redemption
price at maturity by more than a DE MINIMIS amount for this purpose if the
difference between the stated redemption price at maturity of the debt
obligation and its issue price is at least 0.25 percent of the stated redemption
price at maturity multiplied by the number of complete years to maturity. The
old notes were issued with original issuance discount in excess of a DE MINIMIS
amount. The amount of original issue discount on each old note was $38.15.
Because the old notes were issued with original issue discount in excess of
a DE MINIMIS amount, U.S. holders of the notes must generally include original
issue discount in gross income as interest for U.S. Federal income tax purposes
on an annual basis under a constant yield method without regard to the holder's
method of accounting for tax purposes. As a result, U.S. holders generally will
be required to include original issue discount in income in advance of the
receipt of some or all of the related cash payments. The amount of original
issue discount includible in income by a U.S. holder of a note is the sum of the
"daily portions" of original issue discount with respect to the note for each
day during the holder's taxable year on which it held the note. The daily
portion is determined by allocating to each day in any "accrual period" a pro
rata portion of the original issue discount allocable to that accrual period.
The accrual period for a note may be of any length and may vary in length over
the term of the note, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs on the first day
or the final day of an accrual period.
In general, the amount of original issue discount allocable to an accrual
period is an amount equal to the excess, if any, of (1) the product of the
note's "adjusted issue price" at the beginning of such accrual period and its
yield to maturity determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period, over
(2) the sum of any qualified stated interest allocable to the accrual period.
The following rules apply to determine original issue discount allocable to an
accrual period:
- if an interval between payments of qualified stated interest contains more
than one accrual period,
-- the amount of qualified stated interest payable at the end of the
interval is allocated on a pro rata basis to each accrual period in the
interval, and the adjusted issue price at the beginning of each accrual
period in the interval must be increased by the amount of any qualified
stated interest that has accrued prior to the beginning of the first day
of the accrual period but is not payable until the end of the interval;
- if the accrual period is the final accrual period,
-- the amount of original issue discount allocable to the final accrual
period is the difference between the amount payable at maturity other
than a payment of qualified stated interest, and the adjusted issue price
of the note at the beginning of the final accrual period; and
- if all accrual periods are of equal length, except for an initial short
accrual period,
-- the amount of original issue discount allocable to the initial short
accrual period may be computed under any reasonable method.
The adjusted issue price of a note at the beginning of any accrual period is
equal to its issue price increased by the accrued original issue discount for
each prior accrual period and reduced by any prior
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payments made on such note that were not qualified stated interest payments.
Under these rules, U.S. holders of notes with original issue discount will be
required to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
OPTIONAL REDEMPTION OF NOTES
For purposes of computing the yield to maturity on the notes, we will be
deemed to exercise our option to redeem the notes if such deemed exercise could
produce a lower yield on the notes than the stated yield to maturity. Our option
to redeem the notes prior to their stated maturity date should not affect the
computation of the amount of original issue discount on the notes.
REDEMPTION PREMIUM ON THE SENIOR PREFERRED STOCK AND ADDITIONAL PREFERRED SHARES
Under Section 305 of the Internal Revenue Code and the applicable Treasury
Regulations, if the redemption price of preferred stock exceeds its issue price
by more than a DE MINIMIS amount, then the redemption premium will be treated as
a series of constructive distributions over the life of the preferred stock and
taken into account under principles similar to the principles applicable to the
taxation of original issue discount on the notes. The issue price of preferred
stock is less than its redemption price by more than a DE MINIMIS amount if the
difference between the redemption price and the issue price is at least
0.25 percent of the redemption price of the preferred stock multiplied by the
number of complete years to mandatory redemption. The redemption premium on each
share of senior preferred stock is approximately $3.92, which is in excess of a
DE MINIMIS amount. The amount of each constructive distribution will be treated
in the same manner as actual dividends as described below under "Distributions
on the Senior Preferred Stock."
The issue price of an additional preferred share will be the fair market
value of the share on the date of distribution. If the redemption price of an
additional preferred share exceeds the issue price of the share by more than a
DE MINIMIS amount, then a U.S. holder thereof would be required to treat the
excess as a series of constructive distributions over the term of the additional
preferred share, as described above, which distributions would be treated in the
same manner as distributions described below under "Distributions on the Senior
Preferred Stock." Because additional preferred shares may be issued at different
times, it is possible that a U.S. holder would own additional preferred shares
with different issue prices. Consequently, if WRC Media had current or
accumulated earnings and profits in such a case, a U.S. holder would be treated
as having received constructive dividends on its additional preferred shares in
differing amounts depending on the issue price of each additional preferred
share, and those shares would not be fungible with each other or with the old
senior preferred stock purchased in the transactions described under "The
Acquisition and Recapitalization" due to their differing U.S. Federal income tax
characteristics. The term "senior preferred stock" shall hereinafter mean,
unless otherwise indicated, the senior preferred stock and the additional
preferred shares that shall have been issued with respect to the senior
preferred stock. As a result, WRC Media might not be able to determine the
proper amount of income to be accrued for any particular share of senior
preferred stock. Moreover, purchasers of senior preferred stock in the secondary
market might not be able to determine the proper amount of income to be accrued
with respect to the stock.
DISTRIBUTIONS ON THE SENIOR PREFERRED STOCK
Distributions on the senior preferred stock will constitute dividends
taxable as ordinary income for U.S. Federal income tax purposes to the extent of
the current or accumulated earnings and profits of WRC Media as determined under
U.S. Federal income tax principles. Any dividends paid to U.S. holders that are
U.S. corporations may qualify for the dividends-received deduction.
To the extent, if any, that a U.S. holder receives a distribution on its
senior preferred stock that exceeds the current and accumulated earnings and
profits of WRC Media, the distribution will be
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treated first as a non-taxable return of capital reducing the holder's basis in
its shares of senior preferred stock. Any distribution in excess of the holder's
basis in its senior preferred stock will be treated as capital gain.
If a distribution with respect to the senior preferred stock is paid in the
form of additional preferred shares, (1) the amount of the distribution will be
the fair market value of the additional preferred shares as of the date of
distribution, and (2) the distribution will be treated as described in the
preceding two paragraphs.
DISPOSITION OF THE NOTES OR THE SENIOR PREFERRED STOCK
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a note or senior preferred stock, as applicable, a U.S. holder
generally will recognize taxable gain or loss equal to the difference between
(1) the sum of cash plus the fair market value of all other property received on
such disposition (less, in the case of a note, any accrued interest which would
be taxable as such) and (2) the beneficial owner's adjusted tax basis in the
note or the senior preferred stock, as applicable. Special rules may apply to
any redemptions of the senior preferred stock which may result in the amount
paid being treated as a dividend for U.S. Federal income tax purposes.
A U.S. holder's adjusted tax basis in a note generally will equal the amount
of the original issue price of the old notes net of accrued interest, less any
principal payments received by the holder. A U.S. holder's initial tax basis in
the senior preferred stock other than additional preferred shares will generally
be the price the holder paid for the old senior preferred stock. A U.S. holder's
initial tax basis in an additional preferred share will be the fair market value
of the additional preferred share on the date of distribution. Thereafter, the
initial tax basis in the senior preferred stock or additional preferred shares
will be (1) increased by the amount, if any, of any constructive distributions
the holder is treated as having received pursuant to the rules described above
under "Redemption Premium on the Senior Preferred Stock and Additional Preferred
Shares;" and (2) decreased by the portion of any actual or constructive
distribution that is treated as a tax-free recovery of basis as described above
under "Distributions on the Senior Preferred Stock."
Gain or loss recognized on the disposition of a note or senior preferred
stock, as applicable, generally will be capital gain or loss, and will be
long-term capital gain or loss if, at the time of the disposition, the U.S.
holder's holding period for the note or the senior preferred stock, as
applicable, is more than 12 months. The maximum Federal long-term capital gain
rate is 20% for noncorporate U.S. holders and 35% for corporate U.S. holders.
The deductibility of capital losses by U.S. holders is subject to limitations.
U.S. FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
EXCHANGE OFFER
The exchange of old notes for new notes and old senior preferred stock for
new senior preferred stock in the exchange offer will not constitute a taxable
event for a holder that is, with respect to the United States, a foreign
corporation or non-resident alien individual. A non-U.S. holder's holding period
for a new note or new senior preferred stock, as applicable, will include the
holding period for the old note or the old senior preferred stock exchanged
pursuant to the exchange offer, and the holder's adjusted basis in a new note or
new senior preferred stock will be the same as the holder's adjusted basis in
the old note or the old senior preferred stock. The new notes will have the same
U.S. Federal income tax characteristics as the old notes. The new senior
preferred stock will have the same U.S. Federal income tax characteristics as
the old senior preferred stock.
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PAYMENTS OF INTEREST ON THE NOTES
Subject to the discussion of backup withholding below, payments of principal
and interest on the notes by us or any of our agents to a non-U.S. holder will
not be subject to withholding of U.S. Federal income tax, provided that, with
respect to payments of interest, (1) the non-U.S. holder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of stock of any of WRC Media, Weekly Reader and CompassLearning and is
also not a controlled foreign corporation related to any of these entities
through stock ownership and (2) the beneficial owner provides a statement
signed, under penalties of perjury, that includes its name and address and
certifies that it is a non-U.S. holder in compliance with applicable
requirements. New Treasury Regulations would modify the certification
requirements on payments of interest made after December 31, 2000.
DISTRIBUTIONS ON THE SENIOR PREFERRED STOCK
Dividends on the senior preferred stock, including dividends in the form of
additional preferred shares and constructive dividends, that are actually or
deemed paid to a non-U.S. holder of the senior preferred stock generally will be
subject to withholding tax at a rate of 30% or a lower rate if specified by an
applicable income tax treaty. Currently, for purposes of determining whether tax
is to be withheld at a rate of 30% or at a reduced rate, WRC Media ordinarily
will presume that dividends paid on or before December 31, 2000 to an address in
a foreign country are paid to a resident of such country absent knowledge that
the presumption is not warranted. After December 31, 2000, a non-U.S. holder
will be required to properly certify its entitlement to the treaty benefits on
Internal Revenue Service Form W-8BEN or any other appropriate successor forms.
DISPOSITION OF THE NOTES OR THE SENIOR PREFERRED STOCK
No withholding of U.S. Federal income tax will be required with respect to
any gain or income realized by a non-U.S. holder upon the sale, exchange,
redemption, retirement at maturity or other disposition of a note or senior
preferred stock, as applicable. A non-U.S. holder will not be subject to U.S.
Federal income tax on gain realized on the sale or other disposition of a note
or senior preferred stock, as applicable, unless (1) the non-U.S. holder is an
individual who is present in the United States for a period or periods
aggregating 183 or more days in the taxable year of the disposition, and either
the holder has a "tax home" in the United States or the disposition is
attributed to an office or other fixed place of business maintained by the
holder in the United States, or (2) the gain or income is effectively connected
with the conduct by the non-U.S. holder of a trade or business in the United
States.
Notwithstanding the foregoing, a non-U.S. holder generally will be subject
to U.S. Federal income tax on gain recognized on the sale, exchange or
disposition of senior preferred stock if WRC Media is a "United States real
property holding corporation" for U.S. Federal income tax purposes at any time
within the shorter of the five-year period preceding the disposition or the
holder's holding period for the senior preferred stock. WRC Media does not
believe that it currently is a "United States real property holding
corporation," and it expects that it will not become one in the future, although
there can be no assurance in that regard.
EACH NON-U.S. HOLDER IS URGED TO CONSULT THE HOLDER'S TAX ADVISOR AS TO THE
APPLICATION OF THE NEW REGULATIONS AND THE PROCEDURES FOR ESTABLISHING AN
EXEMPTION FROM WITHHOLDING TAX.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We are required to file information returns with the Internal Revenues
Service for non-exempt U.S. holders with respect to:
- payments made in respect of a note including original issue discount;
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- payment of the proceeds from the sale of a note;
- dividends received with respect to senior preferred stock; and
- payment of the proceeds from the sale of senior preferred stock.
In addition, non-exempt U.S. holders may be subject to a 31% backup withholding
tax in respect of such payments if they:
- fail to furnish or certify their correct taxpayer identification number to
the payor in the manner required;
- are notified by the Internal Revenue Service that they have failed to
report payments of interest and dividends properly; or
- under certain circumstances, fail to certify, under penalties of perjury,
that they have not been notified by the Internal Revenue Service that they
are subject to backup withholding for failure to report interest and
dividend payments.
Non-U.S. holders of the notes and the senior preferred stock may be required to
comply with applicable certification procedures to establish that they are not
U.S. holders in order to avoid the application of the information reporting
requirements and backup withholding tax. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against the person's
U.S. Federal income tax liability provided that the required information is
furnished to the Internal Revenue Service.
EACH NON-U.S. HOLDER IS URGED TO CONSULT THE HOLDER'S TAX ADVISOR AS TO THE
APPLICATION OF THE NEW TREASURY REGULATIONS APPLICABLE TO PAYMENTS MADE AFTER
DECEMBER 31, 2000 AND THE PROCEDURES FOR ESTABLISHING AN EXEMPTION FROM BACKUP
WITHHOLDING.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes or new senior preferred stock for
its own account under the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes or new senior
preferred stock. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of new notes
or new senior preferred stock received in exchange for old notes or old senior
preferred stock where the old notes or old senior preferred stock were acquired
as a result of market-making activities or other trading activities. We have
agreed that for a period of one year after the expiration date, we will make
available a prospectus meeting the requirements of the Securities Act of 1933 to
any broker-dealer for use in connection with any resale. In addition, until
, all dealers effecting transactions in the new notes or the new senior
preferred stock may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes or new senior
preferred stock by broker-dealers. The new notes or the new senior preferred
stock received by broker-dealers for their own account under the exchange offer
may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or the new senior preferred stock or a combination of
these methods of resale, at market prices prevailing at the time of resale, at
prices related to the prevailing market prices or negotiated prices. Any of
these resales may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any of these broker-dealers or the purchasers of any of these new notes or
new senior preferred stock. Any broker-dealer that resells the new notes or the
new senior preferred stock that were received by it for its own account under
the exchange offer and any broker or dealer that participates in a distribution
of the new notes or new senior preferred stock may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933 and any profit on
any of these resales of the new notes or new senior preferred stock and any
commissions or concessions received by any of these persons may be deemed to be
underwriting compensation under the Securities Act of 1933. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933.
For a period of one year after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests these documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the reasonable fees and expenses of one counsel for the holders of
the old notes and the old senior preferred stock) other than commissions or
concessions of any broker-dealers and will indemnify the holders of the old
notes and the old senior preferred stock (including any broker-dealers) against
liabilities, including, without limitation, liabilities under the Securities Act
of 1933.
LEGAL MATTERS
Certain legal matters with respect to the new notes and the new senior
preferred stock offered by this registration statement will be passed upon for
us by Cravath, Swaine & Moore, New York, New York. Certain Minnesota legal
matters will be passed upon for us by Leonard, Street and Deinard Professional
Association, Mineapolis, Minnesota, and certain Wisconsin legal matters will be
passed on for us by Foley & Larder, Milwaukee, Wisconsin. Certain legal matters
with respect to the new notes and the new senior preferred stock offered hereby
will be passed upon for the holders by Latham & Watkins, New York, New York and
Davis Polk & Wardwell, New York, New York.
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INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of WRC Media, Inc. and subsidiaries as
of December 31, 1999 and for the period from May 14, 1999 to December 31, 1999
and the statement of operations and cash flows as well as the consolidated
financial statements of Weekly Reader as of December 31, 1999 and for the period
then ended and the financial statements of CompassLearning as of December 31,
1999 and for the period from January 1, 1999 through July 13, 1999, as
predecessor, and for the period from July 14, 1999 through December 31, 1999,
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report, and are included in this registration statement in
reliance upon the authority of said firm as experts in giving said report.
The consolidated financial statements of Weekly Reader as of December 31,
1998 and for each of the two years in the period ended December 31, 1998, and
the consolidated financial statements of American Guidance as of June 30, 1998
and for each of the two years in the period ended June 30, 1998, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this registration statement,
and are included in reliance upon the reports of the firm given upon their
authority as experts in accounting and auditing.
The financial statements of JLC Learning Corporation, prior to being
acquired by WRC Media Inc., predecessor of CompassLearning, as of December 31,
1998 and for each of the two years in the period ended December 31, 1998,
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
In September, 1999, pursuant to authorization of its Board of Directors,
CompassLearning, formerly known as JLC Learning Corporation, dismissed the firm
of PricewaterhouseCoopers LLP, the former accountants of CompassLearning, as its
auditor and retained Arthur Andersen LLP.
On December 13, 1999, pursuant to authorization of its Board of Directors,
Weekly Reader dismissed the firm of Deloitte & Touche LLP, the former
accountants of Weekly Reader, as its auditor and retained Arthur Andersen LLP.
During the fiscal years ended December 31, 1997 and 1998, and the subsequent
interim periods immediately preceding the change in accountants, there were no
disagreements with PricewaterhouseCoopers LLP or Deloitte & Touche LLP on any
matter of accounting principles or practice, financial statement disclosure, or
auditing scope or procedure, which if not resolved to the satisfaction of
PricewaterhouseCoopers LLP or Deloitte & Touche LLP would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports on CompassLearning's, Weekly Reader's or American Guidance's
financial statements. During the fiscal years ended December 31, 1997 and 1998,
and the subsequent interim periods immediately preceding the change in
accountants, there were no reportable events, as that term is used in
Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the Securities Exchange Act
of 1934.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
WRC MEDIA INC. AND SUBSIDIARIES (CO-ISSUER OF SENIOR
SUBORDINATED NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP..................................................... F-3
Consolidated Balance Sheet as of December 31, 1999........ F-4
Consolidated Statement of Operations for the period from
May 14, 1999 (inception) to December 31, 1999........... F-5
Consolidated Statement of Stockholders' Equity from
May 14, 1999 (inception) to December 31, 1999........... F-6
Consolidated Statement of Cash Flows for the period from
May 14, 1999 (inception) through December 31, 1999...... F-7
Notes to Consolidated Financial Statements................ F-8
Condensed Consolidated Balance Sheets as of December 31,
1999 and March 31, 2000 (Unaudited)..................... F-25
Condensed Consolidated Statement of Operations for the
Three Months Ended March 31, 2000 (Unaudited)........... F-26
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2000 (Unaudited)........... F-27
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................. F-28
WEEKLY READER CORPORATION AND SUBSIDIARIES (CO-ISSUER OF
SENIOR SUBORDINATED NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP..................................................... F-29
Report of Independent Auditors--Deloitte & Touche LLP..... F-30
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-31
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999........................ F-32
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997, 1998 and 1999............ F-33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999........................ F-34
Notes to Consolidated Financial Statements................ F-35
Condensed Consolidated Balance Sheets as of December 31,
1999 and March 31, 2000 (Unaudited)..................... F-50
Condensed Consolidated Statement of Operations for the
Three Months Ended March 31, 1999 and 2000
(Unaudited)............................................. F-51
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1999 and 2000
(Unaudited)............................................. F-52
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................. F-53
COMPASSLEARNING, INC. (CO-ISSUER OF SENIOR SUBORDINATED
NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP..................................................... F-54
Report of Independent Accountants--PricewaterhouseCoopers
LLP..................................................... F-55
Balance Sheets as of December 31, 1998 and 1999........... F-56
Statements of Operations and Comprehensive Loss for the
Years Ended December 31, 1997, 1998, for the period from
January 1, 1999 to July 13, 1999 and for the period from
July 14, 1999 to December 31, 1999...................... F-57
Statements of Stockholders' Deficit for the Years Ended
December 31, 1997, 1998 and, for the period from
January 1, 1999 to July 13, 1999 and for the period from
July 14, 1999 to December 31, 1999...................... F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and, for the period from January 1, 1999 to
July 13, 1999 and for the period from July 14, 1999 to
December 31, 1999....................................... F-59
Notes to Financial Statements............................. F-60
Condensed Balance Sheets as of December 31, 1999 and
March 31, 2000 (Unaudited).............................. F-80
Condensed Statement of Operations for the Three Months
Ended March 31, 1999 and 2000 (Unaudited)............... F-81
Condensed Statement of Cash Flows for the Three Months
Ended March 31, 1999 and 2000 (Unaudited)............... F-82
Notes to Condensed Financial Statements (Unaudited)....... F-83
AMERICAN GUIDANCE SERVICE, INC. (SIGNIFICANT SUBSIDIARY
ACQUIRED IN 1998):
Report of Independent Auditors--Deloitte & Touche LLP..... F-84
Consolidated Balance Sheet as of June 30, 1998............ F-85
Consolidated Statements of Income for the Years Ended June
30, 1997 and 1998....................................... F-86
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1997 and 1998...................... F-87
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997 and 1998.................................. F-88
Notes to Consolidated Financial Statements................ F-89
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants--WRC Media Inc.
and Subsidiaries........................................ S-1
Report of Independent Public Accountants--Weekly Reader
and Subsidiaries........................................ S-2(a)
Independent Auditors' Report--Weekly Reader and
Subsidiaries............................................ S-2(b)
Schedule I--WRC Media Inc. Condensed Financial Information
of Registrant as of December 31, 1999 and for the period
from May 14, 1999 (inception) through December 31,
1999.................................................... S-3
Schedule II (a)--WRC Media Inc. Valuation and Qualifying
Accounts for the period from May 14, 1999 (inception)
through December 31, 1999............................... S-6
Schedule II (b)--Weekly Reader Corporation Valuation and
Qualifying Accounts for the years ended December 31,
1997, 1998 and 1999..................................... S-7
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted. In
addition, WRC Media, Inc. has no operations and its ability to service its debt
is dependent on the operations of its subsidiaries. Each of the Company's
subsidiaries has guaranteed, on a joint and several basis, the debt obligations
of WRC Media, Inc. Accordingly, the separate financial statements of the
subsidiary guarantors have not been included in the accompanying financial
statements.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WRC Media Inc.:
We have audited the accompanying consolidated balance sheet of WRC
Media Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the period from May 14, 1999 (inception) through December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WRC Media, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the period from May 14, 1999 through December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 20, 2000
F-3
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,521
Accounts receivable, net of allowance for doubtful
accounts of $2,306...................................... 47,394
Inventories, net.......................................... 14,682
Prepaid expenses.......................................... 2,961
Other current assets...................................... 20,258
--------
Total current assets.................................. 100,816
Property and equipment, net................................. 7,898
Purchased software, net..................................... 6,566
Goodwill, net............................................... 295,384
Deferred financing costs, net............................... 7,843
Deferred tax asset.......................................... --
Identified intangible assets, net........................... 153,676
Other assets................................................ 46
--------
Total assets.......................................... $572,229
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,999
Accrued payroll, commissions and benefits................. 10,917
Current portion of deferred revenue....................... 35,961
Other accrued liabilities................................. 38,990
Current portion of long-term debt......................... 2,939
--------
Total current liabilities............................. 110,806
Deferred revenue, net of current portion.................... 1,780
Due to related party........................................ 2,946
Long-term debt.............................................. 273,617
Other long-term liabilities................................. 14
--------
Total liabilities..................................... 389,163
--------
15% Series B preferred stock subject to redemption,
including accrued dividends and warrants (liquidation
preference $76,406)....................................... 64,767
--------
Warrants on preferred stock................................. 11,751
--------
Common stock subject to redemption.......................... 1,265
--------
Stockholders' equity:
Common stock, ($.01 par value, 20,000,000 shares
authorized; 6,855,853 shares outstanding)............... 69
Additional paid-in capital................................ 126,063
Accumulated deficit....................................... (20,849)
--------
Total stockholders' equity............................ 105,283
--------
Total liabilities and stockholders' equity............ $572,229
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated balance sheet.
F-4
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Sales, net.................................................. $ 50,570
Cost of goods sold.......................................... 16,102
--------
Gross profit.......................................... 34,468
Operating costs and expenses:
Sales and marketing....................................... 14,030
Research and development.................................. 3,861
Distribution, circulation and fulfillment................. 1,959
Editorial................................................. 1,374
General and administrative................................ 5,571
Write-off of in-process research and development costs.... 9,000
Depreciation and amortization............................. 6,243
--------
Loss from operations.................................. (7,570)
Interest expense, including amortization of deferred
financing costs........................................... (8,457)
Other, net.................................................. 32
--------
Loss before extraordinary item........................ (15,995)
Extraordinary item--writeoff of deferred financing costs.... (3,336)
--------
Net loss.............................................. $(19,331)
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-5
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM MAY 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, May 14, 1999.................................... -- $ -- $ -- $ --
Issuance of common stock, net.......................... 6,649 67 122,354 --
Value of stock issued in connection with senior
notes................................................ 207 2 3,709 --
Net loss............................................... -- -- -- (19,331)
Preferred stock dividends.............................. -- -- -- (1,406)
Accretion of preferred stock........................... -- -- -- (112)
----- ---- -------- --------
Balance, December 31, 1999............................... 6,856 $ 69 $126,063 $(20,849)
===== ==== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-6
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (19,331)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization........................... 9,067
Writeoff of in-process research and development costs... 9,000
Extraordinary item...................................... 3,336
Amortization of deferred financing fees................. 555
Provision for doubtful accounts receivable.............. 336
Changes in assets and liabilities, net of assets
acquired-
Decrease in accounts receivable....................... 9,018
Decrease in inventories............................... 34
Increase in prepaid expenses and other current
assets.............................................. (882)
Increase in other intangibles......................... (864)
Increase in accounts payable.......................... 3,345
Increase in due to related party...................... 2,161
Decrease in current and noncurrent deferred revenue... (5,189)
Increase in noncurrent assets......................... (46)
Increase in current and noncurrent accrued
liabilities......................................... 4,964
---------
Net cash provided by operating activities........... 15,504
---------
Cash flows from investing activities:
Capital expenditures...................................... (700)
Payments for acquisitions of business, net of cash
acquired................................................ (466,919)
---------
Net cash used in investing activities............... (467,619)
---------
Cash flows from financing activities:
Net proceeds from long-term debt.......................... 303,894
Repayments of long-term debt.............................. (27,338)
Increase in deferred financing fees....................... (11,317)
Proceeds from sale of preferred stock..................... 75,000
Proceeds from issuance of common stock.................... 123,686
Proceeds from issuance of warrants........................ 3,711
---------
Net cash provided by financing activities........... 467,636
---------
Increase in cash and cash equivalents............... 15,521
Cash and cash equivalents, beginning of period.............. --
---------
Cash and cash equivalents, end of period.................... $ 15,521
=========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-7
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
The accompanying consolidated financial statements include the accounts of
WRC Media Inc. and its subsidiaries ("WRC")--Weekly Reader Corporation, and
subsidiaries ("Weekly Reader") and CompassLearning, Inc. (formerly known as
Jostens Learning Corporation, and formerly EAC I) ("CompassLearning"). The term
"Company" refers to WRC and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in the accompanying consolidated
financial statements.
WRC was incorporated on May 14, 1999. On July 14, 1999, WRC acquired
CompassLearning in a business combination accounted for as a purchase.
The total cost of the acquisition of Compass Learning was $61,935 (including
$2,687 of acquisition costs), which was funded out of cash and assumption of
liabilities. The purchase price was allocated on a preliminary basis, which is
subject to adjustment, resulting from identification of intangibles, which may
be retroactively reclassified out of goodwill. The Company expects to finalize
their allocation of the purchase price by July 1, 2000. The Company has
preliminarily allocated the purchase price to the assets acquired and the
liabilities assumed based upon their fair values as follows:
<TABLE>
<S> <C>
Net liabilities assumed..................................... $(6,290)
Purchased software.......................................... 7,430
In-process research and development......................... 9,000
Other intangible assets..................................... 24,700
Goodwill.................................................... 27,095
-------
$61,935
=======
</TABLE>
On November 17, 1999, WRC completed the recapitalization and purchase of
Weekly Reader. As a result of these transactions, WRC owns 94.9% and
PRIMEDIA INC. owns 5.1% of the common stock of Weekly Reader Corporation.
The recapitalization and purchase of Weekly Reader consisted of the
following:
- The issuance of $152,000 in aggregate principal amount of 12 3/4% Senior
Subordinated Notes due 2009 by WRC, Weekly Reader and CompassLearning.
- WRC lending Weekly Reader $112,363 of the principal amount of the 12 3/4%
Senior Subordinated Notes.
- The completion of the senior bank credit facility by WRC, Weekly Reader
and Compass Learning as borrowers, comprising of a $30,000 revolving
credit facility, a $31,000 term loan and a $100,000 term loan.
- The issuance of $75,000 of 15% Series B Preferred Stock by WRC and the
related issuance of Weekly Reader Preferred Stock to WRC, with identical
terms to the WRC preferred stock.
- The purchase by Weekly Reader of 71.7% of its common stock outstanding
from PRIMEDIA, Inc. for $287,363.
- The purchase by WRC for $107,638 of 94.9% of the remaining 28.3% of Weekly
Reader's common stock outstanding.
F-8
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION (CONTINUED)
The acquisition of 94.9% of the stock of Weekly Reader by WRC has been
reflected as a business transaction accounted for as a purchase. The total cost
of the acquisition, including transaction costs aggregated $409,555. A
preliminary allocation of the purchase cost has been allocated to major
categories of assets and liabilities acquired based on estimated fair market
value as follows-
<TABLE>
<S> <C>
Net assets acquired (including acquired goodwill)........... $159,446
Identified intangibles...................................... 87,133
Goodwill.................................................... 162,976
--------
$409,555
========
</TABLE>
The actual allocation of purchase cost will be based upon formal appraisals
still to be completed and the resulting effect on loss from operations may
differ from these amounts. The Company expects to finalize its allocation of the
purchase price by September 30, 2000.
Unaudited proforma information, assuming that the acquisition of
CompassLearning and the recapitalization and acquisition of Weekly Reader had
occurred on January 1, 1999, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Net sales................................................... $214,088
Gross profit................................................ 148,844
Income from operations...................................... 12,557
Net loss.................................................... (21,718)
</TABLE>
The unaudited pro forma information is presented for informational purposes
only and does not purport to present what the results of operations would have
been had the acquisition of CompassLearning and the acquisition and
recapitalization of Weekly Reader, in fact, occurred on January 1, 1999 or to
project the results of operations for any future period.
BUSINESS
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 70 years.
The Company's customers are primarily concentrated within the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
F-9
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) basis. The Company periodically evaluates the
realizability of inventories and adjusts its allowance for excess or obsolete
inventory as necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying values of cash, accounts receivable, and
accounts payable approximate fair value based on the short-term nature of these
financial instruments.
The carrying values of the Company's Senior Subordinated Notes, Senior Bank
Credit Facilities and Series B 15% Preferred Stock are assumed to approximate
the market value as these instruments were issued in the fourth quarter of 1999.
MARKETABLE SECURITIES
The Company classifies its investment securities as available for sale.
Accordingly, the investment is recorded at fair value with unrealized gains or
losses, net of the related tax effect, excluded from income and reported as
other comprehensive income (loss).
SOFTWARE DEVELOPMENT COSTS
Research and development ("R&D") costs are charged to expense when incurred.
The Company capitalizes software development costs by project commencing when
technological feasibility is established and concluding when the product is
ready for commercial release. Additionally, the Company capitalizes acquired
technologies that meet the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 86 "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE
SOLD, LEASED OR OTHERWISE MARKETED". The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic product lives and changes in software and hardware
technology. Software development costs are amortized on a straight-line basis
over four years or the expected life of the product, whichever is less. The
Company periodically evaluates the net realizable value of capitalized software
development costs based on factors such as budgeted sales, product development
cycles and management's market emphasis.
GOODWILL
Goodwill represents the excess of the purchase price of companies acquired
over the fair value of their net assets at the acquisition date. Goodwill
associated with the acquisition of CompassLearning is being amortized on a
straight-line basis over 7 years while goodwill associated with the acquisition
of Weekly Reader is being amortized on a straight-line basis over 40 years.
Goodwill amortization charged to operations from the period from May 14, 1999
(inception) through December 31, 1999 was $2,271.
F-10
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING FEES
Deferred financing fees are related to direct costs paid by the Company in
connection with their financing agreements. These costs are deferred and are
being amortized on a straight-line basis over the term of the related debt.
Amortization expense charged to operations for the period from November 17, 1999
(the date of the financing) through December 31, 1999 was $555.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over the
estimated useful lives of the related assets. Depreciation is provided
principally on the straight-line method for financial reporting purposes and on
accelerated methods for income tax purposes. Leasehold improvements are
depreciated over the shorter of their useful life or lease term.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
in accordance with SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Under SFAS No. 121,
long-lived assets and identifiable intangible assets, including goodwill, are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be fully recoverable. An impairment loss is
recognized if the sum of the expected long-term undiscounted cash flows is less
than the carrying amount of the long-lived assets being evaluated.
REVENUE RECOGNITION
Subscriptions are recorded as deferred revenue when received and recognized
as income over the term of the subscription. Sales of books, tests and other
items are generally recognized as revenue upon shipment, net of an allowance for
returns.
The Company recognizes software-based product revenues in accordance with
the provisions of Statement of Position ("SOP") 97-2, "SOFTWARE REVENUE
RECOGNITION," as amended by SOP 98-4, "DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN
PROVISIONS" of SOP 97-2. Under SOP 97-2, the Company recognizes revenue for
hardware and software sales upon shipment of the product, provided collection of
the receivable is probable, payment is due within one year and the fee is fixed
or determinable. If an acceptance period is required, revenues are recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period. If significant post-delivery obligations exist or if a product is
subject to customer acceptance, revenues are deferred until no significant
obligations remain or acceptance has occurred. Revenue from service contracts,
instruction and user training is recognized ratably as the services are
performed and post-contract support is recognized ratably over the related
contract. Deferred revenue represents the Company's obligation to perform under
signed contracts.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on vendor specific objective evidence of its
fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
F-11
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Several of the Company's customers are subject to fiscal funding
requirements. If the funding requirements are subject to governmental approval,
the likelihood of cancellation is assessed. If the likelihood of cancellation is
assessed as remote, revenue is recognized. If the likelihood of cancellation is
assessed as other than remote, revenue is deferred. If the funding requirements
are subject to non-governmental approval, revenue is deferred and recognized in
accordance with the provisions of SOP 97-2.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES", which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance is required to offset any net deferred tax
assets if, based upon the available evidence, it is more likely than not that
some or all of the deferred tax asset will not be realized.
ADVERTISING
Advertising costs are expensed the first time the advertising takes place,
except for direct-response advertising, the primary purpose of which is to
elicit sales from customers who can be shown to have responded specifically to
the advertising and that results in probable future economic benefits. Direct-
response advertising consists of product promotional mailings, catalogs and
subscription promotions. These direct-response advertising costs are capitalized
as assets and amortized over the estimated period of future benefit using a
ratio of current period revenues to total current and estimated future period
revenues. The amortization periods range from six months to twelve months
subsequent to the promotional event. Amortization of direct-response advertising
costs is included in marketing and selling expenses on the accompanying
statements of consolidated operations and accumulated deficit. Direct response
advertising costs of approximately $2,700 at December 31, 1999, are included in
other non-current assets on the accompanying consolidated balance sheets, are
net of accumulated amortization of approximately $9,400 at December 31, 1999.
Advertising and promotion expense, which includes amortization of direct
response advertising was approximately $2,429 for the period from May 14, 1999
(inception) to December 31, 1999.
SEGMENT REPORTING
The Company has determined that it has four reportable segments in
accordance with SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION". These four segments are based on the operating reports
that are reviewed by the chief decision-maker, which is based upon the Company's
operating subsidiaries. These segments are reviewed on an individual basis on
net sales, gross profit and Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) only. The Company does not track individual balance sheet
information for its reportable segments and, therefore, has not provided
separate balance sheet and cash flow information for each of the reportable
segments.
F-12
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment information for the period from May 14, 1999 (inception) through
December 31, 1999 and for the three months ended March 31, 2000 is as follows:
<TABLE>
<CAPTION>
NET GROSS
PERIOD ENDING DECEMBER 31, 1999 SALES PROFIT EBITDA
- ------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Weekly Reader.................................... $ 8,764 $ 7,488 $ 4,952
World Almanac.................................... 6,304 4,154 1,818
American Guidance................................ 3,724 2,707 303
------- ------- -------
Sub Total.................................. 18,792 14,349 7,073
CompassLearning.................................. 31,778 20,119 4,417
WRC Media Corporate.............................. -- -- (961)
------- ------- -------
Total.................................... $50,570 $34,468 $10,529
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NET GROSS
THREE MONTHS ENDING MARCH 31, 2000 SALES PROFIT EBITDA
- ------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Weekly Reader.................................... $10,460 $ 8,581 $ 2,116
World Almanac.................................... 13,308 8,874 3,436
American Guidance................................ 11,940 8,550 3,675
------- ------- -------
Sub Total.................................. 35,708 26,005 9,227
CompassLearning.................................. 12,731 6,795 (2,707)
WRC Media Corporate.............................. -- -- --
------- ------- -------
Total...................................... $48,439 $32,800 $ 6,520
======= ======= =======
</TABLE>
3. INVENTORIES
Inventories at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Raw materials............................................... $ 1,183
Finished goods, net......................................... 13,499
-------
Inventories, net........................................ $14,682
=======
</TABLE>
4. PURCHASED SOFTWARE
Purchased software at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Purchased software.......................................... $7,430
Less--accumulated amortization.............................. (864)
------
Purchased software, net................................. $6,566
======
</TABLE>
Amortization of purchased software and capitalized software development
costs are included in cost of products sold.
F-13
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets consist of identified intangible assets
resulting from the acquisitions described in Note 1. As of December 31, 1999,
identified intangible assets consisted of the following:
<TABLE>
<CAPTION>
AMOUNT LIFE
-------- --------------
<S> <C> <C>
Customer lists.................................... $ 62,911 7 to 9 Years
Trademarks........................................ 49,991 1 1/2 to 40
Years
Copyrights........................................ 14,633 8 Years
Product titles.................................... 13,475 7 Years
Pre-publishing costs.............................. 5,952 Substantially
all up to 5
years
Tradename......................................... 3,520 4 Years
Workforce in place................................ 2,980 3 Years
Direct response advertising....................... 3,877 1 Year
Non-compete agreements............................ 1,107 2 Years
Databases......................................... 560 8 Years
Other............................................. 61 4 to 10 Years
--------
Total......................................... 159,067
Less- Accumulated amortization.................... (5,391)
--------
Identified intangible assets, net............. $153,676
========
</TABLE>
6. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT LIFE
-------- -------------
<S> <C> <C>
Land.................................................. $ 707
Computer equipment.................................... 2,688 3 Years
Leasehold improvements................................ 833 3 Years
Furniture............................................. 690 3 to 10 Years
Machinery and equipment............................... 2,152 3 to 10 Years
Internal use software................................. 1,368 5 Years
------
Total............................................. 8,438
Less- Accumulated amortization........................ (540)
------
Property and equipment, net....................... $7,898
======
</TABLE>
F-14
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Rabbi Trust (Note 18)....................................... $18,220
Royalties................................................... 2,275
Accrued acquisition costs................................... 6,544
Accrued interest payable.................................... 4,038
Customer deposits........................................... 653
Pension liability........................................... 1,687
Taxes payable............................................... 547
Other....................................................... 5,026
-------
Other accrued liabilities............................... $38,990
=======
</TABLE>
8. LONG-TERM DEBT
At December 31, 1999, long-term debt consisted of the following:
<TABLE>
<S> <C>
12 3/4% of Senior Subordinated Notes, due 2009(a)........... $146,193
Senior Bank Credit Facilities(b)............................ 130,363
--------
276,556
Less: amounts due within one year........................... (2,939)
--------
Long-term debt, net of current portion.................... $273,617
========
</TABLE>
- ------------------------
(a) In connection with the recapitalization of Weekly Reader described in
Note 1, the Company and its subsidiaries issued 152,000 Units consisting of
$152,000 in aggregate principal amount of 12 3/4% Senior Subordinated Notes
("the Notes") Due 2009 and 205,656 Shares of Common Stock. The notes pay
interest semi-annually in arrears commencing May 15, 2000. The Notes are
joint and several obligations of WRC, Weekly Reader and CompassLearning.
Based upon an independent valuation, $148,289 was allocated to the value of
the Notes while $3,711 was the value ascribed to the common stock. The Notes
were issued net of $2,906 discount, which is being accreted to maturity
using the effective interest method. Accretion of the debt discount for
period from November 17, 1999 through December 31, 1999 was not significant.
Prior to November 15, 2002, the Company may redeem up to 35% of the notes
with net cash proceeds of certain sales of equity securities at a price of
112.75% of the principal amount, plus accrued and unpaid interest.
On or after November 15, 2004, the Company may redeem the notes at redemption
price of 106.375% of the principal amount, plus accrued interest thereon
decreasing annually to 100% in 2007 and thereafter.
(b) The senior bank credit facilities are comprised of $30,000 revolving credit
facility (which includes a letter of credit sub-facility) maturing in 2005,
a $31,000 term loan A facility maturing in 2005 and the $100,000 term loan B
facility maturing in 2006. As of December 31, 1999, no amounts were
outstanding under the revolving credit facility and $30,613 and $99,750 were
outstanding under the
F-15
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM DEBT (CONTINUED)
term loan A and the term loan B facilities, respectively. The term loan A
facility and the term B facility amortize in quarterly installments
beginning on December 31, 1999.
Loans under the senior bank credit facilities bear interest at a rate per
annum equal to-
1. for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25% (subject to
performance-based step downs); and
2. for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%. In addition to paying interest on outstanding loans
under the senior bank credit facilities, the Company is required to pay a
commitment fee to the lenders associated with the revolving credit
facility in respect of the unused commitments thereunder at a rate of
0.5% per annum (subject to performance-based step downs).
The senior bank credit facilities are subject to mandatory prepayment with-
- the proceeds of the incurrence of certain indebtedness;
- the proceeds of certain asset sales or other dispositions
- the proceeds of issuances of certain equity offerings
- annually beginning in 2000, 50% of the Company's excess cash flow (as
defined in the credit agreement) from the prior year.
The borrowing agreement provides for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the borrowing agreements provide for
the maintenance of certain financial covenants, including a limit on the
consolidated leverage rates and maintenance of minimum fixed charged coverage
ratios.
Principal repayments of long-term debt are as follows-
<TABLE>
<S> <C>
2000........................................................ $ 2,939
2001........................................................ 4,487
2002........................................................ 6,037
2003........................................................ 7,588
2004........................................................ 8,363
Thereafter.................................................. 252,950
</TABLE>
9. PREFERRED STOCK
The Company has authorized the issuance of up to 5,000,000 shares of
preferred stock in one or more series as designed by the board of directors. In
connection with the recapitalization described in Note 1, the Company issued
3,000,000 shares of 15% Series B Preferred Stock is due in 2011 with a
liquidation preference of $25.00 per share. The Preferred stock accrues
dividends at a rate of 15% per annum, subject to adjustment under certain
conditions.
In connection with the issuance of the Series B Preferred Stock described
above, the Company issued to the senior preferred stockholders, Preferred Stock
Warrants, which entitle the senior preferred stockholders to acquire 422,874
shares of Weekly Reader voting common stock and 1,495 shares of CompassLearning
common stock. These warrants entitle the holders to acquire 13% of voting common
F-16
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. PREFERRED STOCK (CONTINUED)
stock of Weekly Reader and CompassLearning at an exercise price of $0.01 per
share. Based upon an independent valuation, the Company allocated the $75,000
proceeds from the issuance of the preferred stock as follows:
<TABLE>
<S> <C>
15% Series B Preferred Stock................................ $63,249
Weekly Reader Warrants...................................... 9,133
CompassLearning Warrants.................................... 2,618
-------
$75,000
=======
</TABLE>
The present value of the preferred stock is being accreted to maturity using
the effective interest method. Accretion expense for the period from
November 17, 1999 through December 31, 1999 amounted to $112.
Prior to December 31, 2004, or such earlier dividend date as the Company may
elect, the Company will pay dividends in-kind. After December 31, 2004,
dividends will be paid in cash. During 1999, accrued preferred stock dividends
in-kind amounted to $1,406 and are payable in additional shares of preferred
stock. The Company may redeem the preferred stock, including unpaid dividends,
prior to November 17, 2002 or after November 17, 2004, subject to certain
conditions.
10. COMMON STOCK SUBJECT TO REDEMPTION
In connection with the recapitalization of Weekly Reader in 1999 and merger
with WRC, the Company issued 68,008 shares of common stock to certain
executives. Under certain conditions, the shareholders can require the Company
to repurchase the shares.
11. INCOME TAXES
For the period ended December 31, 1999, the Company had net operating loss
carryforwards of approximately $8,737. No tax benefit has been reflected in the
accompanying financial statements as the utilization of the operating loss
carryforwards is not considered more likely than not. Accordingly, this amount
has been fully offset by a valuation allowance. To the extent that the Company
generates book taxable income in future years, the income tax provision will
reflect the realization of such benefits.
The reconciliation of the federal statutory rate with the effective income
tax rate reflected in the financial statements is as follows:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate................ 35.0%
State income tax (net of federal benefit)................... (1.0)
Write-off of in process R&D................................. (16.3)
Goodwill amortization....................................... (5.5)
Other....................................................... (0.7)
Valuation allowance......................................... (11.5)
-----
--%
=====
</TABLE>
F-17
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following at
December 31, 1999:
<TABLE>
<S> <C>
Goodwill amortization....................................... 303
Deferred financing fees..................................... 263
Other....................................................... 1,163
-------
Gross deferred tax liabilities............................ 1,729
-------
Net operating loss carryforward............................. 3,784
Depreciation and amortization............................... 234
Accrued liabilities......................................... 473
Other....................................................... 70
-------
Gross deferred tax assets................................. 4,561
-------
Net deferred tax asset...................................... 2,832
Valuation allowance......................................... (2,832)
-------
Net deferred tax asset...................................... $ --
=======
</TABLE>
12. IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
During the period from July 14, 1999 to December 31, 1999, the Company
charged to operations $9,000 related to the write-off of purchased in-process
R&D costs acquired in connection with the acquisition of CompassLearning
(Note 1).
The nature of the efforts required to develop the acquired in-process
technologies into commercially viable products principally relate to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical and economic
performance requirements.
The valuation of the in-process R&D costs as a result of the CompassLearning
acquisition was predicated on a determination that the developmental projects at
the time of the acquisition were not technologically feasible and had no
alternative use. This conclusion was attributable to the fact that
CompassLearning had not completed a working model that had been tested and
proven to work at performance levels which were expected to be commercially
viable and that the technologies of the projects have no alternative use other
than as a software application. The value is attributable solely to the
development efforts completed as of the acquisition date.
The Company allocated values to the in-process R&D based on an assessment by
an independent valuation expert of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction on next generation
internet-based technologies and products.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flow to their present values. The present
value calculations were then adjusted to reflect the estimated percent complete
of each project, a
F-18
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. IN-PROCESS RESEARCH AND DEVELOPMENT COSTS (CONTINUED)
procedure designed to reflect the value creation efforts of the target companies
prior to the close of the acquisition.
The developmental projects were evaluated in the context of Statement of
Financial Accounting Standards SFAS No. 2, "ACCOUNTING FOR RESEARCH AND
DEVELOPMENT COSTS", including its related interpretation, and SFAS No. 86. In
process R&D involves products which fall under the following definitions of R&D
(as defined in SFAS No. 2):
- Research is defined as the planned search or critical investigation aimed
at discovery of new knowledge with the hope that such knowledge will be
useful in developing a new product, service, process, or technique, or
bringing about a significant improvement to an existing product or
process.
- Development is defined as the translation of research findings or other
knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended
for sale or use. It includes the conceptual formulation, design, and
testing of product alternatives, construction of prototypes, and operation
of pilot plants.
Activities specifically excluded from R&D include engineering follow-through
in an early phase of commercial production; routine, ongoing efforts to refine
or enhance an existing product; and the adaptation of existing capabilities to a
particular customer's needs.
In order to calculate the value of the in-process R&D, the income approach
was employed. Each of the significant ongoing R&D projects was identified and
valued through interviews and analysis of product development data provided by
management concerning project descriptions, their respective stage of
development, the time and resources needed to complete the project, expected
income generating ability, and associated risks.
The resulting cash flows were discounted to their present value by applying
appropriate discount rates considering each asset's relative risk. The discount
rate selected for the in-process technologies was 20%. In the selection of the
appropriate discount rate, consideration was given to the weighted average cost
of capital. The discount rate utilized for the in-process technologies was
higher than the Company's overall rates of return due to the risk of realizing
cash flows from products that had yet to reach technological feasibility. The
returns on all the acquired assets were established and weighted to ensure the
rates were reasonable in the context of the overall required return.
13. STOCKHOLDERS' EQUITY
STOCK OPTIONS-
During 1999, the Company granted certain employees 301,724 options to
purchase common stock at a price of $18.60 per share. The options vest as
follows- 33%, in 1999, 33% in 2000 and 34% in 2001. No options were exercised or
forfeited in 1999.
The Company accounts for options issued to employees under the provisions of
SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION". As permitted by the
statement, the Company has chosen to continue to account for stock-based
compensation using the intrinsic value method. Accordingly, no compensation
expense has been recognized for its stock-based compensation plan. Had the fair
value method of accounting been applied to the Company's stock plan, which
requires recognition of
F-19
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. STOCKHOLDERS' EQUITY (CONTINUED)
compensation cost using a pricing model, the net loss would have increased by
approximately $60 for the period from May 14, 1999 (inception) to December 31,
1999.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.7% (representing the risk free
interest rate at the date of grant); expected dividend yields of zero percent;
expected terms of five years and no expected volatility.
14. RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENTS
In connection with the acquisition of Weekly Reader and CompassLearning, the
Company entered into management agreements with a significant shareholder. The
significant provisions of these management agreements are as follows-
Since the date of the acquisition of CompassLearning, the shareholder has
been providing to CompassLearning management consulting and financial advisory
services, and CompassLearning has been paying to the shareholder an annual
management fee of $150 payable quarterly, and has reimbursed the shareholder for
reasonable out-of-pocket costs and expenses incurred in connection with the
performance of its services. On November 17, 1999, CompassLearning and the
shareholder amended the terms of CompassLearning's management agreement with the
shareholder, which relieved CompassLearning of its obligation to pay management
fees to the shareholder until 2001.
In accordance with Weekly Reader's management agreement, the shareholder
provides to Weekly Reader management consulting and financial advisory services.
As a result of Weekly Reader's management agreement and the amendment of
CompassLearning's management agreement, CompassLearning and Weekly Reader will
reimburse the shareholder for reasonable out-of-pocket costs and expenses
incurred in connection with the performance of its services and, beginning in
the first quarter of 2001, will be obligated to pay to the shareholder annual
aggregate management fees for services to both CompassLearning and Weekly Reader
totaling $950 payable quarterly.
STRATEGIC ALLIANCE AGREEMENT
A predecessor of one of the Company's subsidiaries (CompassLearning) entered
into a strategic alliance agreement ("Agreement") with a then related party.
This related party was a creditor, investor and customer of CompassLearning. As
a result of the acquisition, those relationships were terminated and an
agreement was executed to specify the terms for the sale of specific software
and services to the related party.
CompassLearning granted the related party $11,500 in Purchase Credit
("Credit"), as defined, to be used over four years toward the purchase of
non-specialized products and services. The Credit may be used for up to 60% of
the purchase price of non-specialized products and services, with the balance
paid in cash. The available balance of the Credit shall be permanently reduced
by the use of the Credit and by a certain amount each year. If the cumulative
Credit utilized does not exceed $2,875, $5,750, and $8,625 as of July 14, 2000,
2001 and 2002, respectively, the total Credit will be reduced by such shortfall
each year. If the Credit is not used by the end of the fourth year, it will be
reduced to zero. The Company will account for the Credit by recording it as
discounts to product sales in the future. Under the Agreement, the related party
is obligated to purchase products and services of at least
F-20
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
$2,000 during any one-year period. Approximately $63 of product was purchased,
and $38 in Credit used, through December 31, 1999.
CONSULTING AND TRANSACTION AGREEMENTS
In connection with WRC Media, Inc.'s acquisition or recapitalization of its
subsidiaries, the Company entered into Transaction and Consulting Agreements
with the CEO and the Vice-Chairman of the Company. Under the terms of these
Agreements, the Company paid the CEO $390 for consulting and transaction
services relating to the acquisition of CompassLearning and $375, of which $75
was paid in cash and $300 was paid in stock of the Company, for the
recapitalization of Weekly Reader. Additionally, the Company also paid the
Vice-Chairman $250, of which $100 was paid in cash and $150 was paid in stock of
the Company, related to the recapitalization of Weekly Reader.
15. EMPLOYEE BENEFIT PLANS
PENSION PLAN
A subsidiary of the Company sponsors a defined benefit pension plan (the
"American Guidance Plan") for the benefit of its employees. The benefits to be
paid under the American Guidance Plan are based on years of service and
compensation amounts for the average of the highest five consecutive plan years.
The American Guidance Plan is funded by means of contributions to the plan's
trust. The pension funding policy is consistent with the funding requirements of
U.S. Federal and other governmental laws and regulations. Plan assets consist
primarily of fixed income, equity and other short-term investments.
F-21
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables set forth the American Guidance Plan's funded status as
of December 31, 1999 and the amounts recognized in the consolidated statement of
consolidated operations-
<TABLE>
<S> <C>
Change in benefit obligation-
Benefit obligation at beginning of period................. $ 8,455
Service cost.............................................. 85
Interest cost............................................. 75
Actuarial gain............................................ (17)
Benefits paid............................................. (32)
-------
Projected benefit obligation.......................... $ 8,566
=======
Change in plan assets-
Fair value of plan assets at beginning of period.......... $ 8,521
Actual return on plan assets.............................. 96
Benefits paid............................................. (32)
-------
Fair value of plan assets............................. $ 8,585
=======
Funded status............................................... $ 19
Unrecognized actuarial gain................................. (1,654)
-------
Accrued pension cost........................................ $(1,635)
=======
Components of net periodic pension expense
Service cost.............................................. $ 85
Interest cost............................................. 76
Expected return on plan assets............................ (85)
-------
Net periodic pension expense.......................... $ 76
=======
Weighted-average assumptions
Discount rate............................................. 6.5%
Expected return on plan assets............................ 9.0%
Rate of compensation increase............................. 4.5%
=======
</TABLE>
F-22
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases for equipment, office and warehouse space
that include remaining noncancellable minimum rental commitments as follows-
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING
DECEMBER 31,
-------------
<S> <C>
2000........................................................ $ 5,538
2001........................................................ 4,215
2002........................................................ 3,632
2003........................................................ 2,855
2004........................................................ 2,314
Thereafter.................................................. 2,412
-------
$20,966
=======
</TABLE>
Rent expense for all operating leases was approximately $1,068 for the
period.
LITIGATION
The Company is a party to litigation arising in the normal course of
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. Management believes that the effect on its results of operations and
financial position, if any, for the disposition of these matters, will not be
material.
17. RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" "SFAS 133", subsequently amended by SFAS
No. 137 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133", which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS NO. 133
requires that all derivative financial instruments, such as interest rate swap
contracts and foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose of intent for
holding them. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or stockholders' equity, depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. As the Company currently holds no derivative financial instruments and
does not currently engage in hedging activities, the adoption of SFAS 133 is not
expected to have a material effect on the Company's financial statements.
18. RABBI TRUST
In 1998, as part of its acquisition of American Guidance, a subsidiary of
Weekly Reader, approximately $19,600 of the American Guidance purchase price was
paid through contributions to several Rabbi Trusts to settle American Guidance's
obligations due to employees under American Guidance's predecessor company stock
option, employee stock ownership and deferred compensation plans. Payments to
the beneficiaries of the Rabbi Trusts are taxable upon distribution from the
Rabbi Trusts with Weekly Reader receiving a corresponding deduction for income
tax purposes. The assets of the Rabbi Trusts predominantly consist of marketable
mutual fund investments that are subject to claims of general creditors of
Weekly Reader in the event of bankruptcy. Accordingly, the assets of
F-23
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. RABBI TRUST (CONTINUED)
Rabbi Trusts and a related liability are in other current assets and accrued
expenses and other current liabilities, respectively, on the consolidated
balance sheet. The balance of this asset and liability as of December 31, 1999
was approximately $18,200. The marketable securities in the Rabbi Trusts have
been classified as trading securities and investment income of $1,875 has been
offset with the related compensation expense of the same amount on the
accompanying consolidated statement of operations. Marketable securities in the
Rabbi Trusts have been recorded at fair value, based on quoted market prices, on
the accompanying consolidated balance sheet.
F-24
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,521 $ 4,561
Accounts Receivable, net.................................. 47,394 42,136
Inventories, net.......................................... 14,682 13,507
Prepaid expenses.......................................... 2,961 3,656
Other current assets...................................... 20,258 20,122
-------- --------
Total current assets.................................... 100,816 83,982
Property and equipment, net................................. 7,898 7,690
Purchased software, net..................................... 6,566 6,102
Goodwill, net............................................... 295,384 290,700
Deferred financing costs, net............................... 7,843 7,551
Identified intangible assets, net........................... 153,676 152,606
Other assets................................................ 46 29
-------- --------
Total Assets............................................ $572,229 $548,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,999 $ 12,948
Accrued payroll, commissions and benefits................. 10,917 7,678
Current portion of deferred revenue....................... 35,961 30,871
Other accrued liabilities................................. 38,990 43,009
Current portion of long-term debt......................... 2,939 3,325
-------- --------
Total current liabilities............................... 110,806 97,831
Deferred revenue, net of current portion.................... 1,780 1,727
Due to related party........................................ 2,946 2,946
Long-term debt.............................................. 273,617 274,700
Other long-term liabilities................................. 14 15
-------- --------
Total liabilities....................................... 389,163 377,219
-------- --------
15% Series B preferred stock subject to redemption,
including accrued dividends and accretion of warrant
value..................................................... 64,767 67,858
-------- --------
Warrants on preferred stock................................. 11,751 11,751
-------- --------
Common stock subject to redemption.......................... 1,265 1,265
-------- --------
Stockholders' equity:
Common stock, ($.01 par value, 20,000,000 shares
authorized; 6,855,853 shares outstanding)............... 69 69
Additional paid-in Capital.................................. 126,063 126,063
Accumulated deficit......................................... (20,849) (35,565)
-------- --------
Total stockholders' equity................................ 105,283 90,567
-------- --------
Total liabilities and stockholders' equity................ $572,229 $548,660
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-25
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Sales, net.................................................. $ 48,439
Cost of goods sold.......................................... 15,639
--------
Gross profit............................................ 32,800
Operating costs and expenses:
Sales and marketing....................................... 11,876
Research and development 2,103
Distribution, circulation and fulfillment................. 3,173
Editorial................................................. 2,487
General and administrative................................ 7,324
Depreciation and Amortization............................. 8,665
--------
Total Operating costs and expenses.......................... 35,628
Loss from operations........................................ (2,828)
Interest expense, including amortization of deferred
financing costs........................................... (8,399)
Other, net.................................................. 56
--------
Loss Before Income Tax Expense.............................. (11,171)
Income Tax Provision........................................ 450
--------
Net Loss................................................ $(11,621)
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-26
<PAGE>
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net Loss.................................................. $(11,621)
Adjustments to reconcile net loss to cash provided by
operating activities--
Depreciation and amortization........................... 9,292
Amortization of deferred financing fees................. 172
Accretion of stock discount............................. 72
Changes in assets and liabilities--
Decrease in accounts receivable......................... 5,258
Decrease in inventories................................. 1,175
Increase in prepaid expenses and other current assets... (559)
Increase in other noncurrent assets..................... (1,346)
Decrease in accounts payable............................ (9,051)
Decrease in deferred revenue............................ (5,143)
Increase in current and noncurrent accrued liabilities 812
--------
Net cash used in operating activities................. (10,939)
--------
Cash flows from investing activities:
Capital expenditures...................................... (1,383)
--------
Net cash (used in) investing activities............... (1,383)
--------
Cash Flows from financing activities:
Proceeds from revolving line of credit.................... 2,000
Retirement of senior bank debt............................ (638)
--------
Net cash provided by financing activities............. 1,362
--------
Decrease in cash and cash equivalents................. (10,960)
Cash and cash equivalents, beginning of period.............. 15,521
--------
Cash and cash equivalents, end of period.................... $ 4,561
========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................... $ 2,720
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-27
<PAGE>
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
The accompanying consolidated financial statements include the accounts of
WRC Media Inc. (WRC) and its subsidiaries--Weekly Reader Corporation, and
CompassLearning, Inc. The term "Company" refers to WRC and its subsidiaries.
WRC was incorporated on May 14, 1999. On July 14, 1999, WRC acquired
CompassLearning in a business combination accounted for as a purchase.
On November 17, 1999, WRC completed the recapitalization and purchase of
Weekly Reader and its subsidiaries. As a result of these transactions, WRC owns
94.9% and PRIMEDIA INC. owns 5.1% of the common stock of Weekly Reader
Corporation.
The separate financial statements of the Subsidiary Guarantors have not been
included because (i) the Subsidiary Guarantors constitute all of the Company's
direct and indirect subsidiaries, (ii) the Subsidiary Guarantors have fully and
unconditionally guaranteed the Company's obligations on a joint and several
basis; (iii) the Company has no operations and its ability to service its debt
is dependent on the operations of its subsidiaries.
All significant intercompany balances and transactions have been eliminated
in the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been
prepared without audit. 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.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with WRC Media, Inc. and Subsidiaries annual financial statements
and related notes for the year ended December 31, 1999. The operating results
for the three-month period ended March 31, 2000 are not necessarily indicative
of the results that may be expected for a full year.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Weekly Reader Corporation:
We have audited the accompanying consolidated balance sheet of Weekly Reader
Corporation and subsidiaries ("Weekly Reader"), a wholly-owned subsidiary of WRC
Media Inc., as of December 31, 1999 and the related consolidated statement of
operations, stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of Weekly Reader's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Weekly Reader at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 20, 2000
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
PRIMEDIA Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Weekly Reader
Corporation and subsidiaries ("Weekly Reader"), a wholly-owned subsidiary of
PRIMEDIA Inc., as of December 31, 1998, and the related consolidated statements
of operations, stockholders' deficit and cash flows for each of the two years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of Weekly Reader's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As further described in Notes 1 and 14, the consolidated financial
statements have been prepared depicting Weekly Reader as a separate business
unit of PRIMEDIA Inc.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Weekly Reader at December 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, Weekly
Reader changed its method of accounting for internal use computer software costs
to conform with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," of the American
Institute of Certified Public Accountants in 1998.
DELOITTE & TOUCHE LLP
New York, New York
August 30, 1999
(November 17, 1999 as to Note 1)
F-30
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,962 $ 14,143
Accounts receivable, net of allowance for doubtful
accounts and returns of $4,996 and $5,367,
respectively............................................ 24,933 27,440
Inventories, net.......................................... 13,641 13,952
Due from related party.................................... -- 500
Deferred income tax asset, net............................ 5,809 --
Prepaid expenses.......................................... 1,701 1,642
Other current assets...................................... 19,405 20,234
-------- ---------
Total current assets.................................. 67,451 77,911
Property and equipment, net................................. 6,608 6,245
Other intangible assets, net................................ 46,636 36,266
Excess of purchase price over net assets acquired, net...... 109,992 107,801
Deferred tax asset, net..................................... 1,224 --
Other non-current assets.................................... 5,365 8,118
-------- ---------
$237,276 $ 236,341
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 16,327 $ 19,491
Deferred revenues......................................... 21,270 18,989
Accrued expenses and other................................ 31,620 36,274
Current portion of long-term debt......................... -- 2,939
-------- ---------
Total current liabilities............................. 69,217 77,693
-------- ---------
Other non-current liabilities............................... 667 --
-------- ---------
Long-term debt.............................................. -- 273,617
Commitments and contingencies
Redeemable preferred stock, plus accrued dividends
(liquidation preference--
$76,406 in 1999).......................................... -- 76,406
Stockholders' equity (deficit):
Common stock ($.01 par value, 20,000,000 shares
authorized; 10,000,000 and 2,830,000 shares issued at
December 31, 1998 and 1999, respectively)............... 100 28
Class A non-voting common stock ($.01 par value, 1,000,000
shares authorized in 1999, no shares issued or
outstanding).............................................. -- --
Class B non-voting common stock ($.01 par value, 1,000,000
shares authorized in 1999, no shares issued or
outstanding).............................................. -- --
Investment by PRIMEDIA, net............................... 183,853 --
Additional paid-in capital................................ -- 9,133
Due from parent........................................... -- (68,684)
Accumulated deficit....................................... (16,561) (131,852)
-------- ---------
Total stockholders' equity (deficit).................. 167,392 (191,375)
-------- ---------
$237,276 $ 236,341
======== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-31
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Sales, net.................................................. $92,904 $118,236 $148,287
Cost of goods sold.......................................... 23,825 30,646 40,211
------- -------- --------
Gross profit.......................................... 69,079 87,590 108,076
Operating costs and expenses:
Marketing and selling..................................... 11,745 17,636 24,316
Distribution, circulation and fulfillment................. 11,593 10,881 13,172
Editorial................................................. 9,030 10,596 10,046
General and administrative................................ 12,736 15,281 15,947
Corporate and group overhead.............................. 2,456 5,577 6,211
Depreciation and amortization............................. 11,428 12,212 15,345
------- -------- --------
Operating income...................................... 10,091 15,407 23,039
Other income (expense):
Intercompany interest expense............................. (6,968) (9,232) (10,133)
Interest expense.......................................... -- -- (4,504)
Amortization of deferred financing costs.................. (663) (184) (184)
Other, net................................................ 1,545 (184) (570)
------- -------- --------
Income before income tax provision........................ 4,005 5,807 7,648
Income tax provision...................................... 5,772 3,942 4,459
------- -------- --------
Net (loss) income..................................... $(1,767) $ 1,865 $ 3,189
======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-32
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL INVESTMENT DUE
--------------------- PAID-IN BY FROM ACCUMULATED
SHARES VALUE CAPITAL PRIMEDIA, INC. PARENT DEFICIT
---------- -------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997..... 10,000,000 $100 $ -- $ 84,141 $ -- $ (16,659)
Push-down accounting
relating to
acquisitions............. -- -- -- 17,452 -- --
Transfers from PRIMEDIA and
subsidiaries, net........ -- -- -- (10,196) -- --
Net loss................... -- -- -- -- -- (1,767)
---------- ---- ------ -------- -------- ---------
Balance, December 31, 1997... 10,000,000 100 -- 91,397 -- (18,426)
Push-down accounting
relating to
acquisitions............. -- -- -- 107,411 -- --
Transfers from PRIMEDIA and
subsidiaries, net........ -- -- -- (14,955) -- --
Net income................. -- -- -- -- -- 1,865
---------- ---- ------ -------- -------- ---------
Balance, December 31, 1998... 10,000,000 100 -- 183,853 -- (16,561)
Net income................. -- -- -- -- -- 3,189
Recapitalization........... (7,200,000) (72) 9,133 -- -- (117,074)
Preferred stock
dividends................ -- -- -- -- -- (1,406)
Transfer from WRC Media,
net...................... -- -- -- -- (68,684) --
Transfers from PRIMEDIA and
subsidiaries, net........ -- -- -- (183,853) -- --
---------- ---- ------ -------- -------- ---------
Balance, December 31, 1999... 2,800,000 $ 28 $9,133 $ -- $(68,684) $(131,852)
========== ==== ====== ======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-33
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......................................... $ (1,767) $ 1,865 $ 3,189
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 11,428 12,212 15,345
Amortization of deferred financing costs................ 663 184 184
Intercompany interest expense........................... 6,968 9,232 2,779
Corporate and group overhead............................ 2,456 5,577 --
Deferred income taxes................................... 5,112 3,142 2,608
Other, net.............................................. (1,531) (4) --
Changes in operating assets and liabilities:
(Increase) decrease in-
Accounts receivable, net.............................. 2,839 (2,578) (2,507)
Inventories, net...................................... 1,951 (1,211) (311)
Prepaid expenses and other assets..................... (575) 1,710 (255)
Increase (decrease) in-
Accounts payable...................................... (1,811) 3,976 3,164
Deferred revenues..................................... (3,733) 1,746 (2,281)
Accrued expenses and other liabilities................ (1,390) (3,662) 4,654
-------- --------- ---------
Net cash provided by operating activities........... 20,610 32,189 26,569
-------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net........... (387) (4,299) (5,870)
Payments for businesses acquired.......................... (17,941) (105,584) (667)
-------- --------- ---------
Net cash used in investing activities............... (18,328) (109,883) (6,537)
-------- --------- ---------
FINANCING ACTIVITIES:
Intercompany, net......................................... (2,334) 79,224 (72,043)
Proceeds from term loans.................................. -- -- 131,000
Proceeds from issuance of senior subordinated notes....... -- -- 146,193
Proceeds from issuance of preferred stock................. -- -- 75,000
Recapitalization.......................................... -- -- (287,363)
Repayments of debt........................................ -- -- (638)
-------- --------- ---------
Net cash provided by (used in) financing
activities........................................ (2,334) 79,224 (7,851)
-------- --------- ---------
INCREASE (DECREASE) IN CASH................................. (52) 1,530 12,181
CASH, beginning of period................................... 484 432 1,962
-------- --------- ---------
CASH, end of period......................................... $ 432 $ 1,962 $ 14,143
======== ========= =========
SUPPLEMENTAL INFORMATION--Cash paid for interest............ $ 195 $ 211 $ 10,399
======== ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-34
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Weekly Reader Corporation ("WRC" or the "Company"), World Almanac Education
Group, Inc. ("World Almanac"), formerly PRIMEDIA Reference, Inc. ("PRI"), and
American Guidance Service, Inc. ("American Guidance") were wholly-owned
subsidiaries of PRIMEDIA Inc. ("PRIMEDIA"). On August 13, 1999, PRIMEDIA entered
into a Redemption, Stock Purchase and Recapitalization Agreement (as amended as
of October 26, 1999, the "Recapitalization Agreement") with WRC Media Inc.,
formerly EAC II Inc. ("WRC Media"). The terms of the Recapitalization Agreement
required that all of the outstanding capital stock of World Almanac and American
Guidance be contributed to WRC prior to WRC Media's purchase of a majority
interest in WRC for a purchase price of $395,000. The presentation of these
financial statements reflects the capital contribution made by PRIMEDIA to WRC
of all the World Almanac and American Guidance shares at their historical
carrying values. In addition, on October 5, 1999, the authorized capital of WRC
was amended to consist of 20,000,000 shares of common stock, par value of $.01
per share, and WRC declared a 10,000-for-one stock split effective on
October 5, 1999. This amendment was retroactively reflected on the accompanying
consolidated financial statements. On November 17, 1999, WRC Media completed its
recapitalization of WRC. The consolidated financial statements include the
accounts of WRC and its subsidiary, Lifetime Learning Systems, Inc. ("Lifetime
Learning"), World Almanac and its subsidiaries, Funk & Wagnalls Yearbook
Corporation and Gareth Stevens, Inc. ("Gareth Stevens"), and American Guidance
and its subsidiary, AGS International Sales, Inc. (collectively referred to as
"Weekly Reader"). As a result of the recapitalization, WRC now owns 94.9% and
PRIMEDIA 5.1% of the common stock of Weekly Reader. In connection with the
Recapitalization, WRC Media issued 3,000,000 shares of 15% Series B Preferred
Stock, due in 2011 with a liquidation preference of $25.00 per share, with
preferred stock warrants, which entitle the preferred shareholders to acquire
422,874 shares of the Company's voting common stock. On November 17, 1999, PRI
legally changed its name to World Almanac Education Group, Inc.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The accompanying consolidated financial statements include the
accounts specifically attributed to Weekly Reader, including allocations of
certain assets, liabilities and expenses relating to shared services and
administrative functions incurred at the corporate and group levels of PRIMEDIA
prior to the recapitalization of Weekly Reader (see Note 14, Related Party
Transactions). The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount of assets, liabilities, revenues and
expenses reported in the consolidated financial statements. Significant
accounting estimates used include estimates for sales returns and allowances,
bad debts and estimates for the realization of deferred income tax assets.
Management has exercised reasonableness in deriving these estimates. However,
actual results may differ from these estimates.
WRC Media classifies the operations of Weekly Reader in one
segment--educational publishing. WRC is a publisher of classroom periodicals and
skills books serving the Pre-Kindergarten through twelfth grade ("Pre K-12")
market. WRC's subsidiary, Lifetime Learning, creates and distributes sponsored
instructional materials primarily for use in the Pre K-12 market. World Almanac
is a publisher and distributor of reference and informational materials targeted
to kindergarten through twelfth grade ("K-12") students, as well as other
general reference and informational materials. American Guidance is a publisher
of individually administered testing products primarily for K-12
F-35
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED)
students and supplemental instructional materials primarily for low-performing
students in middle and secondary schools. Substantially all of Weekly Reader's
sales are in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, Weekly Reader adopted the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Under Weekly
Reader's previous accounting policy, internal use software costs, whether
developed or obtained, were generally expensed as incurred. In compliance with
SOP 98-1, Weekly Reader expenses costs incurred in the preliminary project stage
and, thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Certain costs, such as maintenance and training, are
expensed as incurred. Capitalized costs are amortized over a period of not more
than five years and are subject to impairment evaluation in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The adoption of SOP 98-1, which primarily related to the
non-recurring replacement of a marketing and fulfillment system, resulted in an
increase in net income of approximately $700 and $123 for the years ended
December 31, 1998 and 1999, respectively.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which becomes
effective for Weekly Reader's 2001 consolidated financial statements. SFAS
No. 133 requires that derivative instruments be measured at fair value and
recognized as assets or liabilities in a company's balance sheet. Weekly Reader
is currently evaluating the effect, if any, that SFAS No. 133 will have on its
consolidated financial statements.
INVENTORIES
Inventories, including paper, are valued at the lower of cost or market on a
first-in, first-out ("FIFO") basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment and the amortization of
leasehold improvements are provided at rates based on the estimated useful lives
or lease terms, if shorter, using the straight-line method. Improvements are
capitalized while maintenance and repairs are expensed as incurred.
PURCHASE ACCOUNTING
With respect to acquisitions, the total purchase price has been allocated to
tangible and intangible assets and liabilities based on their respective fair
values. The consolidated financial statements include the operating results of
these acquisitions subsequent to their respective date of acquisition.
F-36
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
Intangible assets are being amortized using both accelerated and
straight-line methods over periods ranging from 3 years to 40 years. The excess
of purchase price over net assets acquired is being amortized on a straight-line
basis over 40 years. The recoverability of the carrying values of the excess of
the purchase price over the net assets acquired and intangible assets is
evaluated periodically to determine if an impairment in value has occurred. An
impairment in value will be considered to have occurred when it is determined
that the undiscounted future operating cash flows generated by the business are
not sufficient to recover the carrying values of such intangible assets. If it
has been determined that an impairment in value has occurred, the excess of the
purchase price over the net assets acquired and intangible assets would be
written down to an amount which will be equivalent to the present value of the
future operating cash flows to be generated by the business.
REVENUE RECOGNITION
Subscriptions are recorded as deferred revenue when received and recognized
as income over the term of the subscription. Sales of books, tests and other
items are generally recognized as revenue upon shipment, net of an allowance for
returns. Advertising revenues are recognized as income on the issue date, net of
provisions for rebates, adjustments and discounts.
EXPENSE RECOGNITION AND DIRECT--RESPONSE ADVERTISING COSTS
Marketing, selling, distribution, editorial, and other general and
administrative expenses are generally expensed as incurred. Editorial costs
relating to major revisions of the FUNK & WAGNALLS ENCYCLOPEDIA and certain
editorial costs relating to the American Guidance product lines are deferred and
amortized using both straight-line and accelerated methods, substantially all of
which over a period of up to 5 years. Capitalized editorial costs are recorded
as prepublication costs. Prepublication costs of $1,900 and $5,337 at
December 31, 1998 and 1999, respectively, included in other non-current assets
on the accompanying consolidated balance sheets, are net of accumulated
amortization of $12 and $1,029 at December 31, 1998 and 1999, respectively.
Amortization of prepublication costs, which is included in depreciation and
amortization on the accompanying statements of consolidated operations was $66,
$12 and $1,017 for the years ended December 31, 1997, 1998 and 1999,
respectively. Advertising and subscription acquisition costs are expensed the
first time the advertising takes place, except for direct-response advertising,
the primary purpose of which is to elicit sales from customers who can be shown
to have responded specifically to the advertising and that results in probable
future economic benefits. Direct-response advertising consists of product
promotional mailings, catalogs and subscription promotions. These
direct-response advertising costs are capitalized as assets and amortized over
the estimated period of future benefit using a ratio of current period revenues
to total current and estimated future period revenues. The amortization periods
range from six months to twelve months subsequent to the promotional event.
Amortization of direct-response advertising costs is included in marketing and
selling expenses on the accompanying statements of consolidated operations.
Direct response advertising costs of approximately $2,500 and $2,700 at
December 31, 1998 and 1999, respectively, included in other non-current assets
on the accompanying consolidated balance sheets, are net of accumulated
amortization of approximately $6,200 and $9,400 at December 31, 1998 and 1999,
respectively. Advertising and promotion expense, which includes amortization of
direct response
F-37
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
advertising of approximately $7,000, $6,400 and $5,900 in 1997, 1998 and 1999,
respectively, was approximately $8,300, $11,000 and $12,600 during the years
ended December 31, 1997, 1998 and 1999, respectively.
CONCENTRATION OF CREDIT RISK
Weekly Reader's customers include schools and other institutions. Accounts
receivable are generally unsecured. A provision for estimated doubtful accounts
is provided for accounts receivable. There are no concentrations of business
transacted with a particular customer or supplier, nor concentrations of revenue
from a particular service or geographic area that could severely impact Weekly
Reader in the near future.
INCOME TAXES
Weekly Reader's subsidiaries file their Federal income taxes as members of
WRC Media's consolidated return and file their state and local income taxes on
either a separate basis or a combined basis in various jurisdictions. Income
taxes have been calculated on a separate return basis and are presented in
accordance with SFAS No. 109, "Accounting for Income Taxes", using the asset and
liability approach. Deferred taxes reflect the tax consequences in future years
of differences between the financial reporting and tax bases of assets and
liabilities. Income tax expense or benefit is the amount payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities computed on a separate company basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For instruments including cash, accounts receivable, accounts payable and
accrued expenses and other, the carrying amount approximates fair value because
of the short maturity of these instruments.
SEGMENT REPORTING
The Company has determined that it has one reportable segment in accordance
with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", which is educational publishing.
3. ACQUISITIONS
Weekly Reader acquired Gareth Stevens and American Guidance in 1997 and
1998, respectively. These acquisitions were financed through borrowings from
PRIMEDIA. The cash payments for these acquisitions on an aggregate basis
(including certain immaterial purchase price adjustments related to prior year
acquisitions) were $17,941 and $105,584 in 1997 and 1998, respectively (net of
liabilities assumed of approximately $4,700, and $34,700 in 1997 and 1998,
respectively). The excess purchase price over net assets acquired was
approximately $12,700 and $73,400 in 1997 and 1998, respectively.
Approximately $19,600 of the American Guidance purchase price was paid by
PRIMEDIA through contributions to several Rabbi Trusts to settle American
Guidance's obligations due to employees under American Guidance's predecessor
company stock option, employee stock ownership and deferred compensation plans.
Payments to the beneficiaries of the Rabbi Trusts are taxable upon distribution
F-38
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
3. ACQUISITIONS (CONTINUED)
from the Rabbi Trusts with Weekly Reader receiving a corresponding deduction for
income tax purposes. The assets of the Rabbi Trusts predominantly consist of
marketable mutual fund investments that are subject to claims of general
creditors of Weekly Reader in the event of bankruptcy. Accordingly, the assets
of the Rabbi Trusts and a related liability are presented in other current
assets and accrued expenses and other current liabilities, respectively, on the
consolidated balance sheets. The balance of this asset and liability as of
December 31, 1998, and 1999 was approximately $19,400 and $18,200, respectively.
The marketable securities in the Rabbi Trusts have been classified as trading
securities and investment income of $1,589 and $1,875 has been offset with the
related compensation expense of the same amount on the accompanying consolidated
statement of operations for the years ended December 31, 1998 and 1999,
respectively. Marketable securities in the Rabbi Trusts have been recorded at
fair value, based on quoted market prices, on the accompanying consolidated
balance sheets.
The following unaudited pro forma information presents the results of
operations of Weekly Reader, for the years ended December 31, 1997 and 1998, as
if the acquisition of American Guidance had taken place on January 1, 1997:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Sales, net.............................................. $131,971 $137,820
Operating income........................................ $ 7,958 $ 14,334
Net income (loss)....................................... $ (3,379) $ 664
</TABLE>
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable....................................... $29,929 $32,807
Less:
Allowance for doubtful accounts......................... (1,737) (1,793)
Allowance for returns and rebates....................... (3,259) (3,574)
------- -------
$24,933 $27,440
======= =======
</TABLE>
5. INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Finished goods............................................ $14,581 $15,720
Raw materials............................................. 929 1,026
Less- Allowance for obsolescence.......................... (1,869) (2,794)
------- -------
$13,641 $13,952
======= =======
</TABLE>
F-39
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
RANGE OF DECEMBER 31,
LIVES -------------------
(YEARS) 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Machinery, equipment and vehicles................ 3-10 $ 6,246 $ 8,576
Furniture and fixtures........................... 5-10 2,701 1,487
Leasehold improvements........................... 5-10 1,092 1,303
Buildings and improvements....................... 32 670 730
------- -------
10,709 12,096
Less- Accumulated depreciation and
amortization................................... (4,101) (5,851)
------- -------
$ 6,608 $ 6,245
======= =======
</TABLE>
Depreciation and amortization of property and equipment was $910, $1,258 and
$1,750 for the years ended December 31, 1997, 1998 and 1999, respectively.
7. OTHER INTANGIBLE ASSETS AND EXCESS OF PURCHASE PRICE OVER NET ASSETS
ACQUIRED, NET
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
RANGE OF DECEMBER 31,
LIVES --------------------
(YEARS) 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Customer and subscriber lists.................. 3-14 $ 58,671 $ 59,821
Non-compete agreements......................... 3-6 25,100 25,100
Product titles................................. 7 22,400 22,400
Trademarks..................................... 40 17,569 18,363
Copyrights..................................... 9 11,100 11,100
Databases...................................... 10 5,812 5,812
Trademark license agreements................... 40 3,795 3,000
Advertiser lists............................... 10 1,780 --
Other.......................................... 4-10 216 846
-------- ---------
146,443 146,442
Less- Accumulated amortization................. (99,807) (110,176)
-------- ---------
$ 46,636 $ 36,266
======== =========
</TABLE>
The excess of purchase price over the fair market value of the net assets
acquired is net of accumulated amortization of $25,540 and $27,731 at
December 31, 1998 and 1999, respectively. Amortization of other intangible
assets and excess of purchase price over net assets acquired was $10,452,
$10,942 and $10,369 for the years ended December 31, 1997, 1998 and 1999,
respectively.
F-40
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following-
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Rabbi Trusts (see Note 3)................................. $19,405 $18,220
Payroll and related employee benefits..................... 4,135 4,222
Acquisition costs......................................... 2,882 3,579
Non-income taxes.......................................... 1,417 435
Pension liability (see Note 12)........................... 1,036 1,635
Royalties................................................. 1,003 1,092
Professional fees......................................... 565 --
Other..................................................... 1,177 7,091
------- -------
$31,620 $36,274
======= =======
</TABLE>
9. INCOME TAXES
At December 31, 1998, Weekly Reader had aggregate net operating loss
("NOLs") carryforwards for Federal income tax purposes of approximately $18,500.
The utilization of such NOLs, however, is subject to certain limitations under
Federal income tax laws. Specifically, as a result of a certain tax election
relating to the Recapitalization Agreement, the NOLs, except those relating to
American Guidance, are expected to remain with PRIMEDIA. Therefore, it is
expected that these losses will not be available to Weekly Reader or its
subsidiaries. The NOL of American Guidance will be limited, by tax law, to a
ratable portion of PRIMEDIA's consolidated NOL for the tax year ended
December 31, 1998. The amount so limited may be available to Weekly Reader and
its subsidiaries and is scheduled to expire in 2018.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
F-41
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
purposes, and (b) operating loss carryforwards. The tax effects of significant
items comprising Weekly Reader's net deferred income tax accounts are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of
inventory....................................... $ 679 $ 117 $ 796
Difference between book and tax basis of accrued
expenses and other.............................. 8,628 1,467 10,095
Reserves not currently deductible................. 1,596 346 1,942
Difference between book and tax basis of other
intangible assets............................... 5,815 1,331 7,146
Operating loss carryforwards...................... 6,082 1,073 7,155
------- ------ -------
Total............................................. 22,800 4,334 27,134
------- ------ -------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other
intangible assets............................... 8,920 1,523 10,443
Difference between book and tax basis of property
and equipment................................... 1,514 254 1,768
Other............................................. 2,472 446 2,918
------- ------ -------
Total............................................. 12,906 2,223 15,129
------- ------ -------
Net deferred income tax assets.................... 9,894 2,111 12,005
Less: Valuation allowances........................ 4,170 802 4,972
------- ------ -------
Net............................................... $ 5,724 $1,309 $ 7,033
======= ====== =======
</TABLE>
F-42
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------
FEDERAL STATE TOTAL
-------- -------- ---------
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of
accrued expenses and other................. $ 160 $ 24 $ 184
Reserves not currently deductible............ 63 9 72
-------- -------- ---------
Total........................................ 223 33 256
-------- -------- ---------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of
inventory.................................. 4 1 5
Difference between book and tax basis of
other intangible assets.................... 61 9 70
Difference between book and tax basis of
accrued expenses and other................. 5 1 6
Difference between book and tax basis of
property and equipment..................... 442 66 508
-------- -------- ---------
Total........................................ 512 77 589
-------- -------- ---------
Net deferred income tax liabilities.......... 289 44 333
Less: Valuation allowances................... (289) (44) (333)
-------- -------- ---------
Net.......................................... $ -- $ -- $ --
======== ======== =========
</TABLE>
Certain deferred tax assets are subject to a valuation allowance, as
management believes it is more likely than not that these assets will not be
realized.
The net deferred tax assets, except those relating to American Guidance and
Gareth Stevens, are expected to remain with PRIMEDIA as a result of a certain
tax election related to the Recapitalization Agreement.
The provision for Federal and state and local income taxes consists of the
following-
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current--Federal.................................... $ 660 $ 800 $1,851
------ ------ ------
Deferred:
State and local................................... 576 246 900
Federal........................................... 4,536 2,896 1,708
------ ------ ------
5,112 3,142 2,608
------ ------ ------
Income tax provision................................ $5,772 $3,942 $4,459
====== ====== ======
</TABLE>
F-43
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
Weekly Reader's provision for income taxes differs from the amount computed
by applying the statutory U.S. Federal income tax rate to income before income
tax provision as follows-
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Provision for taxes at the statutory rate........... $1,402 $2,032 $2,236
State income taxes, net of Federal tax benefit...... 374 160 315
Non-deductible goodwill amortization................ 219 555 800
Change in valuation allowance....................... 3,767 1,205 868
Other............................................... 10 (10) 240
------ ------ ------
Total............................................... $5,772 $3,942 $4,459
====== ====== ======
</TABLE>
10. LONG-TERM DEBT
In connection with the recapitalization and merger of WRC during November
1999, WRC Media, Weekly Reader and CompassLearning Inc. entered into the senior
subordinated note and senior bank credit facility. Since each company is jointly
and severally liable and responsible for the borrowing, they are considered to
be obligated. Accordingly, the debt and related interest expense is reflected in
the financial statements of each entity. For Weekly Reader, a corresponding
entry in the financial statements has been recorded as due from WRC Media.
At December 31, 1999, long-term debt consisted of the following-
<TABLE>
<S> <C>
12 3/4% of Senior Subordinated Notes, due 2009 (a).......... $146,193
Senior Bank Credit Facilities (b)........................... 130,363
--------
276,556
Less-amounts due within one year............................ (2,939)
--------
Long-term debt, net of current portion...................... $273,617
========
</TABLE>
- ------------------------
(a) In connection with the recapitalization of Weekly Reader in 1999, Weekly
Reader, CompassLearning Inc. and WRC Media issued 152,000 Units consisting
of $152,000 in aggregate principal amount of 12 3/4% Senior Subordinated
Notes (the "Notes") due 2009 and 205,656 shares of common stock. Interest on
the notes is payable semi-annually, commencing May 15, 2000.
Based upon an independent valuation, $148,289 was allocated to the value of
the Senior Subordinated Notes while $3,711 was the value ascribed to the
common stock. The notes were issued net of a $2,906 discount, which is being
accreted to maturity using the effective interest method. Accretion of the
debt discount was not significant.
Prior to November 15, 2002, the Company may redeem up to 35% of the Notes
with net cash proceeds of certain sales of equity securities at a price of
112.75% of the principal amount, plus accrued and unpaid interest.
F-44
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
10. LONG-TERM DEBT (CONTINUED)
On or after November 15, 2004, the Company may redeem the notes at a
redemption price of 106.375% of the principal amount, plus accrued interest
thereon decreasing annually to 100% in 2007 and thereafter.
The notes are unconditionally guaranteed by the subsidiaries of the Company.
(b) The senior bank credit facilities are comprised of $30,000 million revolving
credit facility (which includes a letter of credit subfacility) maturing in
2005, the $31,000 term Loan A Facility maturing in 2005 and the $100,000
term loan B facility maturing in 2006. As of December 31, 1999, no amounts
were outstanding under the revolving credit facility and $30,613 and $99,750
were outstanding under the term loan A and the term loan B facilities,
respectively. The term loan A facility and the term loan B facility amortize
in quarterly installments beginning on December 31, 1999.
Loans under the senior bank credit facilities bear interest at a rate per
annum equal to-
1. for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25% (subject to
performance-based step downs); and
2. for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
In addition to paying interest on outstanding loans under the senior bank
credit facilities, the Company is required to pay a commitment fee to the
lenders associated with the revolving credit facility in respect of the
unused commitments thereunder at a rate of 0.5% per annum (subject to
performance-based step downs).
The senior bank credit facilities are subject to mandatory prepayment
with-
- the proceeds of the incurrence of certain indebtedness;
- the proceeds of certain asset sales or other dispositions;
- the proceeds of issuances of certain equity offerings; and
- annually beginning in 2000, 50% of the Company's excess cash flow (as
defined in the credit agreement) from the prior year.
The borrowing agreements provide for certain restrictions, including
restrictions on asset sales, dividend payments and additional indebtedness
payments for restricted investments. In addition, the borrowing agreements
provide for the maintenance of certain financial covenants, including a limit on
the consolidated leverage rates and maintenance of minimum fixed charges
coverage ratios.
F-45
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
10. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows-
<TABLE>
<S> <C>
2000........................................................ $ 2,939
2001........................................................ 4,487
2002........................................................ 6,037
2003........................................................ 7,588
2004........................................................ 8,363
Thereafter.................................................. 252,950
</TABLE>
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 20,000,000 shares of preferred stock in series
and to designate accordingly the dividend, voting, conversion, redemption and
liquidations rights for each series. The 15% Preferred Stock is due in 2011 and
has an aggregate liquidation preference of $25.00 per share. WRC Media, who
holds all of the 3,000,000 preferred stock outstanding, is entitled to receive
dividends at 15% per annum, subject to adjustment under certain conditions.
During 1999, accrued preferred stock dividends amounted to $1,406 and are
payable in additional shares of preferred stock. The Company may redeem the
preferred stock, including unpaid dividends, prior to November 17, 2002 or after
November 17, 2004, subject to certain conditions.
12. RETIREMENT PLANS
Substantially all of Weekly Reader's employees are eligible to participate
in a defined contribution plan of PRIMEDIA. The expense recognized by Weekly
Reader for the plan was $502 in 1997, $425 in 1998 and $444 in 1999.
American Guidance sponsors a defined benefit pension plan (the "American
Guidance Plan") for the benefit of its employees. The allocation of the purchase
price of American Guidance included a liability of $792 related to this plan.
The benefits to be paid under the American Guidance Plan are based on years of
service and compensation amounts for the average of the highest five consecutive
plan years. The American Guidance Plan is funded by means of contributions to
the plan's trust. The pension funding policy is consistent with the funding
requirements of U.S. Federal and other governmental laws and regulations. Plan
assets consist primarily of fixed income, equity and other short-term
investments.
F-46
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
12. RETIREMENT PLANS (CONTINUED)
The following tables set forth the American Guidance Plan's funded status as
of December 31, 1998 and 1999 and the amounts recognized in Weekly Reader's
statement of consolidated operations and accumulated deficit from the
acquisition date through December 31, 1998 and the year ended December 31, 1999:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Change in benefit obligation-
Projected benefit obligation at acquisition date........ $ 8,682 $ 8,455
Service cost.......................................... 318 85
Interest cost......................................... 287 75
Actuarial loss........................................ 308 (17)
Benefits paid......................................... (137) (32)
------- -------
Projected benefit obligation........................ 9,458 8,566
------- -------
Change in plan assets-
Fair value of plan assets at acquisition date........... 8,198 8,521
Actual return on plan assets.......................... (276) 96
Benefits paid......................................... (137) (32)
------- -------
Fair value of plan assets........................... 7,785 8,585
------- -------
Funded status............................................. (1,673) 19
Unrecognized actuarial loss............................... 637 (1,654)
------- -------
Accrued pension cost................................ ($1,036) ($1,635)
======= =======
Components of net periodic pension expense:
Service cost............................................ $ 318 $ 85
Interest cost........................................... 287 75
Expected return on plan assets.......................... (361) (85)
------- -------
Net periodic pension expense........................ $ 244 $ 75
======= =======
Weighted-average assumptions as of December 31, 1998 and
1999:
Discount rate........................................... 6.5% 6.5%
Expected return on plan assets.......................... 9.0% 9.0%
Rate of compensation increase........................... 4.5% 4.5%
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Total rent expense under operating leases was $1,776, $1,836 and $1,934 for
the years ended December 31, 1997, 1998 and 1999, respectively. Certain leases
are subject to escalation clauses and
F-47
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
certain leases contain renewal options. Minimum rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $2,242
2001........................................................ 2,174
2002........................................................ 2,261
2003........................................................ 2,273
2004........................................................ 2,314
Thereafter.................................................. 2,412
</TABLE>
CONTINGENCIES
Weekly Reader is involved in ordinary and routine litigation incidental to
its business. In the opinion of management, there is no pending legal proceeding
that would have a material adverse affect on the consolidated financial
statements of Weekly Reader.
14. RELATED PARTY TRANSACTIONS
The consolidated financial statements at December 31, 1998 include the net
investment by PRIMEDIA which relates to net transfers of cash under a
centralized cash management system, allocations of PRIMEDIA's debt with related
deferred financing fees and interest and allocations of PRIMEDIA's equity.
Outstanding intercompany debt was approximately $167,000 at December 31, 1998.
PRIMEDIA's borrowings under its bank credit facilities and senior notes are
guaranteed by Weekly Reader and each of PRIMEDIA's other domestic wholly-owned
subsidiaries. Deferred financing costs are being amortized by the straight-line
method over the terms of the related indebtedness of PRIMEDIA.
The consolidated financial statements also include costs allocated to Weekly
Reader from PRIMEDIA consisting of: (1) corporate overhead for services and
administrative functions shared with PRIMEDIA and its other operating companies
including, but not limited to, executive management costs, salaries and fringe
benefits for certain legal, financial, information technology and human
resources personnel, information technology expenses, real estate expenses and
third party costs; and (2) direct group overhead costs such as the salaries,
fringe benefits and expenses for PRIMEDIA staff directly involved in operating
Weekly Reader. Corporate overhead costs were allocated based on relative
budgeted profitability measures. Management believes that these allocations were
made on a reasonable basis. This accounting treatment is common in subsidiary
financial statements and may not reflect the actual access to financial
resources and actual expenses which Weekly Reader might have incurred as a
stand-alone operation. These allocations were discontinued subsequent to the
recapitalization of Weekly Reader on November 17, 1999.
Payment of trade payables and other disbursements are processed through the
centralized cash management system operated by PRIMEDIA. All receipts from
customers are collected in Weekly Reader's lock boxes and then transferred to
PRIMEDIA.
F-48
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXPECT SHARE AMOUNTS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
The activity in the Investment by PRIMEDIA, net account for the years ended
December 31, 1997, 1998 and 1999 is as follows-
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year................... $ 84,141 $ 91,397 $ 183,853
Push-down accounting relating to
acquisitions............................... 17,452 107,411 --
Transfers from PRIMEDIA and subsidiaries,
net........................................ (10,196) (14,955) (183,853)
-------- -------- ---------
Balance, end of year......................... $ 91,397 $183,853 $ --
======== ======== =========
</TABLE>
PRIMEDIA does not assess interest to Weekly Reader on its outstanding
intercompany balances other than on the outstanding intercompany debt.
Certain management members of Weekly Reader receive stock options for the
purchase of PRIMEDIA common stock. The stock options were granted with exercise
prices equal to the quoted market price at the time of issuance. The number of
stock options granted during 1997 and 1998 was
0 and 110,660, respectively. The number of stock options exercised during 1997
and 1998 was 4,200 and 600, respectively. The number of stock options
outstanding at December 31, 1998 was 303,100.
F-49
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 14,143 $ 3,430
Accounts receivable, net.................................. 27,440 26,802
Inventories, net.......................................... 13,952 12,785
Due from related party.................................... 500 5,711
Prepaid Expenses.......................................... 1,642 2,396
Other current assets...................................... 20,234 20,098
--------- ---------
Total current assets.................................... 77,911 71,222
Property and equipment, net................................. 6,245 5,884
Other intangible assets, net................................ 44,338 43,743
Excess of purchase price over net assets acquired, net...... 107,801 107,075
Other non-current assets.................................... 46 29
--------- ---------
Total assets............................................ $ 236,341 $ 227,953
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 19,491 11,295
Deferred revenue.......................................... 18,989 17,644
Accrued expenses and other................................ 36,274 32,041
Current portion of long term debt......................... 2,939 3,325
--------- ---------
Total current liabilities............................... $ 77,693 $ 64,305
Long-term debt.............................................. 273,617 274,700
Commitments and contingencies...............................
Redeemable preferred stock, plus accrued dividends.......... 76,406 77,866
Stockholders deficit:
Common stock ($.01 par value, 20,000,000 shares authorized:
2,830,000 shares issued).................................. 28 28
Class A non-voting common stock ($.01 par value, 1,000,000
shares authorized, no shares issued or outstanding)....... -- --
Class B non-voting common stock ($.01 par value, 1,000,000
shares authorized, no shares issued or outstanding)....... -- --
Additional Paid in Capital.................................. 9,133 9,133
Due from parent............................................. (68,684) (64,195)
Accumulated Deficit......................................... (131,852) (133,884)
--------- ---------
Total stockholders' deficit............................. $(191,375) $(188,918)
--------- ---------
Total liabilities and stockholders' deficit............. $ 236,341 $ 227,953
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-50
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Sales, net.................................................. $33,099 $35,708
Cost of goods sold.......................................... 8,287 9,703
------- -------
Gross Profit............................................ 24,812 26,005
Operating costs and expenses:
Marketing and selling..................................... 5,908 5,916
Distribution, circulation and fulfillment................. 3,050 3,173
Editorial................................................. 2,462 2,487
General and administrative................................ 3,577 4,382
Corporate and group overhead.............................. 1,606 867
Depreciation and amortization............................. 3,991 3,713
------- -------
Operating Income........................................ 4,218 5,467
Other income (expense)......................................
Interest expense, including amortization of deferred
financing costs......................................... (3,333) (8,228)
Other, net................................................ (571) 45
------- -------
Income (loss) before income tax expense..................... 314 (2,716)
Income tax provision........................................ -- 450
------- -------
Net income (loss)........................................... $ 314 $(3,166)
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-51
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 314 $ (3,166)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 3,991 3,715
Amortization of deferred financing fees................... 44 --
Changes in operating assets and liabilities:
(Increase) decrease in-
Accounts receivable....................................... (536) 638
Inventories............................................... (216) 1,167
Prepaid expenses.......................................... (240) (753)
Other assets.............................................. (433) (813)
Increase (decrease) in-
Accounts payable.......................................... (6,091) (8,197)
Deferred revenue.......................................... (3,073) (1,344)
Accrued expenses and other liabilities.................... (1,847) (1,964)
------- --------
Net cash used in operating activities................... (8,087) (10,717)
------- --------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net........... (986) (1,065)
------- --------
Net cash used in investing activities................... (986) (1,065)
------- --------
FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... -- 2,000
Retirement of senior bank debt............................ -- (638)
Intercompany, net......................................... 9,753 (293)
------- --------
Net cash provided by financing activities............... 9,753 1,069
------- --------
INCREASE (DECREASE) IN CASH................................. 680 (10,713)
CASH, beginning of period................................... 1,964 14,143
------- --------
CASH, end of period......................................... $ 2,644 $ 3,430
======= ========
SUPPLEMENTAL INFORMATION-Cash paid for interest............. $ 3,289 $ 2,720
======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-52
<PAGE>
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
Weekly Reader Corporation ("WRC" or the "Company"), PRIMEDIA Reference, Inc.
("PRI") and American Guidance Services, Inc. ("American Guidance") were
wholly-owned subsidiaries of PRIMEDIA Inc. ("PRIMEDIA"). On August 13, 1999,
PRIMEDIA entered into a Redemption, Stock Purchase and Recapitalization
Agreement (as amended as of October 26, 1999, the "Recapitalization Agreement")
with WRC Media Inc., formerly EAC II Inc. ("WRC Media"). The terms of the
Recapitalization Agreement required that all of the outstanding capital stock of
PRI and American Guidance be contributed to WRC prior to WRC Media's purchase of
majority interest in WRC for a purchase price of $395,000. The presentation of
these financial statements reflects the capital contribution made by PRIMEDIA to
WRC of all the PRI and American Guidance shares at their historical carrying
values. In addition, on October 5, 1999, the authorized capital of WRC was
amended to consist of 20,000,000 shares of common stock, par value $.01/share,
and WRC declared a 10,000-for-one stock split effective on October 5, 1999. This
amendment was retroactively reflected on the financial statements. On
November 17, 1999, WRC Media completed its recapitalization of WRC. The
consolidated financial statements include the accounts of WRC and its
subsidiary, Lifetime Learning System, Inc. ("Lifetime Learning"), PRI and its
subsidiaries, Funk & Wagnalls Yearbook Corporation and Gareth Stevens, Inc.
("Gareth Stevens"), and American Guidance and its subsidiary, AGS International
Sales, Inc. (collectively referred to as "Weekly Reader"). As a result of the
recapitalization, WRC now owns 94.9% and PRIMEDIA 5.1% of the common stock of
Weekly Reader. On November 17, 1999, PRI legally changed its name to World
Almanac Education Group ("WAE").
All significant intercompany balances and transactions have been eliminated
in the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been
prepared without audit. 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.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with Weekly Reader Corporation and Subsidiaries annual financial
statements and related notes for the year ended December 31, 1999. The operation
results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for a full year.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WRC Media Inc. and
Ripplewood Holding, L.L.C.:
We have audited the accompanying balance sheet of COMPASSLEARNING, INC.
(formerly JLC Learning Corporation and formerly EAC I Inc.) (a Delaware
corporation) (the Company) as of December 31, 1999, and the related statements
of operations and comprehensive loss, and cash flows for the period from
July 14, 1999 (commencement of operations) to December 31, 1999, and the related
statement of stockholders' deficit for the period from May 12, 1999 (inception)
to December 31, 1999, and the accompanying statements of operations and
comprehensive loss, stockholders' deficit and cash flows of the Company's
predecessor, JLC Learning Corporation, for the period from January 1, 1999 to
July 13, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1999, and the results of the Company's and its predecessor's
operations and cash flows for the periods from July 14, 1999 to December 31,
1999 and from January 1, 1999 to July 13, 1999, respectively, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
March 20, 2000
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CompassLearning, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and comprehensive loss, stockholders' deficit and cash flows present
fairly, in all material respects, the financial position of JLC Learning
Corporation (prior to being acquired by WRC Media Inc.) (the "Predecessor
Company") at December 31, 1998 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Predecessor Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of the Predecessor Company for any period subsequent to
December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
July 14, 1999
F-55
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
PREDECESSOR COMPANY
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ -- $ 102
Accounts receivable, net of allowance for doubtful
accounts of $1,327 and $513, respectively............... 21,087 19,954
Due from parent........................................... -- 598
Inventories............................................... 1,011 730
Prepaid expenses.......................................... 2,743 1,319
Investment in marketable securities....................... 314 24
--------- ---------
Total current assets.................................... 25,155 22,727
Software development costs, net............................. 2,690 --
Purchased software, net..................................... -- 6,566
Deferred financing fees..................................... 859 --
Other acquired intangible assets, net....................... 959 48,156
Fixed assets, net........................................... 2,090 1,653
--------- ---------
$ 31,753 $ 79,102
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 2,678 $ 2,508
Due to related parties.................................... 955 500
Accrued salaries and related items........................ 5,942 5,895
Other accrued liabilities................................. 9,587 10,795
Current portion of deferred revenue....................... 20,936 16,971
Current portion of long-term debt......................... -- 2,939
Senior subordinated debt.................................. 17,000 --
--------- ---------
Total current liabilities............................... 57,098 39,608
Deferred revenue, net of current portion.................... 1,723 1,780
Long-term debt.............................................. -- 273,617
Revolving line of credit.................................... 2,238 --
Due to related parties...................................... 2,901 2,160
Other long-term liabilities................................. 818 15
Term note payable to bank................................... 7,500 --
--------- ---------
Total liabilities....................................... 72,278 317,180
--------- ---------
Commitments and contingencies
Stockholders' Deficit:
Mandatorily redeemable preferred stock, $0.01 par value,
10,000 shares authorized issued and outstanding in 1998
(liquidation preference--$11,230 in 1998)............... 11,230 --
Redeemable preferred stock, $.01 par value, 20,000 shares
authorized, issued and outstanding in 1998.............. -- --
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding in 1999.... -- --
Class A common stock, $0.01 par value; 20,000 shares
authorized, 10,000 shares issued and outstanding
(120,565,000 shares authorized, 1,000 shares issued and
outstanding in 1998).................................... -- --
Additional paid-in capital................................ 75,803 31,316
Accumulated deficit....................................... (109,891) (18,708)
Due from parent........................................... -- (250,674)
Unallocated purchase consideration........................ (17,981) --
Cumulative other comprehensive income (loss).............. 314 (12)
--------- ---------
Total stockholders' deficit............................. (40,525) (238,078)
--------- ---------
$ 31,753 $ 79,102
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1998, FOR THE PERIOD FROM JANUARY 1, 1999 TO
JULY 13, 1999 AND FOR THE PERIOD FROM JULY 14, 1999 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------- JULY 14, 1999
JANUARY 1, 1999 TO
TO JULY 13, DECEMBER 31,
1997 1998 1999 1999
-------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenue:
Software license............................. $ 29,159 $ 30,949 $16,231 $ 16,521
Service...................................... 36,029 33,935 16,123 13,502
Hardware..................................... 6,624 4,014 1,669 1,755
-------- -------- ------- --------
71,812 68,898 34,023 31,778
-------- -------- ------- --------
Cost of products sold:
Software license............................. 30,435 6,936 2,783 2,937
Service...................................... 23,399 19,235 9,295 7,622
Hardware..................................... 5,550 3,229 1,296 1,100
-------- -------- ------- --------
59,384 29,400 13,374 11,659
-------- -------- ------- --------
Gross profit................................... 12,428 39,498 20,649 20,119
-------- -------- ------- --------
Operating expenses:
Sales and marketing.......................... 31,357 24,034 11,038 10,444
Research and development..................... 11,177 8,022 3,831 3,861
Write-off of purchased in-process research
and development............................ -- -- -- 9,000
General and administrative................... 13,508 7,705 3,978 2,534
Amortization of intangible assets............ 5,449 245 131 4,014
Restructuring................................ -- 3,012 -- --
-------- -------- ------- --------
61,491 43,018 18,978 29,853
-------- -------- ------- --------
Income (loss) from operations.................. (49,063) (3,520) 1,671 (9,734)
Interest expense............................... (5,013) (4,286) (2,854) (5,654)
Other income (expense), net.................... (2,128) 33 405 16
-------- -------- ------- --------
Loss before income tax expense................. (56,204) (7,773) (778) (15,372)
Income tax expense............................. -- -- -- --
-------- -------- ------- --------
Loss before extraordinary loss................. (56,204) (7,773) (778) (15,372)
Extraordinary loss on debt extinguishment, net
of income taxes.............................. -- -- -- (3,336)
-------- -------- ------- --------
Net loss....................................... (56,204) (7,773) (778) (18,708)
Other comprehensive loss, net of income tax:
Unrealized holding gain (loss) arising during
the period................................. -- 314 119 (12)
Less: reclassification adjustment for gains
included in net loss....................... -- -- (396) --
-------- -------- ------- --------
Comprehensive loss............................. $(56,204) $ (7,459) $(1,055) $(18,720)
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
STATEMENTS OF STOCKHOLDERS' DEFICIT
PREDECESSOR
YEARS ENDED DECEMBER 31, 1997, 1998 AND
FOR THE PERIOD FROM JANUARY 1, 1999 TO JULY 13, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE REDEEMABLE CLASS A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ----------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- --------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ 10,000 $ 9,076 20,000 $ -- 1,000 $ -- $ 75,803
Accrued dividends on mandatorily
redeemable preferred stock.... -- 1,000 -- -- -- -- --
Accretion of stock issuance
costs and related discount.... -- 77 -- -- -- -- --
Net loss for the year ended
December 31, 1997............. -- -- -- -- -- -- --
------- ------- ------- -------- --------- ---- ---------
Balance, December 31, 1997........ 10,000 $10,153 20,000 -- 1,000 -- 75,803
Accrued dividends on mandatorily
redeemable preferred stock.... -- 1,000 -- -- -- -- --
Accretion of stock issuance
costs and related discount.... -- 77 -- -- -- -- --
Net loss for the year ended
December 31, 1998............. -- -- -- -- -- -- --
Comprehensive income............ -- -- -- -- -- -- --
------- ------- ------- -------- --------- ---- ---------
Balance, December 31, 1998........ 10,000 11,230 20,000 -- 1,000 -- 75,803
Accrued dividends on mandatorily
redeemable preferred stock.... -- 500 -- -- -- -- --
Accretion of stock issuance
costs and related discount.... -- 39 -- -- -- -- --
Comprehensive loss.............. -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
------- ------- ------- -------- --------- ---- ---------
Balance, July 13, 1999............ 10,000 $11,769 20,000 $ -- 1,000 $ -- $ 75,803
======= ======= ======= ======== ========= ==== =========
===========================================================================================================================
<CAPTION>
CUMULATIVE
UNALLOCATED OTHER
ACCUMULATED PURCHASE COMPREHENSIVE
DEFICIT CONSIDERATION INCOME TOTAL
----------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996........ $ (43,760) $(17,981) $ -- $ 23,138
Accrued dividends on mandatorily
redeemable preferred stock.... (1,000) -- -- --
Accretion of stock issuance
costs and related discount.... (77) -- -- --
Net loss for the year ended
December 31, 1997............. (56,204) -- -- (56,204)
--------- -------- ----- --------
Balance, December 31, 1997........ (101,041) (17,981) -- (33,066)
Accrued dividends on mandatorily
redeemable preferred stock.... (1,000) -- -- --
Accretion of stock issuance
costs and related discount.... (77) -- -- --
Net loss for the year ended
December 31, 1998............. (7,773) -- -- (7,773)
Comprehensive income............ -- -- 314 314
--------- -------- ----- --------
Balance, December 31, 1998........ (109,891) (17,981) 314 (40,525)
Accrued dividends on mandatorily
redeemable preferred stock.... (500) -- -- --
Accretion of stock issuance
costs and related discount.... (39) -- -- --
Comprehensive loss.............. -- -- (277) (277)
Net loss........................ (778) -- -- (778)
--------- -------- ----- --------
Balance, July 13, 1999............ $(111,208) $(17,981) $ 37 $(41,580)
========= ======== ===== ========
==================================
</TABLE>
COMPANY
FOR THE PERIOD FROM JULY 14, 1999 TO DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CUMULATIVE
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------- PAID-IN ACCUMULATED DUE FROM COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT PARENT LOSS DEFICIT
--------- ------------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 14, 1999..... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Class A
common stock........... 10,000 -- 28,698 -- -- -- 28,698
Issuance of warrants..... -- -- 2,160 -- -- -- 2,160
Transfer of warrants to
related party.......... -- -- (2,160) -- -- -- (2,160)
Issuance of parent's
long-term debt
warrants............... -- -- 2,618 -- (250,674) -- (248,056)
Comprehensive loss....... -- -- -- -- -- (12) (12)
Net loss................. -- -- -- (18,708) -- -- (18,708)
--------- ---- --------- --------- --------- ----- ---------
Balance, December 31,
1999..................... 10,000 $ -- $ 31,316 $ (18,708) $(250,674) $ (12) $(238,078)
========= ==== ========= ========= ========= ===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1998, FOR THE PERIOD FROM JANUARY 1, 1999
TO JULY 13, 1999 AND FOR THE PERIOD FROM JULY 14, 1999
TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------- JULY 14, 1999
JANUARY 1, 1999 TO
TO JULY 13, DECEMBER 31,
1997 1998 1999 1999
-------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................ $(56,204) $(7,773) $ (778) $ (18,708)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization......................... 33,733 4,025 1,713 5,135
Impairment of investments in equity securities........ 2,157 -- -- --
Write-off of purchased in-process research and
development......................................... -- -- -- 9,000
Extraordinary loss.................................... -- -- -- 3,336
Gain on disposition of marketable securities.......... -- -- (396) --
Provision for doubtful accounts receivable............ -- -- 225 (23)
Amortization of deferred financing fees and debt
discount............................................ 2,302 286 204 297
Changes in assets and liabilities, net of effect of
business acquired:
Decrease (increase) in accounts receivable.......... 5,348 8,353 966 (777)
Decrease in inventories............................. 1,483 39 269 13
Decrease in prepaid expenses........................ 2,872 106 1,107 5
(Decrease) increase in accounts payable............. (1,120) (139) (554) 384
Increase (decrease) in due to related parties....... 700 (15) -- --
Increase (decrease) in accrued salaries and related
items............................................. 12 554 (144) (1,936)
(Decrease) increase in deferred revenue............. (2,333) (6,862) (6,267) 2,702
Net (decrease) increase in other accrued liabilities
and other long-term liabilities................... (3,603) 1,171 (908) (1,466)
-------- ------- -------- ---------
Net cash used in operating activities............. (14,653) (255) (4,563) (2,038)
-------- ------- -------- ---------
Cash Flows From Investing Activities:
Purchase of business.................................... -- -- -- (55,493)
Capital expenditures.................................... (1,136) (536) (142) (374)
Proceeds from disposition of marketable securities...... -- -- 396 --
Cash paid for trademark................................. -- -- -- (375)
Software development costs capitalized.................. (3,125) -- -- --
-------- ------- -------- ---------
Net cash provided by (used in) investing
activities...................................... (4,261) (536) 254 (56,242)
-------- ------- -------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................. -- -- -- 28,698
Decrease in due to former parent........................ (179) (162) --
Borrowings under revolving line of credit............... -- -- 36,816 18,510
Payments on revolving line of credit.................... (14,300) (65,552) (31,912) (18,510)
Proceeds from revolving line of credit, net of financing
fees of $1,145 in 1998................................ 22,800 66,645 -- --
Borrowings under senior subordinated notes.............. -- -- -- 165,193
Payments on senior subordinated notes................... -- -- -- (19,000)
Retirement of previous line of credit, net.............. -- (8,500) -- --
Borrowings under senior credit facility................. -- -- -- 133,363
Payments on senior credit facility...................... -- -- -- (3,000)
Borrowings on long-term note payable to bank............ -- 7,500 -- --
Payment of financing fees............................... -- -- -- (1,473)
Increase in due from Parent............................. -- -- -- (248,654)
Increase in due to related party........................ -- -- -- 2,660
-------- ------- -------- ---------
Net cash provided by (used in) financing
activities...................................... 8,321 (69) 4,904 57,787
-------- ------- -------- ---------
Change in Cash............................................ (10,593) (860) 595 (493)
Cash, beginning of period................................. 11,453 860 -- 595
-------- ------- -------- ---------
Cash, end of period....................................... $ 860 $ -- $ 595 $ 102
======== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS
CompassLearning, Inc. (formerly JLC Learning Corporation and formerly EAC
I Inc.) (the "Company") is a provider of technology-based educational programs
to schools and school districts for kindergarten through twelfth grade. Prior to
July 14, 1999, the Company's predecessor (the "Predecessor") was a wholly-owned
subsidiary of Software Systems Corporation ("SSC"), a wholly-owned subsidiary of
JLC Learning Holdings, Inc. ("Holdings").
The Company operates in the education software industry and management
believes it has maintained a leadership position among a multitude of providers.
The Company's products and services include fully integrated software systems,
standalone CD ROM delivery, and a full service offering, including installation,
teacher training, onsite and remote diagnostics and maintenance.
The Company focuses its market efforts in the United States and several U.S.
territories, and is exploring opportunities in international markets. The
Company's selling and distribution efforts include a direct sales force,
telemarketing and catalog sales.
The Predecessor was acquired by WRC Media Inc. (the "Parent") on July 14,
1999 (the "Purchase Date"). The Company's statement of operations and
comprehensive loss and cash flows for the period from July 14, 1999 to
December 31, 1999 include the operations of the Predecessor since the Purchase
Date. The Securities and Exchange Commission deems an acquired business to be a
predecessor when the registrant is in substantially the same business of the
entity acquired and the registrant's own operations prior to the acquisition
appear insignificant relative to the business acquired. A predecessor must
present audited financial statements for the interim period between the
predecessor's most recent year-end and the date of the acquisition by the
registrant. Accordingly, the accompanying financial statements for the period
from January 1, 1999 to July 13, 1999 of the Predecessor, and for the period
from July 14, 1999 to December 31, 1999 of the Company are presented. The
purchase method of accounting was used to record assets acquired and liabilities
assumed by the Company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since those financial statements report
financial position, results of operations, and cash flows of two separate
entities.
On November 17, 1999, the Parent completed a recapitalization (the
"Recapitalization") of Primedia Inc.'s Supplemental Education Group, consisting
of the businesses of Weekly Reader, American Guidance and World Almanac. In
connection with the Recapitalization, the Company's existing indebtedness
incurred in connection with the purchase of the Predecessor was extinguished.
Accordingly, the Company has recognized an extraordinary loss on debt
extinguishment of $3,336 in its accompanying statement of operations during the
period July 14, 1999 to December 31, 1999.
As a result of the Recapitalization, the Company became, along with certain
other Parent subsidiaries, a co-issuer of the Parent's 12 3/4% Senior
Subordinated Notes, due 2009 ("Notes") and senior bank credit facilities. The
Company relies on the Parent's and its subsidiaries, (including the other
co-issuer subsidiaries) ability to fund the debt service. The inability of the
Parent and its subsidiaries (including the other co-issuer subsidiaries) to meet
the debt service requirements would adversely impact the Company's financial
position and results of operations.
F-60
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS (CONTINUED)
A. FORMATION OF THE COMPANY
The Company was incorporated on May 12, 1999, for the purpose of acquiring
the Predecessor. The acquisition was consummated by EAC I Inc.(a wholly-owned
subsidiary of the Parent) merging with the Predecessor, with EAC I Inc. being
the surviving entity. EAC I Inc. then changed its name to JLC Learning
Corporation, which subsequently changed its name to CompassLearning, Inc. on
January 20, 2000.
B. ACQUISITION OF THE PREDECESSOR
On July 14, 1999, the Parent purchased all the outstanding common stock and
preferred stock of the Predecessor for approximately $55,200. The purchase price
and acquisition costs were funded by approximately $28,700 in equity
contributions, and a senior credit facility and senior subordinated notes of
approximately $29,537. There was approximately $350 in cash after the
acquisition. Concurrent with the closing, the Predecessor's existing line of
credit, term note payable to the bank, senior subordinated notes and notes
payable to related parties were refinanced.
The acquisition of the Predecessor was accounted for using the purchase
method of accounting. The total cost of the acquisition of $61,935 (including
$6,735 of acquisition costs) was allocated to assets and liabilities based on an
independent valuation of their estimated fair values as of the Purchase Date as
follows:
<TABLE>
<S> <C>
Net liabilities assumed..................................... $(6,290)
Purchased software.......................................... 7,430
In-process research and development......................... 9,000
Other intangible assets..................................... 24,700
Goodwill.................................................... 27,095
-------
$61,935
=======
</TABLE>
Included in the purchase price allocation above, are obligations related to
bonuses payable as a result of the acquisition and Stock Appreciation Rights
("SARs") (see Note 16).
Immediately following the acquisition, the Company recognized a $9,000
charge related to the write-off of purchased in-process research and development
("R&D") costs acquired in connection with the acquisition described above.
The nature of the efforts required to develop the acquired in-process
technologies into commercially viable products principally relate to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical and economic
performance requirements.
The valuation of the acquired in-process research and development was
predicated on the determination that the developmental projects at the time of
the acquisition were not technologically feasible and had no alternative future
use. This conclusion was attributable to the fact that the Company had not
completed a working model that had been tested and proven to work at performance
F-61
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS (CONTINUED)
levels which were expected to be commercially viable and that the technologies
of the projects have no alternative use other than as a software application.
The value is attributable solely to the development efforts completed as of the
acquisition date.
As of the acquisition date, the Predecessor's significant ongoing R&D
projects included the development of:
- Curriculum: Next-generation reading system (5-8)
- Assessment: Web-based JCAT platform
- Management: Compass 4.x and Compass 5.0 (next-generation)
The Company allocated values to the in-process R&D based on an assessment by
an independent valuation expert of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the Predecessor's
next-generation Internet-based technologies and products.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The present
value calculations were then adjusted to reflect the estimated percent complete
of each project, a procedure designed to reflect the value creation efforts of
the target companies prior to the close of the acquisition.
The developmental projects were evaluated in the context of Statement of
Financial Accounting Standards (SFAS) No. 2, ACCOUNTING FOR RESEARCH AND
DEVELOPMENT COSTS, including its related interpretation, and SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD LEASED, OR OTHERWISE
MARKETED. In-process R&D involves products which fall under the following
definitions of R&D (as defined in SFAS No. 2):
- Research is defined as the planned search or critical investigation aimed
at discovery of new knowledge with the hope that such knowledge will be
useful in developing a new product, service, process, or technique, or in
bringing about a significant improvement to an existing product or
process.
- Development is defined as the translation of research findings or other
knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended
for sale or use. It includes the conceptual formulation, design, and
testing of product alternatives, construction of prototypes, and operation
of pilot plants.
Activities specifically excluded from R&D include engineering follow-through
in an early phase of commercial production; routine, ongoing efforts to refine
or enhance an existing product; and the adaptation of existing capabilities to a
particular customer's needs.
In order to calculate the value of the in-process R&D, the income approach
was employed. Each of the significant ongoing R&D projects was identified and
valued through interviews and analysis of
F-62
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS (CONTINUED)
product development data provided by management concerning project descriptions,
their respective stage of development, the time and resources needed to complete
the projects, expected income generating ability, and associated risks. Of the
$9,000 write-off of in-process R&D, $220, $80 and $8,700 was allocated to the
management, assessment, and curriculum described above.
The resulting cash flows were discounted to their present value by applying
appropriate discount rates considering each asset's relative risk. The discount
rate selected for the in-process technologies was 20%. In the selection of the
appropriate discount rate, consideration was given to the weighted average cost
of capital. The discount rate utilized for the in-process technologies was
higher than the Company's overall rates of return due to the risk of realizing
cash flows from products that had yet to reach technological feasibility. The
returns on all the acquired assets were established and weighted to ensure the
rates were reasonable in the context of the overall required return.
Accordingly, the assets, including in-process R&D, and liabilities, are
recorded based on their fair values at the date of acquisition and the results
of operations for the acquisition has been included in the financial statements
for the periods subsequent to acquisition. The Company allocated the fair values
of the net assets acquired between acquired in-process R&D, developed technology
and goodwill.
C. UNAUDITED PROFORMA INFORMATION
The following unaudited proforma information includes the combined results
of operations of the Company and its Predecessor for the period from January 1,
1999 to December 31, 1999, and gives effect to the acquisition of the
Predecessor as if it had been consummated on January 1, 1999 and the completion
of the Recapitalization on November 17, 1999.
<TABLE>
<S> <C>
Net revenue................................................. $65,801
Loss from operations........................................ 3,176
Net loss.................................................... 7,044
</TABLE>
The unaudited pro forma information excludes the effect of the $9,000 charge
related to the write-off of purchased in-process research and development and
has been adjusted for interest expense, depreciation and amortization expense
resulting from the acquisition of the Predecessor and the completion of the
Recapitalization. The unaudited pro forma information is provided for
illustrative purposes only and is not necessarily indicative of the combined
results of operations that would have been achieved had the acquisition occurred
on the date indicated, nor does it purport to project the results of operations
of the Company for the year or for any future period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported
F-63
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
B. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies at
December 31, 1999. Considerable judgment is required in estimating fair values.
Accordingly, the estimates may not be indicative of the amounts the Company
could realize in a current market exchange. The carrying amounts of cash,
accounts receivable, and accounts payable approximate fair values. The carrying
value of the notes and warrants approximate market based upon the fact that
these instruments were issued in late 1999.
C. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) basis. The Company periodically evaluates the
realizability of inventories.
D. INVESTMENT IN MARKETABLE SECURITIES
The Company classifies its investment in marketable securities as available
for sale. Accordingly, the investment is recorded at fair value with unrealized
gains or losses, net of the related tax effect, excluded from income and
reported as other comprehensive income (loss). A loss included in other expense
of $2,157 was realized on investments in 1997 due to what was considered a
nontemporary decline in fair value. During 1998, pursuant to a business
combination involving the Predecessor's investee, the investment which was
written down to zero in 1997 was exchanged for shares of a publicly traded
company. The unrealized gain of $314 at December 31, 1998 reflects the market
value of this investment. The Predecessor had proceeds from the disposition of
marketable securities of $396, in the period January 1, through July 13, 1999
and no realized gains or losses in 1998.
E. PURCHASED SOFTWARE AND DEVELOPMENT COSTS
In accordance with SFAS No. 86, "ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED," the Company capitalizes
software development costs by project commencing when technological feasibility
is established and concluding when the product is ready for commercial release.
Additionally, the Company capitalizes acquired technologies that meet the
provisions of SFAS No. 86. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
product lives and changes in software and hardware technology. Software
development costs are amortized on a straight-line basis over four years or the
expected life of the product, whichever is less. The Company periodically
evaluates the net realizable value of capitalized software development costs
based on factors such as budgeted sales, product development cycles and
management's market emphasis. R&D costs are charged to expense when incurred.
F-64
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OTHER ACQUIRED INTANGIBLE ASSETS
Intangible assets include goodwill, tradenames, trademark, customer lists
and workforce in place. Goodwill represents the excess of the purchase price
over the fair value of assets acquired as a result of the acquisition of the
Predecessor on July 14, 1999 and is being amortized on a straight-line basis
over 18 months to seven years. For the periods prior to July 14, 1999,
intangible assets included goodwill that was amortized over seven years.
G. DEFERRED FINANCING FEES
Deferred financing fees are direct costs paid by the Company in connection
with their revolving credit agreement. These costs were being amortized over the
term of the related debt until the debt was extinguished. Amortization for the
years ended December 31, 1997 and 1998 was approximately $1,322 and $286,
respectively. Amortization for the period from January 1, 1999 to July 13, 1999
was approximately $204 and for the period from July 14, 1999 to November 17,
1999, was approximately $230. On November 17, 1999, the Company wrote-off
deferred financing fees through an extraordinary charge as the Parent refinanced
all the Company's debt.
H. FIXED ASSETS
Fixed assets are recorded at cost and depreciated over the estimated useful
lives of the related assets. Depreciation is provided principally on the
straight-line method for financial reporting purposes and on accelerated methods
for income tax purposes. Leasehold improvements are depreciated over the shorter
of their useful life or lease term.
I. LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
in accordance with SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". Under SFAS No. 121,
long-lived assets and certain identifiable intangible assets, including
goodwill, are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be fully recoverable. An impairment
loss is recognized if the sum of the expected long-term undiscounted cash flows
is less than the carrying amount of the long-lived assets being evaluated.
J. REVENUE RECOGNITION
The Company recognizes revenues in accordance with the provisions of
Statement of Position (SOP) 97-2, "SOFTWARE REVENUE RECOGNITION", as amended by
SOP 98-9, "MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT
TO CERTAIN TRANSACTIONS". Under SOP 97-2, the Company recognizes revenue for
hardware and software sales upon shipment of the product, provided collection of
the receivable is probable, payment is due within one year and the fee is fixed
or determinable. If an acceptance period is required, revenues are recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period. If significant post-delivery obligations exist or if a product is
subject to customer acceptance, revenues are deferred until no significant
obligations remain or
F-65
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acceptance has occurred. Revenue from service contracts, instruction and user
training is recognized as the services are performed and post-contract support
is recognized ratably over the related contract. Deferred revenue represents the
Company's obligation to perform under signed contracts.
For contracts with multiple elements (e.g., deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on vendor specific objective evidence of its
fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
Several of the Company's customers are subject to fiscal funding
requirements. If the funding requirements are subject to governmental approval,
the likelihood of cancellation is assessed. If the likelihood of cancellation is
assessed as remote, revenue is recognized. If the likelihood of cancellation is
assessed as other than remote, revenue is deferred. If the funding requirements
are subject to non-governmental approval, revenue is deferred and recognized in
accordance with the remaining provisions of SOP 97-2.
K. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES", which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance is required to offset any net deferred tax
assets if, based upon the available evidence, it is more likely than not that
some or all of the deferred tax asset will not be realized. The Company will
consider the elimination of the valuation allowance when available evidence
indicates the deferred assets will be realized.
L. ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $1,832
and $705 for the years ended December 31, 1997 and 1998, respectively.
Advertising expense was approximately $509 for the period from January 1, 1999
to July 13, 1999 and $740 for the period from July 14, 1999 to December 31,
1999.
M. SEGMENT REPORTING
The Company has determined that it has three reportable segments in
accordance with SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION". These three segments are software license, service and
hardware. These segments are separately stated in the accompanying statements of
operations and comprehensive loss. The Company does not allocate selling and
administrative expenses to these individual segments and reviews them
individually on a gross margin basis only. The Company does not track individual
balance sheet information for its three reportable segments and, therefore, has
not provided separate balance sheet and cash flow information for each of the
reportable segments.
F-66
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N. COMPREHENSIVE INCOME
The Predecessor adopted SFAS No. 130, "REPORTING COMPREHENSIVE INCOME" for
the year ended December 31, 1998. SFAS 130 requires the Company to measure and
disclose all elements of comprehensive income that result from recognized
transactions and other events in the financial statements. Accordingly, the
Company has reported unrealized gains on marketable securities as a separate
component of stockholders deficit.
3. INVENTORIES
Inventories at December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999
-------- --------
<S> <C> <C>
Materials and supplies...................................... $ 175 $ 157
Finished products........................................... 836 573
------ ------
$1,011 $ 730
====== ======
</TABLE>
4. PURCHASED SOFTWARE
Purchased software at December 31, 1999, was as follows:
<TABLE>
<S> <C>
Purchased software.......................................... $7,430
Less--accumulated amortization.............................. (864)
------
$6,566
======
</TABLE>
Amortization of purchased software is included in cost of products sold and
was approximately $864 for the period from July 14, 1999 to December 31, 1999.
5. SOFTWARE DEVELOPMENT COSTS
Software development costs are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Capitalized software costs............................... $39,713 $ --
Less--accumulated amortization........................... (37,023) --
------- -------
$ 2,690 $ --
======= =======
</TABLE>
Amortization of capitalized computer software development costs is included
in cost of products sold and aggregated $24,751 and $2,189 for the years ended
December 31, 1997 and 1998, respectively and was approximately $887 for the
period from January 1, 1999 to July 13, 1999. Included in
F-67
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. SOFTWARE DEVELOPMENT COSTS (CONTINUED)
amortization of capitalized computer software development costs for the year
ended December 31, 1997 were accelerated amortization charges of $17,269 for the
reduction of certain capitalized costs to their net realizable value due to a
change in the Predecessor's product focus. Accelerated amortization charges in
1998 were not material.
6. OTHER ACQUIRED INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
LIFE 1998 1999
---------- -------- --------
<S> <C> <C> <C>
Tradenames................................... 4 years $ -- $ 3,520
Customer lists............................... 7 years -- 18,200
Workforce in place........................... 3 years -- 2,980
Trademark.................................... 18 months -- 375
Goodwill..................................... 7 years 1,718 27,095
-------- -------
1,718 52,170
Less--accumulated amortization............... (759) (4,014)
-------- -------
$ 959 $48,156
======== =======
</TABLE>
Amortization expense related to intangible assets was $5,449 and $245 for
the years ended December 31, 1997 and 1998. Amortization expense for the period
from January 1, 1999 through July 13, 1999 was $131 and $4,014 for the period
from July 14, 1999 to December 31, 1999. Included in amortization for the year
ended December 31, 1997 was an accelerated amortization charge of approximately
$2,415. This charge was a result of an impairment of the tradename, workforce in
place and goodwill intangible assets, which had been established as a result of
the original acquisition of the Predecessor by Holdings, due to a change in the
Predecessor's product focus.
F-68
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. FIXED ASSETS
Fixed assets at December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
LIFE 1998 1999
------------ -------- --------
<S> <C> <C> <C>
Computer equipment.................... 1 to 3 years $ 2,914 $1,610
Warehouse equipment................... 1 to 3 years 60 --
Leasehold improvements................ 3 to 5 years 252 102
Other furniture and fixtures.......... 2 to 7 years 2,012 198
------- ------
5,238 1,910
Less--accumulated depreciation........ (3,148) (257)
------- ------
2,090 $1,653
======= ======
</TABLE>
Depreciation expense was approximately $695 for the period from January 1,
1999 to July 13, 1999, $257 for the period from July 14, 1999 to December 31,
1999, and $3,532 and $1,591 for the years ended December 31, 1997 and 1998,
respectively. In 1998, the Predecessor wrote off $7,770 of fully depreciated
assets which were no longer in use.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Customer deposits.......................................... $ 653
Royalties.................................................. 1,183
Acquisition related accruals............................... 2,965
Interest payable........................................... 4,038
Other...................................................... 1,956
-------
$10,795
=======
</TABLE>
9. LONG-TERM DEBT
At December 31, 1999, long-term debt consisted of the following:
<TABLE>
<S> <C>
12.75% of Senior Subordinated Notes, due 2009 (a)........... $146,193
Senior Bank Credit Facilities (b)........................... 130,363
--------
276,556
Less: amounts due within one year........................... (2,939)
--------
Long-term debt, net of current portion...................... $273,617
========
</TABLE>
(a) In connection with the Recapitalization, the Parent and the Company
issued 152,000 Units consisting of $152,000 in aggregate principal amount
of 12.75% of Senior Subordinated Notes (the "Notes") and 205,656 shares
of common stock of the Parent. The Notes pay interest
F-69
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. LONG-TERM DEBT (CONTINUED)
semi-annually in arrears commencing May 15, 2000. The Notes are joint and
several obligations of the Parent and the Company.
Based upon an independent valuation, $148,289 was allocated to the value
of the Notes while $3,711 was the value ascribed to the common stock. The
Notes were issued net of a $2,096 discount, which is being accreted to
maturity using the effective interest method. Accretion for period from
November 17, 1999 through December 31, 1999 was not significant.
Prior to November 15, 2002, the Parent may redeem up to 35% of the Notes
with net cash proceeds of certain sales of equity securities at a price
of 112.75% of the principal amount, plus accrued and unpaid interest.
On or after November 15, 2004, the Parent may redeem the Notes at a
redemption price of 106.375% of the principal amount, plus accrued
interest thereon decreasing annually to 100% in 2007 and thereafter.
(b) The senior bank credit facilities are comprised of a $30,000 revolving
credit facility (which includes a letter of credit subfacility) maturing
in 2005, a $31,000 term loan A facility maturing in 2005 and a $100,000
term loan B facility maturing in 2006. As of December 31, 1999, no
amounts were outstanding under the revolving credit facility and $30,613
and $99,750 were outstanding under the term loan A and the term loan B
facilities, respectively. The term loan A facility and the term B
facility amortize in quarterly installments beginning on December 31,
1999.
Loans under the senior bank credit facilities bear interest at a rate per
annum equal to-
1. for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25% (subject to
performance-based step downs); and
2. for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
In addition to paying interest on outstanding loans under the senior bank
credit facilities, the Parent is required to pay a commitment fee to the lender
associated with the revolving credit facility in respect of the unused
commitments thereunder at a rate of 0.5% per annum (subject to performance-
based step downs).
The senior bank credit facilities are subject to mandatory prepayment with-
- the proceeds of the incurrence of certain indebtedness
- the proceeds of certain asset sales or other dispositions
- the proceeds of issuances of certain equity offerings
- annually beginning in 2000, 50% of the Parent's excess cash flow (as
defined in the credit agreement) from the prior year.
F-70
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. LONG-TERM DEBT (CONTINUED)
The borrowing agreements provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the borrowing agreements provide for
the maintenance of certain financial covenants, including a limit on the
consolidated leverage rates and maintenance of minimum fixed charged coverage
ratios.
Maturities of long-term debt are as follows-
<TABLE>
<S> <C>
2000...................................................... $ 2,939
2001...................................................... 4,487
2002...................................................... 6,037
2003...................................................... 7,588
2004...................................................... 8,363
Thereafter................................................ 252,950
</TABLE>
10. REVOLVING CREDIT AGREEMENT
On June 29, 1995, the Predecessor entered into a revolving credit agreement
with a maximum loan availability of $40,000, including up to $3,000 of letters
of credit (the "Loan Facility"). Borrowings outstanding under this agreement at
December 31, 1997 were $8,500. The original termination date for the revolving
line of credit was the last business day of June 2000; however in March 1998,
the Predecessor paid all outstanding amounts under this agreement and terminated
the Loan Facility.
In March 1998, the Predecessor entered into a new loan facility which
includes a new revolving line of credit agreement with a maximum loan
availability of $20,000, including up to $2,000 of letters of credit and a term
loan of $7,500 (see Note 12). Advances on the line of credit are limited to the
lesser of 75% of eligible billed accounts plus 40% of eligible unbilled accounts
of $2,000, whichever is less, and the amount collected on accounts by the
Predecessor for a defined period immediately preceding the advance. Loans under
this agreement are secured by 100% of all capital or other equity interests, as
well as accounts receivable, inventory, fixed assets, intangibles and contract
rights. Interest is computed at 0.0875% to 2.75%, depending on the amount
outstanding, plus the prime lending rate as most recently announced by Norwest
Bank Minnesota, NA and at a minimum, a rate of 9%. At December 31, 1998 the
minimum rate was being used. The agreement described above contains certain
restrictive covenants, which include requiring the Predecessor to meet certain
profitability levels and to maintain a certain tangible net worth. The new line
of credit agreement matures in March 2001. Borrowings outstanding under this
line of credit agreement at December 31, 1998 were $2,238. On July 14, 1999, the
Predecessor repaid the revolving line of credit including accrued interest in
conjunction with the acquisition of the Predecessor by the Company (see
Note 1).
11. SENIOR SUBORDINATED NOTES
On June 29, 1995, the Predecessor entered into a senior subordinated note
purchase agreement whereby the Predecessor borrowed a total of $17,000 from two
lending institutions under note agreements which bear interest at 12.25% and
mature on the last business day of June 2002. Interest is payable quarterly. The
notes are secured by the same collateral as the $20,000 revolving credit
agreement (see Note 10) and are guaranteed by Holdings.
F-71
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. SENIOR SUBORDINATED NOTES (CONTINUED)
In connection with the issuance of the note agreements, the lending
institutions each received warrants to acquire a specified number of shares of
Holdings Common Stock. The value ascribed to the warrants of approximately
$1,260 was recorded as a discount from the face value of the debt and was being
amortized over the term of the Senior Subordinated Notes. During 1997, the
Predecessor accelerated the amortization on the warrants due to an impairment in
the value.
The subordinated agreements require the Predecessor to meet certain
operating ratios and limits. The Predecessor failed to meet certain covenants
during the years ended December 31, 1997 and 1998. In addition, the Predecessor
failed to make quarterly interest payments due on December 31, 1997 and for each
of the four quarters in 1998. Accordingly, amounts outstanding under the senior
subordinated notes have been classified as current liabilities at December 31,
1998.
On July 14, 1999 the Predecessor repaid the senior subordinated notes
including accrued interest in conjunction with the acquisition of the
Predecessor by the Company (see Note 1).
12. TERM NOTE PAYABLE TO BANK
In March 1998, in connection with a new loan facility (see Note 10) the
Predecessor obtained a term loan in the amount of $7,500, which matures in March
2000. The term loan is secured by 100% of all capital or other equity interests,
as well as accounts receivable, inventory, fixed assets, intangibles and
contract rights. The term loan bears interest at 13.0% up to February 1, 1999
and at 15% thereafter. The loan agreement contains certain restrictive covenants
which are consistent with those described in Note 10. On July 14, 1999, the
Predecessor repaid the term loan including accrued interest in conjunction with
the acquisition of the Predecessor by the Company (see Note 1).
13. INCOME TAXES
Due to the losses incurred from operations, the Predecessor and the Company
have no provisions for (benefits from) income taxes for the years ended
December 31, 1997 and 1998, for the period from January 1, 1999 to July 13, 1999
and for the period from July 14, 1999 to December 31, 1999.
The Company accounts for income taxes using a balance sheet approach whereby
deferred tax assets and liabilities are determined based on the differences in
financial reporting and income tax basis of assets. The differences are measured
using the income tax rate in effect during the year of measurement.
There was no current or deferred benefit for income taxes for the period
from January 1, 1999 to July 13, 1999 and for the period from July 14, 1999 to
December 31, 1999. The following table provides
F-72
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. INCOME TAXES (CONTINUED)
a reconciliation between the amount determined by applying the statutory federal
income tax rate to the pretax loss and benefit for income taxes:
<TABLE>
<CAPTION>
JANUARY 1, 1999 JULY 14, 1999 TO
TO JULY 13, DECEMBER 31,
1999 1999
--------------- ----------------
<S> <C> <C>
Benefit at federal statutory rate........ $ 342 $ 6,548
State income tax benefit, net............ 49 935
Write-off of in-process R&D.............. -- (3,600)
Goodwill amortization.................... -- (710)
Other permanent differences.............. (50) (50)
Valuation allowance...................... (341) (3,123)
----- -------
$ -- $ --
===== =======
</TABLE>
The income tax effects of loss carryforwards and temporary differences
between financial and income tax reporting that give rise to the deferred income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforward............. $ 23,717 $ 9,460
Bad debt expense............................ 1,657 205
Accrued liabilities......................... 1,827 940
Depreciation and amortization............... 20,427 --
Other....................................... 871 500
-------- -------
Gross deferred tax assets................... 48,499 11,105
Deferred tax asset valuation allowance...... (48,499) (9,205)
Gross deferred tax liabilities (depreciation
and amortization)......................... -- (1,900)
-------- -------
Net deferred tax assets..................... $ -- $ --
======== =======
</TABLE>
In assessing the realizability of its deferred tax assets, the Company
considers whether it is more likely than not that some or all of such assets
will be realized. As a result of historical operating losses, the Company has
fully reserved its net deferred tax assets as of December 31, 1998 and 1999.
As of December 31, 1999, the Company had a net operating loss carryforward
(NOLC) for federal income tax purposes of approximately $86,240. The Company
experienced an ownership change as a result of the acquisition of the
Predecessor on July 14, 1999. As a result of the change, the NOLC existing as of
that change date is subject to an annual limitation of approximately $710. As a
result of the ownership change, the Company projects that approximately all but
$23,650 of the NOLC will expire. The Company has reduced its gross deferred tax
asset related to the NOLC to reflect the exclusion of that portion of the loss
that is expected to expire as a result of the change of ownership limitation.
F-73
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. COMMITMENTS AND CONTINGENCIES
a. LEASES
The Company has operating leases for equipment, office and warehouse
space that include remaining noncancelable minimum rental commitments as
follows:
Twelve months ending December 31:
<TABLE>
<S> <C>
2000........................................................ $3,296
2001........................................................ 2,041
2002........................................................ 1,371
2003........................................................ 582
------
Total minimum lease payments................................ 7,290
Total minimum noncancelable sublease rentals................ (787)
------
$6,503
======
</TABLE>
Of the approximate $6,503 in minimum rental commitments, net of sublease
rentals, approximately $119 has been accrued in the accompanying balance
sheet at December 31, 1999, as they represent excess space liabilities.
Rent expense for all operating leases was approximately $4,370 and $3,060
for the years ended December 31, 1997 and 1998 and $1,482 for the period
from January 1, 1999 to July 13, 1999, and $933 for the period from
July 14, 1999 to December 31, 1999, net of sublease rentals of
approximately $647 and $447 for the years ended December 31, 1997 and
1998 and $122 for the period from January 1, 1999 to July 13, 1999, and
$102 for the period from July 14, 1999 to December 31, 1999.
b. LITIGATION
During 1999, the U.S. Department of Labor commenced an investigation into
the issue of whether the Company was properly treating certain employees
as exempt employees under the Fair Labor Standards Act. A final
disposition of this investigation is pending. As management believes the
employees have been properly classified and intends to vigorously
challenge this investigation, no accrual have been made in the
accompanying balance sheet. Additionally, the Company cannot reasonably
estimate the loss at this time.
In the normal course of business, the Company is a party to various
litigation. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. Management believes that the effect on its
results of operations and financial position, if any, for the disposition
of these matters, will not be material.
c. ROYALTY AGREEMENT
The Company has a minimum royalty commitment under a software license
agreement with monthly payments due through March 2000. Accordingly, the
Company has accrued approximately $344 associated with this royalty
agreement at December 31, 1999.
F-74
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In June 1998, the Predecessor restructured a significant software license
agreement with a third party. The Predecessor returned investment
securities valued at $2,285 by the third party and also accepted reduced
rights under the license agreement in order to settle $5,500 in minimum
future royalty obligations which the Predecessor owed. The Predecessor
retained the right to sell product from this third party through 2001.
The remaining unamortized prepaid royalties with respect to this license
agreement was $2,700 and $2,064 with net carrying values of $1,420 and
$783 as of December 31, 1998, and 1999, respectively to be amortized on a
units-of-production basis.
d. WARRANTS
In connection with the Recapitalization, the Parent issued warrants to
acquire 13% of the voting common stock of the Company at an exercise
price of $0.01 per share. Based upon an independent valuation, the Parent
allocated $2,618 to these warrants.
15. RELATED PARTY TRANSACTIONS
a. STRATEGIC ALLIANCE AGREEMENT
In anticipation of the acquisition of the Predecessor by the Company, the
Predecessor entered into a strategic alliance agreement ("Agreement")
with a then related party. This related party was a creditor, investor
and customer of the Company. As a result of the acquisition, those
relationships were terminated and the agreement was executed to specify
terms for the sale of specific software product and services to the
related party.
The Company granted the related party $11,500 in Purchase Credits
("Credits"), as defined, to be used over four years toward the purchase
of non-specialized products and services. The Credits may be used for up
to 60% of the purchase price of non-specialized products and services,
with the balance paid in cash. The available balance of the Credits shall
be permanently reduced by the use of the Credits and by a certain amount
each year. If the cumulative Credits utilized do not exceed $2,875,
$5,750, and $8,625 as of July 14, 2000, 2001, and 2002, respectively, the
total Credits will be reduced by such shortfall each year. If the Credits
are not used by the end of the fourth year, they will be reduced to zero.
The Company will account for the Credits by recording them as discounts
to product sales in the future. Under the Agreement, the related party is
obligated to purchase products and services of at least $2,000 during any
one-year period. Approximately $63 of product was purchased, and $38 in
credits used, through December 31, 1999.
b. TRADEMARK LICENSE AGREEMENT
The Company entered into a trademark license agreement with the
Predecessor's former parent to permit the Company to use specific
trademarks until December 31, 2000 in return for $375 in cash payments.
At December 31, 1999, $250 is accrued in other accrued liabilities to the
Predecessor's former parent. The $375 is recorded as an intangible asset
and is being amortized over 18 months (see Note 6).
F-75
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
c. MANAGEMENT AGREEMENT
On November 17, 1999, the Company entered into an agreement with
Ripplewood Holdings LLC for management consulting and financial advisory
services. The Company will be required to pay an annual fee, paid
quarterly, of $150 beginning in 2001.
d. DUE FROM PARENT
As a result of the November 17, 1999 Recapitalization, the Company became
a co-guarantor on its Parent's long-term debt. Therefore, the long-term
debt was pushed down to the Company and an offsetting contra-equity
account, Due from Parent, was established.
Additionally, included in current assets, Due from Parent, are certain
Parent expenses paid by the Company and subsequently charged back as
these expenses relate to officer compensation, travel and other business
related expenses.
e. DUE TO RELATED PARTY
During November 1999, the Company borrowed $500 from a subsidiary of its
Parent, Weekly Reader Corporation.
During November 1999, the Company transferred certain warrants valued at
$2,160 to EAC III Inc., an investor in the Parent, in connection with the
debt restructuring on November 17, 1999.
The Predecessor benefited from a management and advisory services
agreement between Holdings and an affiliate of Holdings' shareholders.
Out-of-pocket expenses were paid to this affiliate of $50, $25 and $5
during the years ended December 31, 1997, 1998 and 1999, respectively.
In conjunction with the issuance of the Class A Preferred Stock, the
Predecessor entered into a consulting arrangement with an investor. The
arrangement provided for $500 per year to be paid to the investor for
consulting services through November 1999. At December 31, 1998, prepaid
consulting fees of $417, were included in prepaid expenses and the
Predecessor incurred consulting expenses of $459 and $499 for the years
ended December 31, 1997 and 1998, respectively, relating to this
arrangement. Amounts due to this investor for consulting fees at
December 31, 1998 are $1,400. The current portion of these amounts at
December 31, 1998 are $750 and are included in due to related parties.
In addition to the consulting arrangement, the Predecessor entered into a
sales and marketing agreement with this investor whereby the Predecessor
would sell product to the investor at a discount. Approximately $736,
$354 and $69 in sales were made to the investor during the years ended
December 31, 1997, 1998 and 1999, respectively. Included in accounts
receivable at December 31, 1999, was $60 from sales to this former
investor.
In June 1998, the Predecessor delivered a promissory note to this
investor to repurchase securities sold to the investor in November 1996.
The note accrues interest at 10% with principal and accrued interest
payable on April 15, 2001. The balance as of December 31,
F-76
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
1998 was $2,251 which is included in the non current portion of due to
related party on the accompanying balance sheet.
At December 31, 1998 the Predecessor had amounts due to its former parent
relating to the settlement of intercompany transactions of $205 which was
included in due to related parties.
During 1998, the Predecessor re-engaged a consultant of an affiliate to
explore additional investment alternatives. Fees paid to this consultant
for the year ended December 31, 1998 were $647.
16. EMPLOYEE BENEFIT PLANS
a. STOCK APPRECIATION RIGHTS
In February 1999, the Predecessor's Board of Directors adopted the 1998
Stock Appreciation Rights ("SAR") Plan. SARs in the aggregate of
1,500,000 were created and 1,013,500 SARs, at a base value of $4.00 per
SAR, as determined by the Board of Directors, were granted. As a result
of the acquisition of the Predecessor by the Company, the SARs became
100% vested and are no longer subject to value changes. The SARs were
valued at $5.50 per share at the time of the acquisition. In connection
with the acquisition, approximately $1,520 was ascribed to the value of
the SARs. Of the $1,520 value ascribed to the SARs, $1,120 was paid to
employees in November 1999 and $400 is being held in escrow for
distribution in June 2000 in accordance with the terms of the
acquisition.
b. SALE BONUS
In January 1999, the Predecessor entered into agreements to pay a sale
bonus to select members of management. As a result of the acquisition of
the Predecessor by the Company, $913 was paid in November 1999.
c. 401(K) RETIREMENT PLAN
The Company has a retirement savings plan covering substantially all
eligible employees. This 401(k) Plan provides for a 33% matching
contribution by the Company, limited to eligible contributions by the
employees. The Predecessor accrued $442 and $360 for the years ended
December 31, 1997 and 1998, respectively, and $175 for period from
January 1, to July 13, 1999. Additionally, the Company accrued $198
during the period July 14, 1999 to December 31, 1999. All 1999
contributions will be paid in 2000.
17. MANDATORILY REDEEMABLE PREFERRED STOCK
On December 19, 1996, the Predecessor issued 10,000 shares of $.01 par value
Class B Preferred Stock and recorded the stock at $10,000 less issuance costs of
approximately $900, its fair value on date of issuance. These shares represent
all of the authorized shares of the Class B Preferred Stock. The Predecessor is
required to redeem all outstanding shares of the Class B Preferred Stock, at a
redemption price of $1,000 per share plus any accrued and unpaid dividends, by
December 19, 2008. Holders of Class B Preferred Stock have no voting rights, are
entitled to a preferential distribution of
F-77
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
$1,000 per share plus accrued and unpaid dividends in the event of a
liquidation, and are entitled to annual dividends of $100 per share until the
Predecessor redeems the stock. At December 31, 1998 accrued dividends of $2,000
are included in stockholders' equity. The stock will be accreted to its
redemption value through charges to accumulated deficit. On July 14, 1999, the
Company redeemed the mandatorily redeemable preferred stock in conjunction with
the acquisition of the Predecessor by the Company (see Note 1).
18. STOCKHOLDERS' DEFICIT
On November 1, 1996, the Predecessor issued 20,000 shares of $.01 par value
Class A Preferred Stock for $20,000 less issuance costs of $1,835. In
conjunction with the Class A Preferred Stock, $100 was paid to Holdings for a
warrant to purchase a specified number of shares of Holdings Common Stock.
Concurrent with the sale of the warrant, Holdings contributed the proceeds
received to the Predecessor.
The authorized redeemable preferred stock and common stock of the
Predecessor consists of 20,000 shares of $.01 par value Class A Preferred Stock
and 120,565,000 shares of $.001 par value Class A Common Stock. At December 31,
1998, 1,000 shares of the Class A Common Stock were issued and outstanding. All
outstanding shares of Class A Common Stock are held by SSC. At December 31,
1998, all 20,000 shares of the Class A Preferred Stock were issued and
outstanding. Holders of Class A Common stock are entitled to one vote per share.
Holders of Class A Preferred Stock have no voting rights. In the event of a
liquidation of the Predecessor, holders of Class A Preferred Stock are entitled
to a preferential distribution of $1,000 per shares plus accrued and unpaid
dividends. Distribution amounts in excess of the Class A and Class B preferred
stock distribution preference are to be distributed ratably to all of the
Class A common stockholders. The Predecessor, at its option, may redeem all the
shares of Class A Preferred Stock, at a redemption price of $1,000 per share
plus any accrued and unpaid dividends. Holders of Class A Preferred Stock are
entitled to annual dividends of $100 per share. As of December 31, 1998 accrued
and unpaid dividends on the Class A Preferred Stock was $4,000.
Included in the paid-in capital of the Predecessor at December 31, 1998 is
$40,000 in debt payable by SSC to the Predecessor's former parent, as part of
the purchase consideration. Such debt is not payable by the Predecessor,
guaranteed by the Predecessor, nor subject to repayment from the proceeds of any
future equity transactions of the Predecessor.
19. UNALLOCATED PURCHASE CONSIDERATION
In conjunction with the acquisition of the Predecessor by Holdings on
June 29, 1995, warrants and an exchangeable note issued to the Predecessor's
former parent allowed the former parent to acquire up to a 30.7% interest in
Holdings. Accordingly, 69.3% of the purchase consideration was allocated to the
assets acquired and liabilities assumed at their respective fair values, with
the remainder allocated at Predecessor's book value as of the date of
acquisition. The application of the purchase method resulted in an allocation of
the excess purchase consideration over historical carryover basis of Predecessor
("unallocated purchase consideration") of approximately $17,981.
F-78
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
FOR THE YEAR ENDED ---------------- ------------------
DECEMBER 31, JANUARY 1, 1999 JULY 14, 1999
------------------- TO TO
1997 1998 JULY 13, 1999 DECEMBER 31, 1999
-------- -------- ---------------- ------------------
<S> <C> <C> <C> <C>
Cash paid during the period for interest...... $2,208 $1,561 $ 925 $1,306
Cash paid during the year for income taxes.... -- -- -- --
Non-cash investing and financing activity
Note payable issued for equity securities
(see Note 15)............................. -- 2,251 -- --
Equity Securities exchanged for Prepaid
Royalty (see Note 14)..................... -- 2,285 -- --
</TABLE>
21. RESTRUCTURING
During July 1998 the Predecessor recorded a restructuring charge of $3,012
related to the adoption by the Predecessor of a formal action plan for
restructuring its operations. This restructuring was adopted in an effort to
establish a more competitive cost structure in response to current sales levels.
In connection with the plan in 1998 the Predecessor paid employee severance
and benefit costs of approximately $1,400 when it decreased its workforce by
approximately 90 employees.
As of December 31, 1998, the remaining accrual associated with this
restructuring was approximately $1,400. This accrual consists of estimated
future severance and related obligations of $600; estimated future rent
obligations associated with excess lease space of $600; and an accrual for other
related costs of $200. As of December 31, 1999 the remaining accrual associated
with the restructuring was fully utilized.
F-79
<PAGE>
COMPASSLEARNING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 102 $ 1,131
Accounts receivable, net.................................. 19,954 15,334
Due from related party.................................... 598 --
Inventories, net.......................................... 730 722
Prepaid Expenses.......................................... 1,319 1,260
Investment in marketable securities....................... 24 24
--------- ---------
Total current assets.................................... 22,727 18,471
Purchased software, net..................................... 6,566 6,102
Other acquired intangible assets, net....................... 48,156 46,016
Fixed assets, net........................................... 1,653 1,806
--------- ---------
Total assets............................................ $ 79,102 $ 72,395
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,508 $ 1,653
Due to related party...................................... 500 5,989
Accrued salaries and related items........................ 5,895 4,296
Other accrued liabilities................................. 10,795 6,282
Current portion of deferred revenue....................... 16,971 13,227
Current portion of long-term debt......................... 2,939 3,325
--------- ---------
Total current liabilities............................... 39,608 34,772
Deferred revenue, not of current portion.................... 1,780 1,727
Long-term debt.............................................. 273,617 274,700
Due to related party........................................ 2,160 2,160
Other long-term liabilities................................. 15 15
--------- ---------
Total liabilities....................................... 317,180 313,374
--------- ---------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, ($.01 par value, 10,000,000 shares
authorized,
no shares issued and outstanding)......................... -- --
Class A common stock ($.01 par value, 20,000 shares
authorized,
10,000 shares issued and outstanding)..................... -- --
Additional paid-in Capital.................................. 31,316 31,316
Accumulated deficit......................................... (18,708) (32,551)
Due from parent............................................. (250,674) (239,732)
Cumulative other comprehensive loss......................... (12) (12)
--------- ---------
Total stockholders' deficit............................. (238,078) (240,979)
--------- ---------
Total liabilities and stockholders' deficit............. $ 79,102 $ 72,395
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-80
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
1999 2000
----------- --------
<S> <C> <C>
Revenue, net................................................ $ 13,582 $ 12,731
Cost of products sold....................................... 6,354 5,936
-------- --------
Gross Profit................................................ 7,228 6,795
-------- --------
Operating expenses:
Sales and marketing....................................... 4,934 5,960
Research and development.................................. 1,739 2,103
General and administrative................................ 1,935 1,786
Corporate overhead........................................ -- 289
Amortization of intangible assets......................... 61 2,139
-------- --------
Loss from operations........................................ (1,441) (5,482)
Interest expense............................................ (1,309) (8,227)
Other income, net........................................... 404 11
-------- --------
Loss before income tax expense.............................. (2,346) (13,698)
Income tax expense.......................................... -- --
-------- --------
Net Loss.................................................... $ (2,346) $(13,698)
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-81
<PAGE>
COMPASSLEARNING, INC. WITH PREDECESSOR
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
1999 2000
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Loss.................................................. $(2,346) $(13,698)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 826 2,764
Amortization of deferred financing fees................... 96 --
Changes in assets and liabilities:
Decrease in accounts receivable........................... 3,193 4,620
Decrease in inventories................................... 339 8
Decrease in prepaid expenses.............................. 508 59
Increase (decrease) in accounts payable................... 151 (855)
(Decrease) in deferred revenue............................ (4,828) (3,797)
(Decrease) in other accrued liabilities and other
long-term liabilities................................... (2,675) (2,069)
------- --------
Net cash used in operating activities................. (4,736) (12,968)
------- --------
Cash flows from investing activities:
Capital expenditures...................................... (52) (318)
------- --------
Net cash used in investing activities................. (52) (318)
------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit.................... 4,788 --
Change in intercompany balances........................... -- 14,315
------- --------
Net cash provided by financing activities............. 4,788 14,315
------- --------
Change in Cash.............................................. -- 1,029
Cash, beginning of period................................... -- 102
------- --------
Cash, end of period......................................... $ -- $ 1,131
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................... $ 319 $ --
======= ========
</TABLE>
The acccompanying notes to consolidated financial statements
are an integral part of these statements.
F-82
<PAGE>
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
CompassLearning, Inc. (formerly JLC Learning Corporation and formerly EAC I
Inc.) (the "Company"), is a leading provider of technology-based educational
programs to schools and school districts for kindergarten through twelfth grade.
Prior to July 14, 1999, the Company's predecessor (the "Predecessor") was a
wholly-owned subsidiary of Software Systems Corporation ("SSC"), a wholly-owned
subsidiary of JLC Learning Holdings, Inc. ("Holdings").
The Predecessor was acquired by WRC Media Inc. (the "Parent") on July 14,
1999 (the "Purchase Date"). The Securities and Exchange Commission deems an
acquired business to be a predecessor when the acquirer is in substantially the
same business of the entity acquired and the acquirer's own operations prior to
the acquisition appear insignificant relative to the business acquired.
Accordingly, the accompanying financial statements for the three months ended
March 31, 1999 are of the Predecessor, while the financial statements for the
three months ended March 31, 2000 are of the Company. The purchase method of
accounting was used to record the assets acquired and liabilities assumed by the
Company. Such accounting generally results in the acquirer recording the assets
purchased and liabilities assumed at fair value, which results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Predecessor and Company are not
comparable in all material respects since those financial statements report
financial position, results of operations, and cash flows of two separate
entities.
The accompanying condensed consolidated financial statements have been
prepared without audit. 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.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with Compass Learning, Inc's financial statements and related notes
for the period ended December 31, 1999. The operating results for the
three-month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for a full year.
F-83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Guidance Service, Inc.
Circle Pines, Minnesota
We have audited the accompanying consolidated balance sheet of American
Guidance Service, Inc. (the "Company") as of June 30, 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended June 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of June 30, 1998
and the results of its operations and its cash flows for each of the two years
in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
July 31, 1998
(August 5, 1998 as to Note 14)
F-84
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
-----------
1998
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 3,137
Accounts and notes receivable:
Trade, less allowance for doubtful accounts and sales
returns of $445......................................... 3,587
Author and other receivables (Note 5)..................... 14
Inventories (Note 2)........................................ 4,237
Prepaids and other.......................................... 1,414
Deferred income taxes (Note 9).............................. 700
-------
Total current assets.................................. 13,089
Other Assets:
Author and other receivables, less allowance for doubtful
accounts of $70, net of current maturities (Note 5)....... 18
Intangibles, net of accumulated amortization of $4,615 (Note
2)........................................................ 798
Cash surrender value of life insurance, net of policy loans
of $1,930................................................. 295
Deferred income taxes (Note 9).............................. 1,450
-------
Total other assets.................................... 2,561
Property, Equipment, and Leasehold Improvements, net (Note
4)........................................................ 1,202
-------
$16,852
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable (Note 6)..................................... $ 1,500
Accounts payable.......................................... 2,843
Accrued liabilities:
Salaries and wages...................................... 1,832
Royalties............................................... 412
State, local, and payroll taxes......................... 261
Pension and other accrued liabilities................... 1,279
Income taxes............................................ 961
Current maturities of deferred compensation (Note 7)...... 39
-------
Total current liabilities........................... 9,127
Deferred Compensation, net of current maturities (Note 7)... 754
Commitments and Contingencies (Notes 8, 10, and 13)
Stockholders' Equity:
Common stock.............................................. 21
Additional paid-in capital................................ 2,866
Retained earnings......................................... 5,444
-------
8,331
Notes receivable from ESOP and Profit Sharing Plan (Note
8)...................................................... (1,360)
-------
Total stockholders' equity............................ 6,971
-------
$16,852
=======
</TABLE>
See notes to consolidated financial statements.
F-85
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1997 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Sales....................................................... $33,449 $42,680
Cost of Sales............................................... 9,480 11,779
------- -------
Gross profit............................................ 23,969 30,901
Expenses:
Development............................................... 4,407 5,349
Sales..................................................... 7,455 8,447
General and administrative................................ 6,346 7,044
Pension................................................... 486 452
ESOP contribution......................................... 1,307 1,600
Interest expense.......................................... 229 159
Interest income........................................... (129) (126)
Other expense............................................. 835 732
------- -------
Total expenses.......................................... 20,936 23,657
------- -------
Income Before Income Tax Expense............................ 3,033 7,244
Income Tax Expense (Note 9)................................. 775 2,700
------- -------
Net Income.................................................. $ 2,258 $ 4,544
======= =======
</TABLE>
See notes to consolidated financial statements.
F-86
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
VOTING PAR VOTING PAR NONVOTING PAR
VALUE $.01 VALUE $.01 VALUE $.01 ADDITIONAL
CLASS A CLASS B CLASS C PAID-IN RETAINED
COMMON STOCK COMMON STOCK COMMON STOCK CAPITAL EARNINGS
-------------------- ------------------- -------------------- ---------- --------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1997............ 1,460,497 $14 10,800 $ 1 1,027,359 $10 $1,714 $4,073
Repurchases and retirement of
stock............................ (88,830) (1) (122,837) (1) (127) (2,530)
ESOP contributions to reduce
guaranteed debt..................
Issuance of stock options.......... 769
Net income......................... 2,258
--------- --- ------- ---- --------- --- ------ ------
BALANCE AT JUNE 30, 1997........... 1,371,667 13 10,800 1 904,522 9 2,356 3,801
Conversion to Class A Common
Stock............................ 915,322 10 (10,800) (1) (904,522) (9)
Repurchase and retirement of Class
A Common Stock................... (163,398) (2) (320) (2,901)
Advances on notes receivable to
ESOP and Profit Sharing Plan.....
ESOP contributions to reduce
guaranteed debt..................
ESOP contributions to reduce note
receivable from ESOP.............
Issuance of stock options.......... 795
Stock options exercised............ 14,000 35
Net income......................... 4,544
--------- --- ------- ---- --------- --- ------ ------
BALANCE AT JUNE 30, 1998........... 2,137,591 $21 -- $ -- -- $-- $2,866 $5,444
========= === ======= ==== ========= === ====== ======
<CAPTION>
NOTES
RECEIVABLE
GUARANTEED FROM ESOP TOTAL
ESOP DEBT AND PROFIT STOCKHOLDERS'
OBLIGATIONS SHARING PLAN EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1997............ $(1,215) $4,597
Repurchases and retirement of
stock............................ (2,659)
ESOP contributions to reduce
guaranteed debt.................. 477 477
Issuance of stock options.......... 769
Net income......................... 2,258
------- ------- ------
BALANCE AT JUNE 30, 1997........... (738) 5,442
Conversion to Class A Common
Stock............................
Repurchase and retirement of Class
A Common Stock................... (3,223)
Advances on notes receivable to
ESOP and Profit Sharing Plan..... $(2,222) (2,222)
ESOP contributions to reduce
guaranteed debt.................. 738 738
ESOP contributions to reduce note
receivable from ESOP............. 862 862
Issuance of stock options.......... 795
Stock options exercised............ 35
Net income......................... 4,544
------- ------- ------
BALANCE AT JUNE 30, 1998........... $ -- $(1,360) $6,971
======= ======= ======
</TABLE>
See notes to consolidated financial statements.
F-87
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
1997 1998
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $2,258 $4,544
Adjustments to reconcile net income to net cash provided
by operating activities:
ESOP contributions to reduce guaranteed debt............ 477 738
ESOP contributions...................................... -- 862
Compensation from issuance of stock options............. 769 795
Depreciation and amortization........................... 624 742
Deferred compensation expense........................... 209 394
Deferred income taxes................................... 200 1,175
Change in assets and liabilities, net of acquisitions:
Accounts receivable--trade............................ 282 (1,053)
Inventories........................................... (425) (1,355)
Prepaids and other.................................... 1,374 (981)
Accounts payable...................................... (139) 548
Accrued liabilities................................... 285 491
Income taxes.......................................... 456 (169)
------ ------
Net cash provided by operating activities........... 6,370 6,731
------ ------
Cash Flows From Investing Activities:
Acquisition of property and equipment..................... (391) (387)
Net payments on author and other receivables.............. 28 100
Net increase in cash surrender value of life insurance.... (263) (375)
Cash paid for business acquisitions (Note 12)............. (782) (1,550)
------ ------
Net cash used in investing activities............... (1,408) (2,212)
------ ------
Cash Flows From Financing Activities:
Proceeds from note payable................................ -- 1,500
Proceeds from life insurance policy loans................. -- 692
Payments of long-term debt................................ (664) (1,453)
Payments of deferred compensation......................... (128) (467)
Repurchase of common stock................................ (2,659) (3,223)
Advances on notes receivable to ESOP and Profit Sharing
Plan.................................................... -- (2,222)
Proceeds from exercise of stock options................... -- 35
------ ------
Net cash used in financing activities............... (3,451) (5,138)
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents........ 1,511 (619)
Cash and Cash Equivalents at Beginning of Year.............. 2,245 3,756
------ ------
Cash and Cash Equivalents at End of Year.................... $3,756 $3,137
====== ======
</TABLE>
See note to consolidated financial statements.
F-88
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. NATURE OF BUSINESS
American Guidance Service, Inc. ("American Guidance") is a publisher of
individually administered testing products primarily for kindergarten through
twelfth grade students and supplemental instructional materials primarily for
low performing students in middle and secondary grades.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of American Guidance and its 100%-owned subsidiary, AGS International
Sales, Inc. All significant intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS--American Guidance considers investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK--American Guidance's business
activity is conducted primarily in the United States. Customers include schools
and other institutions. Accounts receivable are generally unsecured. A provision
for estimated doubtful accounts is provided for accounts receivable. There are
no concentrations of business transacted with a particular customer or supplier
nor concentrations of revenue from a particular service or geographic area that
could severely impact American Guidance in the near future.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method. If the first-in, first-out
("FIFO") cost method had been used to value inventories, inventories would have
been greater by approximately $2,222 at June 30, 1998.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS--Property, equipment, and
leasehold improvements are depreciated over the estimated useful lives of the
assets using the straight-line method of depreciation.
AMORTIZATION OF OTHER ASSETS--Copyrights, noncompete agreements, and customer
lists are amortized by the straight-line method over their estimated lives,
which generally range from one to five years.
IMPAIRMENT OF LONG-LIVED ASSETS--Management of American Guidance periodically
reviews the carrying value of long-lived assets for potential impairment
whenever circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability of such assets, American
Guidance compares the expected undiscounted future cash flows that result from
the use of the asset and its disposition and recognizes an impairment loss,
based on the discounted cash flows, when such undiscounted cash flows are less
than the carrying amount of the asset.
STOCK-BASED COMPENSATION--American Guidance has adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
This Statement defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or
F-89
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other measurement date over the amount an employee must pay to acquire the
stock. American Guidance accounts for stock option grants and awards to
employees in accordance with APB Opinion No. 25 and related interpretations.
REVENUE RECOGNITION AND EDITORIAL COSTS--Sales of books, tests and other items
are generally recognized as revenue upon shipment, net of an allowance for
returns. Editorial costs are expensed as incurred.
INCOME TAXES--American Guidance records income taxes in accordance with SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for the
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is the
taxes payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. CASH FLOWS
Cash provided by operating activities includes the following for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Interest paid............................................... $229 $ 159
Income taxes paid........................................... 119 1,715
</TABLE>
4. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
<TABLE>
<CAPTION>
ESTIMATED
1998 USEFUL LIFE
-------- -----------
<S> <C> <C>
Land and building....................................... $ 495 30 years
Office furniture and equipment.......................... 3,795 3-10 years
Machinery and equipment................................. 1,034 5-10 years
Leasehold improvements.................................. 1,052 10-32 years
------
6,376
Less: accumulated depreciation.......................... 5,174
------
$1,202
======
</TABLE>
F-90
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. AUTHOR RECEIVABLES
Receivables from authors consist of royalty advances made prior to publication
and the authors' portion of developmental costs related to the publication. All
amounts are secured by future royalties and are due in quarterly installments.
None of these receivables are interest bearing at June 30, 1998.
6. FINANCING
NOTES PAYABLE--At June 30, 1998, American Guidance had a revolving credit
agreement (the "Revolver") with a bank providing up to $3,000 in borrowings
through August 31, 2000. The Revolver bears interest at the bank's reference
rate or, at American Guidance's option, a LIBOR advance rate. The LIBOR advance
rate may vary between 1.25% and 1.75% over the prevailing LIBOR rates based on
certain financial ratios of American Guidance. The interest rate on outstanding
borrowings of $1,500 at June 30, 1998 was 8.5%. American Guidance may borrow up
to 75% of eligible accounts receivable and 40% of eligible inventory, as
defined. At June 30, 1998, there was $1,500 borrowing availability under the
line. American Guidance's accounts receivable and inventories serve as
collateral under the Revolver.
If total Revolver borrowings exceed $1,000, American Guidance is required to
comply with restrictive covenants including ratios on cash flow leverage, fixed
charge coverage, and debt to tangible net worth, and restrictions on capital
expenditures, acquisitions, stock repurchases, and the payment of dividends. As
of June 30, 1998, American Guidance was in compliance with these financial
covenants.
7. DEFERRED COMPENSATION
American Guidance entered into deferred compensation agreements with an officer
of American Guidance in 1967 and 1985. The officer retired in 1992. Pursuant to
the terms of the 1967 agreement, minimum annual payments of $9 (adjusted for a
price index) will be made for a 12-year period beginning the first day of the
calendar month following the date of separation from active employment. The 1985
agreement, as amended, requires American Guidance to make payments of $100 per
year, including interest at 6%, through September 1999. In fiscal 1998, American
Guidance and the former officer agreed to terminate the agreements. In
connection with the termination of the agreements, American Guidance made a $383
lump-sum distribution to the former officer.
During 1996, American Guidance established two supplemental executive retirement
plans (a defined contribution plan and a defined benefit plan) for certain
officers of American Guidance. At June 30, 1998, American Guidance has an
accrued contribution to the defined contribution plan of $356 and an accrued
pension cost of $369 for the defined benefit plan.
The liability for the above agreements as of June 30, 1998 is as follows:
<TABLE>
<S> <C>
Supplemental executive retirement plans..................... $725
Other....................................................... 68
----
793
Less: current portion....................................... 39
----
$754
====
</TABLE>
F-91
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. DEFERRED COMPENSATION (CONTINUED)
Deferred compensation expense totaled $209 and $394 for the years ended
June 30, 1997 and 1998, respectively.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN--During 1990, American Guidance formed an Employee
Stock Ownership Plan and Trust ("ESOP") for the benefit of employees meeting
certain eligibility requirements. Simultaneously with the formation of the ESOP,
the ESOP entered into agreements with certain of its stockholders to purchase
3,100 shares of its Class B common stock and 787,762 shares of its Class C
common stock for $9,000. In addition, the ESOP subscribed to purchase 439,490
shares of Class A common stock from American Guidance for $5,001. During 1991,
the ESOP borrowed $11,650, which was guaranteed by American Guidance, the
proceeds of which were used by the ESOP to retire the notes payable to
stockholders and pay the stock subscription to American Guidance. In 1992,
American Guidance sold 230,769 shares of Class A common stock to the ESOP for
$3,000, which the ESOP financed with additional guaranteed ESOP borrowings.
American Guidance reflected the guaranteed ESOP borrowings as long-term debt as
of June 30, 1997. A like amount of "Guaranteed ESOP Debt Obligations" was
recorded as a reduction of stockholders' equity. As American Guidance made
annual contributions to the ESOP, these contributions, plus the dividends paid,
if any, on the Class A common stock held by the ESOP, are used to repay the
loans. The principal amount of the loans was repaid in fiscal 1998 and the
amount of the "Guaranteed ESOP Debt Obligations" was reduced to zero.
Contributions to the ESOP totaled $1,307 and $1,600 for the years ended
June 30, 1997 and 1998, respectively.
Terms of the ESOP and the Profit Sharing Plan require that, under certain
conditions, American Guidance purchase stock which has been distributed to
participants. As of June 30, 1998, 100% of American Guidance's stock is held by
the ESOP and the Profit Sharing Plan. Management currently believes that any
requirements to purchase stock distributed to participants for the next three to
five years can be met by cash reserves and future cash flows without adversely
affecting the financial resources of American Guidance.
NOTES RECEIVABLE FROM ESOP AND PROFIT SHARING PLAN--During 1998, American
Guidance entered into notes receivable aggregating $2,222 with the ESOP and the
Profit Sharing Plan. At June 30, 1998, the notes receivable from the ESOP and
the Profit Sharing Plan had a balance of $1,360.
DEFINED CONTRIBUTION PLAN--On July 1, 1998, the profit sharing and savings plan
was merged with the ESOP. The profit sharing and savings plan provided for an
annual contribution up to the maximum amount allowed as a deduction by the
Internal Revenue Code. The Board of Directors, at its sole discretion,
determined the amount of American Guidance's contribution. No American Guidance
contributions were made for the years ended June 30, 1997 and 1998. During 1997,
American Guidance repurchased 122,027 shares of its Class C common stock at
$12.00 per share from the profit sharing and savings plan. Per share repurchase
prices are based on annual independent appraisals of American Guidance.
F-92
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED BENEFIT PENSION PLAN--American Guidance has a defined benefit pension
plan covering substantially all of its employees. The benefits payable are based
on years of service and the employee's average compensation for the highest
salaried five years of employment.
The following table sets forth the plan's funded status and amounts recognized
in the consolidated balance sheets as of June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations--accumulated
benefit obligations, including vested benefits of
$6,842.................................................... $ 7,214
=======
Plan assets at fair value................................... $ 8,198
Projected benefit obligation................................ (8,682)
Deferred transition obligation.............................. 32
Unrecognized prior service cost............................. (56)
Unrecognized loss........................................... 456
-------
Accrued pension cost........................................ $ (52)
=======
</TABLE>
Net pension cost includes the following components for the years ended June 30:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Service costs............................................... $ 402 $ 396
Interest cost on projected benefit obligation............... 470 507
Actual return on plan assets................................ (1,560) (955)
Net amortization and deferral............................... 1,074 315
------- -----
$ 386 $ 263
======= =====
</TABLE>
The following rates were used in determining the actuarial present value of the
projected benefit obligations:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Weighted-average discount rate.............................. 6.5%
Rate of increase in future compensation levels.............. 4.5
Expected long-term rate of return on assets................. 9.0
</TABLE>
F-93
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES
Income tax expense for the years ended June 30 consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Current:
Federal.................................................. $ 475 $ 1,300
State.................................................... 100 225
------ -------
575 1,525
------ -------
Deferred:
Federal.................................................. 170 1,000
State.................................................... 30 175
------ -------
200 1,175
------ -------
$ 775 $ 2,700
====== =======
</TABLE>
Reconciliations of the expected Federal income tax expense at the statutory rate
with the actual income tax expense for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Tax computed at Federal statutory rate.................... $ 1,062 $ 2,535
State tax (net of Federal benefit)........................ 86 264
Change in valuation allowance............................. (500) --
Other..................................................... 127 (99)
------- -------
$ 775 $ 2,700
======= =======
</TABLE>
F-94
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
The tax effect of temporary differences and income tax carryforwards comprising
the deferred taxes shown on the consolidated balance sheet as net assets at
June 30 is as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Current:
Allowance for returns and doubtful accounts............... $ 184
Inventory costs........................................... 785
Prepaid expenses.......................................... (475)
Accrued liabilities....................................... 206
------
700
------
Noncurrent:
Depreciation and amortization............................. 153
Deferred compensation..................................... 304
Deferred gross profit..................................... (397)
Options granted below fair market value................... 920
Alternative minimum tax carryforwards..................... 470
------
1,450
------
Total................................................... $2,150
======
</TABLE>
At June 30, 1998, American Guidance has available alternative minimum tax credit
carryforwards of approximately $470 for Federal tax purposes; this Federal
credit can be carried forward indefinitely.
10. LEASES
American Guidance leases its building under an operating lease agreement from a
stockholder. The agreement, which was effective June 1995, calls for an initial
lease period of five years with an option to renew the lease for one additional
five-year term. In addition to the monthly lease payments, American Guidance is
responsible for all operating expenses and real estate taxes associated with the
building. American Guidance had previously leased this property under the
provisions of a 1985 lease agreement.
Future minimum requirements for the lease payments required under the operating
lease are $240 per year for fiscal years ending June 30, 1999 through June 30,
2000 or $480 in aggregate.
Rent expense was $297 and $267 for the years ended June 30, 1997 and 1998,
respectively.
11. STOCK OPTIONS
During fiscal 1995, American Guidance established a stock option plan, which
provides for the granting of nonqualified stock options to purchase Class A
common stock to employees. The options become exercisable two years after the
date of grant or upon a change in control of American Guidance, as defined, and
expire ten years from the date of grant. American Guidance has also granted
options to its Board of Directors in lieu of compensation.
F-95
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. STOCK OPTIONS (CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............................ 172,500 $ 8.62 208,286 $ 8.18
Granted..................................................... 62,786 6.83 127,528 7.23
Terminated.................................................. (27,000) 7.81 (907) 7.23
Exercised................................................... -- -- (14,000) 2.57
------- ------ ------- ------
Outstanding at end of year.................................. 208,286 $ 8.18 320,907 $ 8.09
------- ------ ------- ------
Options exercisable at end of year.......................... 98,786 $12.04 222,314 $10.48
======= ====== ======= ======
</TABLE>
The following table summarizes information about stock options at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- --------------------- --------------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.00 89,528 7 $ 0.00 37,935 $ 0.00
5.75 46,500 8 $ 5.75 -- $ --
11.20-13.25..... 184,879 7 $ 12.60 184,379 $12.54
------- -------
$0.00-$13.25.... 320,907 $ 8.09 222,314 $10.48
======= =======
</TABLE>
During the years ended June 30, 1997 and 1998, American Guidance recorded an
increase in additional paid-in capital and compensation expense of $702 and $735
related to the granting of options to purchase 52,000 and 52,500 shares,
respectively, of common stock to officers and employees of American Guidance in
accordance with an established variable compensation plan. The exercise price
per share of these options was dependent on American Guidance's fiscal 1997 and
1998 performance. These options will have exercise prices ranging from $0 to
$5.75.
During the years ended June 30, 1997 and 1998, American Guidance also recorded
an increase in additional paid-in capital and compensation expense of $67 and
$60 relating to the granting of options to purchase 5,700 and 4,528 shares of
Class A common stock, respectively, to certain Board members. These options will
have an exercise price of $0.
Had compensation costs for the stock options issued in 1997 and 1998 been
determined based on the fair value at the grant date, consistent with the
provisions of SFAS No. 123, American Guidance's 1997 and 1998 pro forma net
income would have been $2,220 and $4,404, respectively, compared with actual net
income of $2,258 and $4,544, respectively.
Under SFAS No. 123, the value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; a
F-96
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. STOCK OPTIONS (CONTINUED)
risk-free interest rate of 6.86% and 5.50% in 1997 and 1998, respectively; and
an expected life of ten years.
12. ACQUISITIONS
In October 1997, American Guidance acquired certain assets of Craig-Hart
Publishing Company. The acquisition was accounted for as a purchase. Craig-Hart
Publishing Company publishes and sells test preparation and other educational
materials. Craig-Hart Publishing Company was purchased for $1,550 cash. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Copyrights.................................................. $ 50
Other current assets........................................ 330
Inventory................................................... 220
Customer lists.............................................. 950
------
$1,550
======
</TABLE>
In March 1997, American Guidance acquired certain assets of International
Thomson Publishing Inc. ("ITP"). The acquisition was accounted for as a
purchase. ITP publishes and sells adult educational materials. ITP was purchased
for $782 in cash. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Copyrights.................................................. $ 60
Other current assets........................................ 300
Inventory................................................... 422
------
$ 782
======
</TABLE>
Pro forma results were not materially different than actual operating results.
13. COMMITMENTS AND CONTINGENCIES
American Guidance has employment agreements with certain executives that require
it to pay those executives' salary, bonus, and benefits for up to the greater of
the term of the agreement or 30 months if American Guidance terminates that
executive's employment for reasons other than disability or for cause, as
defined. American Guidance would also have to pay the executive's nonvested
portion of American Guidance's employee stock ownership plan. The employment
agreements also provide that in the event of a sale or merger of American
Guidance, the executives will receive a percentage of the sale price if American
Guidance's value exceeds $65,000. No provision has been recorded in the
consolidated financial statements for this contingency.
In 1998, American Guidance entered into various Share Redemption Agreements
requiring it to pay the former stockholders an amount greater than the original
repurchase price in the event of a sale or merger of American Guidance before
June 30, 2001. No provision has been recorded in the consolidated financial
statements for this contingency.
F-97
<PAGE>
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. SUBSEQUENT EVENT
Subsequent to year end, American Guidance's Board of Directors, which has
authority under the ESOP and Profit Sharing Plan, signed a letter of intent to
sell all of the issued and outstanding common stock for approximately $100,000.
Based on this estimated sales price, the amount due under the employment
agreements and share redemption agreements were $3,238 and $2,691, respectively.
F-98
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS OR IN THE ACCOMPANYING
LETTER OF TRANSMITTAL. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATIONS. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
AN OFFER TO SELL OR TO BUY ONLY THE SECURITIES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
CURRENT ONLY AS OF THEIR RESPECTIVE DATES.
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , (THE 90TH DAY AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware provides
that WRC Media Inc., CompassLearning, Inc. and Weekly Reader Corporation have
the power to indemnify any director or officer, or former director or officer,
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) against the expenses (including attorney's fees), judgments, fines
or amounts paid in settlement actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors or officers, if such person shall have acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding; PROVIDED
that such person had no reasonable cause to believe his conduct was unlawful,
except that, if such action shall be in the right of the corporation, no such
indemnification shall be provided as to any claim, issue or matter as to which
such person shall have been judged to have been liable to the corporation unless
and to the extent that the Court of Chancery of the State of Delaware, or any
court in such suit or action was brought, shall determine upon application that,
in view of all of the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses as such court shall deem
proper.
WRC Media Inc., CompassLearning, Inc. and Weekly Reader Corporation's
(collectively the "CORPORATION") bylaws provide that subject to Section 3 of
Article VII of the bylaws, the Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Subject to Section 3 of Article VII of the bylaws, the Corporation shall
have the power to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS (CONTINUED)
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification under Article VII of the bylaws (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in Section 1 or Section 2
of Article VII of the bylaws, as the case may be. Such determination shall be
made, with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or
(4) by the stockholders. To the extent, however, that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith, without the necessity of authorization in
the specific case.
For purposes of any determination under Section 3 of Article VII of the
bylaws, a person shall be deemed to have acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Corporation, or, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe such person's conduct was unlawful, if such
person's action is based on the records or books of account of the Corporation
or another enterprise, or on information supplied to such person by the officers
of the Corporation or another enterprise in the course of their duties, or on
the advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in Section 4 of Article VII of
the bylaws shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the Corporation as a director, officer, employee or
agent. The provisions of Section 4 of Article VII of the bylaws shall not be
deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Section 1 or 2 of Article VII of the bylaws, as the case may be.
Notwithstanding any contrary determination in the specific case under
Section 3 of Article VII of the bylaws, and notwithstanding the absence of any
determination thereunder, any director, officer, employee or agent may apply to
any court of competent jurisdiction in the State of Delaware for indemnification
to the extent otherwise permissible under Sections 1 and 2 of Article VII of the
bylaws. The basis of such indemnification by a court shall be a determination by
such court that indemnification of the director, officer, employee or agent is
proper in the circumstances because such person has met the applicable standards
of conduct set forth in Sections 1 or 2 of Article VII of the bylaws, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of Article VII of the bylaws nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director, officer, employee or agent seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification
pursuant to Section 5 of the bylaws shall be given to the Corporation promptly
upon
II-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS (CONTINUED)
the filing of such application. If successful, in whole or in part, the
director, officer, employee or agent seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Expenses incurred in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director, officer, employee or agent to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation as authorized in Article VII of
the bylaws.
The indemnification and advancement of expenses provided by or granted
pursuant to Article VII of the bylaws shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in such
director's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of Article VII of the bylaws shall be made
to the fullest extent permitted by law. The provisions of Article VII of the
bylaws shall not be deemed to preclude the indemnification of any person who is
not specified in Section 1 or 2 of Article VII of the bylaws but whom the
Corporation has the power or obligation to indemnify under the provisions of the
General Corporation Law of the State of Delaware or otherwise.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power or the obligation to indemnify such person against such liability under
the provisions of Article VII of the bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1 Purchase Agreement dated November 10, 1999 among WRC Media
Inc., Weekly Reader Corporation and CompassLearning, Inc.
2.1 Redemption, Stock Purchase and Recapitalization Agreement
dated August 13, 1999 among WRC Media Inc. and Primedia Inc.
3.1 Articles of Incorporation of WRC Media Inc.
3.2 Bylaws of WRC Media Inc.
3.3 Articles of Incorporation of Weekly Reader Corporation
3.4 Bylaws of Weekly Reader Corporation
3.5 Articles of Incorporation of CompassLearning, Inc.
3.6 Bylaws of CompassLearning, Inc.
3.7 Articles of Incorporation of Lifetime Learning Systems, Inc.
3.8 Bylaws of Lifetime Learning Systems, Inc.
3.9 Articles of Incorporation of American Guidance Service, Inc.
3.10 Bylaws of American Guidance Service, Inc.
3.11 Articles of Incorporation of AGS International Sales, Inc.
3.12 Bylaws of AGS International Sales, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
3.13 Articles of Incorporation of World Almanac Education Group,
Inc.
3.14 Bylaws of World Almanac Education Group, Inc.
3.15 Articles of Incorporation of Funk & Wagnalls Yearbook Corp.
3.16 Bylaws of Funk & Wagnalls Yearbook Corp.
3.17 Articles of Incorporation of Gareth Stevens, Inc.
3.18 Bylaws of Gareth Stevens, Inc.
4.1 Indenture dated November 17, among WRC Media Inc., Weekly
Reader Corporation, CompassLearning, Inc. and Bankers Trust
Company
4.2 Registration Rights Agreement dated November 17, 1999 among
WRC Media Inc., Weekly Reader Corporation, CompassLearning,
Inc., Primedia Reference Inc., Funk & Wagnalls Yearbook
Corp., Lifetime Learning Systems, Inc., Gareth Stevens,
Inc., American Guidance Service, Inc. and AGS International
Sales, Inc.
4.3* Amended Certificate of Designations, Preferences and Rights
of 15% Senior Preferred Stock due 2011 and 15% Series B
Senior Preferred Stock due 2001 of WRC Media Inc.
4.4 WRC Media Inc. Preferred Stockholders Agreement dated
November 17, 1999 between WRC Media Inc., Weekly Reader
Corporation and CompassLearning, Inc. and the preferred
shareholders listed on the signature pages thereto
4.5 Form of Note
4.6 Certificate of Preferred Stock
5.1* Opinion of Cravath, Swaine & Moore regarding the legality of
the new notes and the new senior preferred stock
5.2* Opinion of Leonard, Street and Deinard Professional
Association regarding certain Minnesota legal matters.
5.3* Opinion of Foley & Lardner regarding certain Wisconsin legal
matters.
10.1 Note Agreement, dated as of July 13, 1999, among
CompassLearning, Inc. (as successor by merger to EAC I
Inc.), The Northwestern Mutual Life Insurance Company and
SGC Partners II L.L.C.
10.2 Stock Purchase Agreement, dated July 13, 1999, among
Software Systems Corp., Sylvan Learning Systems, Inc.,
Pyramid Ventures, Inc., GE Capital Equity Investments, Inc.
and CompassLearning, Inc. (as successor by merger to EAC I
Inc.)
10.3 Credit Agreement dated November 17, 1999 among Weekly Reader
Corporation, CompassLearning, Inc., WRC Media Inc., DLJ
Capital Funding, Inc., Bank of America, N.A. and General
Electric Capital Corporation
10.4 Security and Pledge Agreement dated November 17, 1999 among
Weekly Reader Corporation, CompassLearning, Inc., WRC Media
Inc., Primedia Reference Inc., American Guidance Service
Inc., Lifetime Learning Systems, Inc., AGS International
Sales, Inc., Funk & Wagnalls Yearbook Corp. and Gareth
Stevens, Inc.
10.5 Subsidiary Guaranty dated November 17, 1999 among Primedia
Reference Inc., American Guidance Service Inc., Lifetime
Learning Systems, Inc., AGS International Sales, Inc., Funk
& Wagnalls Yearbook Corp. and Gareth Stevens, Inc.
10.6 Stockholders Agreement dated November 17, 1999 among Weekly
Reader Corporation, CompassLearning, Inc., WRC Media Inc.,
EAC III L.L.C., Donaldson, Lufkin & Jenrette and Banc of
America Securities
10.7 Shareholders Agreement dated as of November 17, 1999 among
WRC Media, Weekly Reader Corporation and PRIMEDIA, Inc.
10.8 Employment Agreement dated as of the 17th day of November,
1999 among WRC Media Inc., EAC III L.L.C., CompassLearning,
Inc. and Martin E. Kenney, Jr.
10.9 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Terry Bromberg
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.10 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Peter Bergen
10.11 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Robert Jackson
10.12 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Kenneth Slivken
10.13 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Sandy Maccarone
10.14 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Thaddeus Kozlowski
10.15 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Eric Ecker
10.16 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Lester Rackoff
10.17 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Therese K. Crane
10.18 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Joyce F. Russell
10.19 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service Inc. and Larry
Rutkowski
10.20 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service, Inc. and Gerald Adams
10.21 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Al De Seta
10.22 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Janice P. Bailey
10.23 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Nancy Lockwood
10.24 Transitional Services Agreement dated as of November 17,
1999, among Primedia Inc., WRC Media Inc. and Weekly Reader
Corporation
10.25 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Therese K. Crane and WRC Media
Inc.
10.26 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Peter Bergen, Larry Rutkowski, Al
De Seta, Robert Jackson, Kenneth Slivken and WRC Media Inc.
10.26.1* Shareholder Agreement dated as of January 1, 2000 among EAC
III L.L.C., Lester Rackoff, Sandy Maccarone, Ted Kozlowski,
Eric Ecker, Terry Bromberg, Gerald Adams, Linda Hein, Janice
Bailey, David Press, Cindy Buckosh, Robert Famighetti, Ken
Park and WRC Media Inc.
10.27 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Martin Kenney and WRC Media Inc.
10.28 Preferred Stock and Warrants Subscription Agreement dated
November 17 between WRC Media Inc., Weekly Reader
Corporation, CompassLearning, Inc. and the other signatories
thereto
10.29 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and CompassLearning, Inc.
10.30 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and Weekly Reader Corporation
12* Ratio of EBITDA to Cash Interest Expense
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
12.1* Statement regarding Ratios of Earnings to Fixed Charges
Computations
21.1 List of Subsidiaries of the Registrants
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Deloitte & Touche LLP
23.3* Consent of PricewaterhouseCoopers LLP
23.4 Consent of Cravath, Swaine & Moore (included in its opinion
filed as Exhibit 5.1)
23.5 Consent of Simba Information Inc.
25.1 Statement of Eligibility of Bankers Trust Corporation under
the Trust Indenture Act of 1939, as amended, on Form T-1.
27.1* Financial Data Schedule--WRC Media & its subsidiaries
27.2* Financial Data Schedule--Weekly Reader Corporation &
subsidiaries
27.3* Financial Data Schedule--CompassLearning Inc.
99.1 Letter of Transmittal for Tender of 15% Senior Preferred
Stock Due 2011 of WRC Media Inc.
99.2 Letter of Transmittal for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.3 Notice of Guaranteed Delivery for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.4 Notice of Guaranteed Delivery for Tender of 15% Senior
Preferred Stock Due 2011 of WRC Media Inc.
99.5 Notice of Withdrawal of Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.6 Notice of Withdrawal of Tender of 15% Senior Preferred Stock
Due 2011 of WRC Media Inc.
99.7 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 12 3/4% Senior Subordinated Notes Due 2009 of
WRC Media Inc., Weekly Reader Corporation and
CompassLearning, Inc.
99.8 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 15% Senior Preferred Stock Due 2011 of WRC Media
Inc.
99.9 Form of Letter to Clients for 12 3/4% Senior Subordinated
Notes Due 2009 of WRC Media Inc.
99.10 Form of Letter to Clients for 15% Senior Preferred Stock Due
2011 of WRC Media Inc.
99.11 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
</TABLE>
- ------------------------
* Filed herewith.
ITEM 22. UNDERTAKINGS
Each of the undersigned Registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
II-6
<PAGE>
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the 'Calculation
of Registration Fee' table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 (Section 239.13 of this chapter) or
Form S-8 (Section 239.16b of this chapter), and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Section 210.3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, PROVIDED that the registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3 (Section 239.33 of this chapter), a post-
effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Section 210.3-19 of this
chapter if such financial statements and information are contained in periodic
reports filed with or furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Form F-3.
Each of the undersigned Registrants hereby undertakes (i) to respond to
requests for information that are incorporated by reference into the Prospectus
pursuant to Item 4, 10(b), 11, or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This undertaking also includes information
in documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
Each of the undersigned Registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Each of the undersigned Registrants hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a
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<PAGE>
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be initial bona fide
offering thereof.
Each of the undersigned Registrants hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
Each of the undersigned Registrants hereby undertakes that every prospectus:
(i) that is filed pursuant to the immediately preceding paragraph or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or processing) is asserted by any such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiciton the quesiton of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
WRC MEDIA INC.,
By: /s/ MARTIN E. KENNEY, JR.
-----------------------------------------
Name: Martin E. Kenney, Jr.
Title: CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- Director/Chief Executive Officer
Martin E. Kenney, Jr.
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer/CFO/CAO
Robert S. Lynch
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
*
------------------------------------------- Vice-Chairman
Ralph D. Caulo
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
WEEKLY READER CORPORATION,
By: /s/ PETER E. BERGEN
-----------------------------------------
Name: Peter E. Bergen
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Chief Executive Officer
Peter E. Bergen
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Lester Rackoff Officer
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director/Executive Vice President
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
COMPASSLEARNING, INC.,
By: /s/ MARTIN E. KENNEY, JR.
-----------------------------------------
Name: Martin E. Kenney, Jr.
Title: CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- Director/Chief Executive Officer/President
Martin E. Kenney, Jr.
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Joyce F. Russell Officer
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
LIFETIME LEARNING SYSTEMS, INC.,
By: /s/ PETER E. BERGEN
-----------------------------------------
Name: Peter E. Bergen
Title: CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- Chief Executive Officer
Peter E. Bergen
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Lester Rackoff Officer
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
AMERICAN GUIDANCE SERVICE, INC.,
By: /s/ LARRY RUTKOWSKI
-----------------------------------------
Name: Larry Rutkowski
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Chief Executive Officer
Larry Rutkowski
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Gerald G. Adams Officer
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-13
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
AGS INTERNATIONAL SALES, INC.,
By: /s/ LARRY RUTKOWSKI
-----------------------------------------
Name: Larry Rutkowski
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Chief Executive Officer
Larry Rutkowski
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Gerald G. Adams Officer
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
WORLD ALMANAC EDUCATION GROUP, INC.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Principal Executive Officer
Alfred De Seta
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Janice P. Bailey Officer
*
------------------------------------------- Director
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
FUNK & WAGNALLS YEARBOOK CORP.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Principal Executive Officer
Alfred De Seta
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Janice P. Bailey Officer
*
------------------------------------------- Chairman
D. Ronald Daniel
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director/Executive Vice President
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
*
------------------------------------------- Director
William F. Dawson, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<S> <C> <C>
GARETH STEVENS, INC.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 26TH DAY OF MAY, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
------------------------------------------- President/Principal Executive Officer
Alfred De Seta
*
------------------------------------------- Chief Financial Officer/Chief Accounting
Janice P. Bailey Officer
*
------------------------------------------- Director
Timothy C. Collins
*
------------------------------------------- Director/Secretary
Charles L. Laurey
*
------------------------------------------- Director/Treasurer
Robert S. Lynch
*
------------------------------------------- Director
Martin E. Kenney, Jr.
*
------------------------------------------- Director
James N. Lane
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES L. LAUREY
--------------------------------------
Charles L. Laurey
ATTORNEY-IN-FACT
</TABLE>
II-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WRC Media Inc. and Subsidiaries:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of WRC Media and
Subsidiaries included in this Form 10-K as of December 31, 1999 and for the
period from May 14, 1999 to December 31, 1999 and have issued our report thereon
dated March 20, 2000. Our audit was made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The
accompanying schedule is the responsibility of WRC Media's management and is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 20, 2000
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Weekly Reader and Subsidiaries:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Weekly Reader and
Subsidiaries included in this Form 10-K as of December 31, 1999 and for the year
then ended and have issued our report thereon dated March 20, 2000. Our audit
was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The accompanying schedule is the
responsibility of Weekly Readers' management and is presented for the purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. The schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 20, 2000
S-2(a)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PRIMEDIA Inc.
New York, New York
We have audited the consolidated financial statements of Weekly Reader
Corporation and subsidiaries ("Weekly Reader"), a wholly-owned subsidiary of
PRIMEDIA Inc., as of December 31, 1998, and for each of the two years in the
period ended December 31, 1998, and have issued our report thereon dated
August 30, 1999 (November 17, 1999 as to Note 1) (included elsewhere in this
Registration Statement). Our audits also included the 1997 and 1998 financial
statement schedules of Weekly Reader included on page S-7 of this Registration
Statement. These financial statement schedules are the responsibility of Weekly
Reader's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
August 30, 1999
S-2(b)
<PAGE>
SCHEDULE I
WRC MEDIA INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 1,276
GOODWILL, net............................................... 379,927
DEFERRED FINANCING COSTS, net............................... 7,843
INVESTMENTS IN SUBSIDIARIES................................. 76,016
--------
Total assets.......................................... $465,062
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to subsidiaries....................................... $ 598
Accrued interest.......................................... 2,458
Current portion of long-term debt......................... 2,939
Other..................................................... 799
--------
Total current liabilities............................. 6,794
DUE TO RELATED PARTY........................................ 786
LONG-TERM DEBT.............................................. 273,617
DUE TO SUBSIDIARIES......................................... 11,751
--------
Total liabilities..................................... 292,948
--------
15% SERIES B PREFERRED STOCK SUBJECT TO REDEMPTION,
including
accrued dividends and warrants............................ 64,767
COMMON STOCK SUBJECT TO REDEMPTION.......................... 1,265
--------
STOCKHOLDERS' EQUITY:
Common stock, ($.01 par value, 20,000,000 shares
authorized; 6,855,853 outstanding)...................... 69
Additional paid-in capital................................ 126,075
Accumulated deficit....................................... (20,062)
Total stockholders' equity............................ 106,082
--------
Total liabilities and stockholders' equity............ $465,062
========
</TABLE>
S-3
<PAGE>
WRC MEDIA INC. (PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
SALES, net................................... $ --
OPERATING COSTS AND EXPENSES:
General and administrative................. (975)
Depreciation and amortization.............. (692)
---------
Loss from operations................... (1,667)
INTEREST EXPENSE, INCLUDING AMORTIZATION OF
DEFERRED FINANCING COSTS (5,116)
DIVIDENDS.................................. (1,406)
ACCRETION OF PREFERRED STOCK WARRANTS...... (112)
---------
Net loss............................... $ (8,301)
=========
</TABLE>
S-4
<PAGE>
WRC MEDIA INC. (PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net loss................................... $ (8,301)
Adjustments to reconcile net loss to net
cash provided by operating activities-...
Depreciation and amortization............ 951
Changes in assets and liabilities, net
assets acquired-.......................
Increase in due to subsidiaries........ 12,349
Increase in accrued interest........... 2,458
Increase in other accrued.............. 799
Increase in due to related party....... 786
---------
Net cash provided by operating
activities......................... 17,343
---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Payments for acquisitions of businesses.... (408,121)
Investments in subsidiaries................ (76,016)
---------
Net cash used in investing
activities......................... (484,137)
---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from long-term debt, net of
repayments............................... 276,556
Proceeds from sale of preferred stock,
including accrued dividends.............. 64,767
Proceeds from issuance of common stock..... 126,146
Debt issuance costs........................ (7,843)
---------
Net cash provided by financing
activities......................... 476,371
Increase in cash and cash
equivalents........................ 1,276
CASH AND CASH EQUIVALENTS, beginning of
period..................................... --
---------
CASH AND CASH EQUIVALENTS, end of period..... $ 1,276
=========
</TABLE>
S-5
<PAGE>
SCHEDULE II(A)-WRC MEDIA
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------ -------- --------- --------------
OPENING ENDING BALANCE
BALANCE DECEMBER 31,
MAY 14, 1999 EXPENSE WRITEOFFS 1999
------------ -------- --------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts.................. 2,342 447 (483) 2,306
Sales Returns and Allowances..................... 4,287 716 (1,429) 3,574
</TABLE>
S-6
<PAGE>
SCHEDULE II(B)-WEEKLY READER
<TABLE>
<CAPTION>
- -------------------------------------------- --------------- -------- --------- --------------
OPENING BALANCE ENDING BALANCE
ALLOWANCE FOR DOUBTFUL ACCOUNTS JANUARY 1, EXPENSE WRITEOFFS DECEMBER 31,
- -------------------------------------------- --------------- -------- --------- --------------
<S> <C> <C> <C> <C>
1999........................................ $1,737 $942 $ (886) $1,793
1998........................................ $1,499 $867 $ (629) $1,737
1997........................................ $1,709 $897 $(1,107) $1,499
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------- --------------- -------- --------- --------------
OPENING BALANCE ENDING BALANCE
SALES RETURNS AND ALLOWANCES JANUARY 1, EXPENSE WRITEOFFS DECEMBER 31,
- -------------------------------------------- --------------- -------- --------- --------------
<S> <C> <C> <C> <C>
1999........................................ $3,259 $5,937 $(5,622) $3,574
1998........................................ $3,320 $4,955 $(5,016) $3,259
1997........................................ $7,046 $5,876 $(9,602) $3,320
</TABLE>
S-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1 Purchase Agreement dated November 10, 1999 among WRC Media
Inc., Weekly Reader Corporation and CompassLearning, Inc.
2.1 Redemption, Stock Purchase and Recapitalization Agreement
dated August 13, 1999 among WRC Media Inc. and Primedia Inc.
3.1 Articles of Incorporation of WRC Media Inc.
3.2 Bylaws of WRC Media Inc.
3.3 Articles of Incorporation of Weekly Reader Corporation
3.4 Bylaws of Weekly Reader Corporation
3.5 Articles of Incorporation of CompassLearning, Inc.
3.6 Bylaws of CompassLearning, Inc.
3.7 Articles of Incorporation of Lifetime Learning Systems, Inc.
3.8 Bylaws of Lifetime Learning Systems, Inc.
3.9 Articles of Incorporation of American Guidance Service, Inc.
3.10 Bylaws of American Guidance Service, Inc.
3.11 Articles of Incorporation of AGS International Sales, Inc.
3.12 Bylaws of AGS International Sales, Inc.
3.13 Articles of Incorporation of World Almanac Education Group,
Inc.
3.14 Bylaws of World Almanac Education Group, Inc.
3.15 Articles of Incorporation of Funk & Wagnalls Yearbook Corp.
3.16 Bylaws of Funk & Wagnalls Yearbook Corp.
3.17 Articles of Incorporation of Gareth Stevens, Inc.
3.18 Bylaws of Gareth Stevens, Inc.
4.1 Indenture dated November 17, among WRC Media Inc., Weekly
Reader Corporation, CompassLearning, Inc. and Bankers Trust
Company
4.2 Registration Rights Agreement dated November 17, 1999 among
WRC Media Inc., Weekly Reader Corporation, CompassLearning,
Inc., Primedia Reference Inc., Funk & Wagnalls Yearbook
Corp., Lifetime Learning Systems, Inc., Gareth Stevens,
Inc., American Guidance Service, Inc. and AGS International
Sales, Inc.
4.3* Amended Certificate of Designations, Preferences and Rights
of 15% Senior Preferred Stock due 2011 and 15% Series B
Senior Preferred Stock due 2001 of WRC Media Inc.
4.4 WRC Media Inc. Preferred Stockholders Agreement dated
November 17, 1999 between WRC Media Inc., Weekly Reader
Corporation and CompassLearning, Inc. and the preferred
shareholders listed on the signature pages thereto
4.5 Form of Note
4.6 Certificate of Preferred Stock
5.1* Opinion of Cravath, Swaine & Moore regarding the legality of
the new notes and the new senior preferred stock
5.2* Opinion of Leonard, Street and Deinard Professional
Association regarding certain Minnesota legal matters.
5.3* Opinion of Foley & Lardner regarding certain Wisconsin legal
matters.
10.1 Note Agreement, dated as of July 13, 1999, among
CompassLearning, Inc. (as successor by merger to EAC I
Inc.), The Northwestern Mutual Life Insurance Company and
SGC Partners II L.L.C.
10.2 Stock Purchase Agreement, dated July 13, 1999, among
Software Systems Corp., Sylvan Learning Systems, Inc.,
Pyramid Ventures, Inc., GE Capital Equity Investments, Inc.
and CompassLearning, Inc. (as successor by merger to EAC I
Inc.)
10.3 Credit Agreement dated November 17, 1999 among Weekly Reader
Corporation, CompassLearning, Inc., WRC Media Inc., DLJ
Capital Funding, Inc., Bank of America, N.A. and General
Electric Capital Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.4 Security and Pledge Agreement dated November 17, 1999 among
Weekly Reader Corporation, CompassLearning, Inc., WRC Media
Inc., Primedia Reference Inc., American Guidance Service
Inc., Lifetime Learning Systems, Inc., AGS International
Sales, Inc., Funk & Wagnalls Yearbook Corp. and Gareth
Stevens, Inc.
10.5 Subsidiary Guaranty dated November 17, 1999 among Primedia
Reference Inc., American Guidance Service Inc., Lifetime
Learning Systems, Inc., AGS International Sales, Inc., Funk
& Wagnalls Yearbook Corp. and Gareth Stevens, Inc.
10.6 Stockholders Agreement dated November 17, 1999 among Weekly
Reader Corporation, CompassLearning, Inc., WRC Media Inc.,
EAC III L.L.C., Donaldson, Lufkin & Jenrette and Banc of
America Securities
10.7 Shareholders Agreement dated as of November 17, 1999 among
WRC Media, Weekly Reader Corporation and PRIMEDIA, Inc.
10.8 Employment Agreement dated as of the 17th day of November,
1999 among WRC Media Inc., EAC III L.L.C., CompassLearning,
Inc. and Martin E. Kenney, Jr.
10.9 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Terry Bromberg
10.10 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Peter Bergen
10.11 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Robert Jackson
10.12 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Kenneth Slivken
10.13 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Sandy Maccarone
10.14 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Thaddeus Kozlowski
10.15 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Eric Ecker
10.16 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Lester Rackoff
10.17 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Therese K. Crane
10.18 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Joyce F. Russell
10.19 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service Inc. and Larry
Rutkowski
10.20 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service, Inc. and Gerald Adams
10.21 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Al De Seta
10.22 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Janice P. Bailey
10.23 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Nancy Lockwood
10.24 Transitional Services Agreement dated as of November 17,
1999, among Primedia Inc., WRC Media Inc. and Weekly Reader
Corporation
10.25 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Therese K. Crane and WRC Media
Inc.
10.26 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Peter Bergen, Larry Rutkowski, Al
De Seta, Robert Jackson, Kenneth Slivken and WRC Media Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
10.26.1* Shareholder Agreement dated as of January 1, 2000 among EAC
III L.L.C., Lester Rackoff, Sandy Maccarone, Ted Kozlowski,
Eric Ecker, Terry Bromberg, Gerald Adams, Linda Hein, Janice
Bailey, David Press, Cindy Buckosh, Robert Famighetti, Ken
Park and WRC Media Inc.
10.27 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Martin Kenney and WRC Media Inc.
10.28 Preferred Stock and Warrants Subscription Agreement dated
November 17 between WRC Media Inc., Weekly Reader
Corporation, CompassLearning, Inc. and the other signatories
thereto
10.29 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and CompassLearning, Inc.
10.30 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and Weekly Reader Corporation
12* Cash Interest Expense Calculation
12.1* Statement Regarding Ratios of Earnings to Fixed Charges
Computations
21.1 List of Subsidiaries of the Registrants
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Deloitte & Touche LLP
23.3* Consent of PricewaterhouseCoopers LLP
23.4 Consent of Cravath, Swaine & Moore (included in its opinion
filed as Exhibit 5.1)
23.5 Consent of Simba Information Inc.
25.1 Statement of Eligibility of Bankers Trust Corporation under
the Trust Indenture Act of 1939, as amended, on Form T-1.
27.1* Financial Data Schedule--WRC Media & its subsidiaries
27.2* Financial Data Schedule--Weekly Reader Corporation &
subsidiaries
27.3* Financial Data Schedule--CompassLearning Inc.
99.1 Letter of Transmittal for Tender of 15% Senior Preferred
Stock Due 2011 of WRC Media Inc.
99.2 Letter of Transmittal for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.3 Notice of Guaranteed Delivery for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.4 Notice of Guaranteed Delivery for Tender of 15% Senior
Preferred Stock Due 2011 of WRC Media Inc.
99.5 Notice of Withdrawal of Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.6 Notice of Withdrawal of Tender of 15% Senior Preferred Stock
Due 2011 of WRC Media Inc.
99.7 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 12 3/4% Senior Subordinated Notes Due 2009 of
WRC Media Inc., Weekly Reader Corporation and
CompassLearning, Inc.
99.8 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 15% Senior Preferred Stock Due 2011 of WRC Media
Inc.
99.9 Form of Letter to Clients for 12 3/4% Senior Subordinated
Notes Due 2009 of WRC Media Inc.
99.10 Form of Letter to Clients for 15% Senior Preferred Stock Due
2011 of WRC Media Inc.
99.11 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
</TABLE>
- ------------------------
* Filed herewith.
<PAGE>
EXHIBIT 4.3
AMENDED CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS OF
15% SENIOR PREFERRED STOCK DUE 2011 AND
15% SERIES B SENIOR PREFERRED STOCK DUE 2011
of
WRC MEDIA INC.
Pursuant to Sections 103 and 151 of the General Corporation Law
of the State of Delaware
We, the undersigned, Robert S. Lynch, Treasurer, and Charles L. Laurey,
Secretary, of WRC Media Inc., a Delaware corporation (hereinafter called the
"CORPORATION"), pursuant to the provisions of Sections 103 and 151 of the
General Corporation Law of the State of Delaware, do hereby amend the
Certificate of Designations originally filed with the Office of the Secretary of
the State of Delaware on November 16, 1999 to read in its entirety as set forth
below. In amending such Certificate of Designations, we hereby state and certify
that (i) a majority of the outstanding stock entitled to vote thereon and a
majority of the outstanding stock of each class entitled to vote thereon as a
class has voted in favor of this amendment and (ii) pursuant to the authority
expressly vested in the Board of Directors of the Corporation by the Certificate
of Incorporation, the Board of Directors duly adopted the following resolutions
amending the previously filed Certificate of Designations to read in its
entirety as follows:
RESOLVED, that, pursuant to Article IV of the Amended and Restated
Certificate of Incorporation (which authorizes 20,000,000 shares of preferred
stock, par value $0.01 per share ("PREFERRED STOCK"), of which no shares of
Preferred Stock were issued and outstanding on November 16, 1999 when the
Certificate of Designations for the 15% Senior Preferred Stock Due 2011 was
originally filed and of which 3,000,000 shares of Preferred Stock are issued and
outstanding as of the date of the filing of the Amended Certificate of
Designations, the Board of Directors hereby fixes the powers, designations,
preferences and relative, participating, optional and other special rights, and
the qualifications, limitations and restrictions, of two series of Preferred
Stock
2
<PAGE>
by amending and restating the Certificate of Designations originally filed
on November 16, 1999 with respect to the 15% Senior Preferred Stock Due 2011.
RESOLVED, that each share of each such series of Preferred Stock shall
rank equally in all respects and shall be subject to the following provisions:
(1) NUMBER AND DESIGNATION. 6,400,000 shares of the Preferred Stock of the
Corporation shall be designated as 15% Senior Preferred Stock Due 2011 (the "15%
SENIOR PREFERRED STOCK") and 6,400,000 shares of the Preferred Stock of the
Corporation shall be designated as 15% Series B Senior Preferred Stock Due 2011
(the "SERIES B SENIOR PREFERRED STOCK" and, together with the 15% Senior
Preferred Stock, the "SENIOR PREFERRED STOCK").
(2) RANK. The Senior Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up, rank prior to all
classes of or series of common stock of the Corporation, including the
Corporation's common stock, par value $.01 per share ("COMMON STOCK"), and each
other class of capital stock of the Corporation, the terms of which do not
expressly provide that such class shall rank senior to, or on a parity with, the
Senior Preferred Stock or the terms of which do not specify any rank relative to
the Senior Preferred Stock. All capital stock of the Corporation to which the
Senior Preferred Stock ranks prior (whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise), including the Common Stock,
are collectively referred to herein as the "JUNIOR SECURITIES." All capital
stock of the Corporation with which the Senior Preferred Stock ranks on a parity
(whether with respect to dividends or upon liquidation, dissolution or winding
up) are collectively referred to herein as the "PARITY SECURITIES." The
respective definitions of Junior Securities and Parity Securities shall also
include any rights or options exercisable for or convertible into any of the
Junior Securities and Parity Securities, as the case may be. The 15% Senior
Preferred Stock and the Series B Senior Preferred Stock shall rank on a parity
with, and be identical to (except as set forth in Section 4(a)), each other as
to dividend and redemption rights and rights upon liquidation, dissolution and
winding-up of the Corporation.
(3) DIVIDENDS. (a) (i) The holders of shares of Senior Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends,
dividends (subject to Sections 3(a)(ii) and (iii)) at a rate equal to (the
"DIVIDEND RATE") (1) 15% per annum (computed on the basis of a 360 day year) or
(2), if (A) any Registration Statement is not filed with the Securities and
Exchange Commission (the "COMMISSION") on or prior to the applicable Filing
Deadline, (B) any such Registration Statement has not been declared effective by
the Commission on or prior to the applicable Effectiveness Target Date, (C) the
Exchange Offer has not
2
<PAGE>
been Consummated on or prior to the Consummation Deadline or (D) any
Registration Statement is declared effective but shall thereafter cease to be
effective or fail to be usable for its intended purpose without being succeeded
within 2 days by a post-effective amendment to such Registration Statement that
cures such failure and that is itself declared effective within 5 days of filing
such post-effective amendment to such Registration Statement (each such event
referred to in clauses (A) through (D), (a "REGISTRATION DEFAULT"), 15.5% per
annum (computed on the basis of a 360 day year) for each week or portion thereof
that the Registration Default continues. Notwithstanding anything to the
contrary set forth herein, (1) upon filing of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (A) above, (2) upon the effectiveness of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (B) above, (3) upon Consummation of the Exchange Offer, in the case of (C)
above, or (4) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration Statement)
to again be declared effective or made usable in the case of (D) above, the
Dividend Rate shall return to 15% (before giving effect to any applicable
Default Dividend). In the event the Corporation is unable or shall fail to
discharge its obligation to redeem all outstanding shares of Senior Preferred
Stock pursuant to Section 5(b) or 5(c), the Dividend Rate as provided above
shall increase by .50% per quarter (each, a "DEFAULT DIVIDEND") for each quarter
or portion thereof following the date on which such redemption was required to
be made until cured, PROVIDED that the aggregate increase shall not exceed 10%.
Such dividends shall be payable in the manner set forth below in Sections
3(a)(ii) and (iii) quarterly on March 31, June 30, September 30, and December 31
of each year (unless such day is not a business day, in which event on the next
succeeding business day) (each of such dates being a "DIVIDEND PAYMENT DATE" and
each such quarterly period being a "DIVIDEND PERIOD"). Such dividends shall be
cumulative from the date of issue, whether or not in any Dividend Period or
Periods there shall be funds of the Corporation legally available for the
payment of such dividends.
"CONSUMMATE" means, with respect to an Exchange Offer, the occurrence of
(a) the filing and effectiveness under the Act of the Exchange Offer
Registration Statement relating to the New Preferred Stock to be issued in the
Exchange Offer, (b) the maintenance of such Exchange Offer Registration
Statement continuously effective and the keeping of the Exchange Offer open for
a period not less than the period required pursuant to Article V of the
Shareholders Agreement and (c) the delivery by the Corporation of New Preferred
Stock with the same liquidation value as the Liquidation Value of the 15% Senior
Preferred Stock tendered by holders thereof pursuant to the Exchange Offer.
3
<PAGE>
"EFFECTIVENESS TARGET DATE" shall have the meaning ascribed such term in
the Shareholders Agreement.
"EXCHANGE OFFER" shall have the meaning ascribed such term in the
Shareholders Agreement.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall have the meaning ascribed
such term in the Shareholders Agreement.
"FILING DEADLINE" shall have the meaning ascribed such term in the
Shareholders Agreement.
"NEW PREFERRED STOCK" means the Corporation's new Series B Senior
Preferred Stock, of identical type and having identical terms as the 15% Senior
Preferred Stock, to be issued (i) in the Exchange Offer or (ii) as contemplated
by Article V of the Shareholders Agreement.
"REGISTRATION STATEMENT" means any registration statement of the
Corporation relating to (a) an offering of New Preferred Stock pursuant to an
Exchange Offer or (b) the registration for resale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement, in each case, (i) that
is filed pursuant hereto and (ii) including the prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
"SHELF REGISTRATION STATEMENT" shall have the meaning ascribed such term
in the Shareholders Agreement.
"SHAREHOLDERS AGREEMENT" means the Preferred Stockholders Agreement dated
as of November 17, 1999 among the Corporation, Weekly Reader Corporation, JLC
Learning Corporation, EAC III LLC, SGC Partners II LLC, DLJ Merchant Banking
Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore
Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A,
L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJMB
Funding II, Inc., DLJ EAB Partners, L.P., DLJ First ESC, L.P., DLJ ESC II, L.P.
and the other parties listed on the signature pages thereto.
"TRANSFER RESTRICTED SECURITIES" means each share of 15% Senior Preferred
Stock, until the earliest to occur of (i) the date on which such 15% Senior
Preferred Stock is exchanged in the Exchange Offer for a share of New Preferred
Stock which is entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery requirements of the Act, (ii) the date on
which such share of 15% Senior Preferred Stock has been disposed of in
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<PAGE>
accordance with a Shelf Registration Statement (and the purchasers thereof have
been issued New Preferred Stock), or (iii) the date on which such 15% Senior
Preferred Stock is distributed to the public pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "ACT").
(ii) Prior to the first Dividend Payment Date after the fifth
anniversary of the issuance of the Senior Preferred Stock (or such earlier
Dividend Payment Date as the Corporation shall elect) (either such date
being referred to as the "CASH PAY DATE"), dividends shall not be payable
in cash to holders of shares of Senior Preferred Stock but shall, subject
to Section 3(b), accrete to the Liquidation Value in accordance with
Section 4(a).
(iii) Following the Cash Pay Date, each such dividend shall be
payable in cash on the Liquidation Value per share of the Senior Preferred
Stock, in equal quarterly amounts (to which the Default Dividend, if any,
shall be added), to the holders of record of shares of the Senior
Preferred Stock, as they appear on the stock records of the Corporation at
the close of business on such record dates, not more than 60 days or less
than 10 days preceding the payment dates thereof, as shall be fixed by the
Board of Directors. Following the Cash Pay Date, accrued and unpaid
dividends for any past Dividend Periods may be declared and paid at any
time, without reference to any Dividend Payment Date, to holders of record
on such date, not more than 45 days preceding the payment date thereof, as
may be fixed by the Board of Directors.
(b) At the written request of the holders of a majority of the shares of
Senior Preferred Stock, the Corporation shall, commencing on the first Dividend
Payment Date after such request and ending on the Cash Pay Date, be required to
pay all dividends on shares of Senior Preferred Stock by the issuance of
additional shares of Senior Preferred Stock of the same series of Senior
Preferred Stock as the series on which such dividends have accrued ("ADDITIONAL
SHARES"). The Additional Shares shall be identical to all other shares of such
series of Senior Preferred Stock, except as set forth in Section 4. For the
purposes of determining the number of Additional Shares to be issued as
dividends pursuant to this Section 3(b), such Additional Shares shall be valued
at their Applicable Liquidation Value as provided in Section 4(c).
(c) Holders of shares of Senior Preferred Stock shall not be entitled to
any dividends, whether payable in cash, property or stock, in excess of the
cumulative dividends, as herein provided, on the Senior Preferred Stock. Except
as provided in this Section 3, no interest, or sum of money in lieu of interest,
shall be payable
5
<PAGE>
in respect of any dividend payment or payments on the Senior Preferred Stock
that may be in arrears.
(d) So long as any shares of the Senior Preferred Stock are outstanding,
no dividends, except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment or other distribution declared or made
upon Parity Securities, nor shall any Parity Securities be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Corporation, directly or indirectly, unless, in each case (to the extent
such dividends on the Senior Preferred Stock are payable in cash), full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on the Senior Preferred Stock for all Dividend Periods terminating on or prior
to the date of payment of the dividend on, or the acquisition of, as applicable,
such class or series of Parity Securities. When (to the extent such dividends
are payable in cash) dividends on the Senior Preferred Stock are not paid in
full or a sum sufficient for such payment is not set apart, as aforesaid, all
dividends declared upon shares of the Senior Preferred Stock and all dividends
declared upon any other class or series of Parity Securities shall (in each
case, to the extent payable in cash) be declared ratably in proportion to the
respective amounts of dividends accumulated and unpaid on the Senior Preferred
Stock and accumulated and unpaid on such Parity Securities.
(e) So long as any shares of the Senior Preferred Stock are outstanding,
no dividends (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Junior
Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan of the Corporation or any
subsidiary) (all such dividends, distributions, redemptions or purchases being
hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Junior Securities), unless
in each case (i) the full cumulative dividends on all outstanding shares of the
Senior Preferred Stock and any other Parity Securities shall (to the extent
payable in cash) have been paid or set apart for payment for all past Dividend
Periods with respect to the Senior Preferred Stock and all past dividend periods
with respect to such Parity Securities and (ii) (to the extent payable in cash)
sufficient funds shall have been paid or set apart for the payment of the
dividend for the current Dividend Period with respect to the Senior
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<PAGE>
Preferred Stock and the current dividend period with respect to such Parity
Securities.
(4) LIQUIDATION PREFERENCE. (a) In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation (whether
capital or surplus) shall be made to or set apart for the holders of Junior
Securities, the holders of the shares of Senior Preferred Stock shall be
entitled to receive an amount equal to the Liquidation Value of such share plus
any accrued and unpaid cash dividends to the date of distribution. "LIQUIDATION
VALUE" on any date means, with respect to (x) any share of Senior Preferred
Stock other than any Additional Shares, the sum of (1) $25.00 per share and (2)
the aggregate of all dividends accreted on such share until the most recent
Dividend Payment Date upon which an accretion to Liquidation Value has occurred
(or if such date is a Dividend Payment Date upon which an accretion to
Liquidation Value has occurred, such date), PROVIDED that in the event of an
actual liquidation, dissolution or winding up of the Corporation or the
redemption of any shares of Senior Preferred Stock pursuant to Section 5
hereunder, the amount referred to in (2) shall be calculated by including
dividends accreting to the actual date of such liquidation, dissolution or
winding up or the redemption date, as the case may be, rather than the Dividend
Payment Date referred to above and, PROVIDED FURTHER that in no event will
dividends accrete beyond the earlier of (i) the Cash Pay Date and (ii) the most
recent Dividend Payment Date prior to the Dividend Payment Date on which
dividends on the Senior Preferred Stock are payable in Additional Shares (except
that in the event of an actual liquidation, dissolution or winding up of the
Corporation or the redemption of any shares of Senior Preferred Stock pursuant
to Section 5 hereunder, the amount referred to in (ii) shall be calculated by
including dividends accreting to the actual date of such liquidation,
dissolution or winding up or the redemption date, as the case may be), and (y)
any Additional Share, the Applicable Liquidation Value. Solely for purposes of
calculating the Liquidation Value with respect to any share of Series B Senior
Preferred Stock issued subsequent to November 17, 1999, other than Additional
Shares, such share shall be deemed to have been issued on November 17, 1999,
regardless of when such share was actually issued. All accretions to Liquidation
Value will be calculated using compounding on a quarterly basis. Except as
provided in the preceding sentences, holders of shares of Senior Preferred Stock
shall not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the affairs of the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of the shares
of Senior Preferred Stock shall be insufficient to pay in full the preferential
amount aforesaid and liquidating payments on any Parity Securities, then such
assets, or the proceeds thereof, shall be distributed among the holders of
shares of Senior Preferred Stock and any such
7
<PAGE>
other Parity Securities ratably in accordance with the respective amounts that
would be payable on such shares of Senior Preferred Stock and any such other
stock if all amounts payable thereon were paid in full. For the purposes of this
Section (4), (i) a consolidation or merger of the Corporation with one or more
corporations or (ii) a sale or transfer of all or substantially all of the
Corporation's assets, shall not be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities, after
payment shall have been made in full to the holders of the Senior Preferred
Stock, as provided in this Section (4), any other series or class or classes of
Junior Securities shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the Senior Preferred Stock shall not be
entitled to share therein.
(c) The Applicable Liquidation Value of any Additional Shares shall be the
Liquidation Value of Senior Preferred Stock outstanding immediately prior to the
first Dividend Payment Date occurring after a request for payment in Additional
Shares has been made in accordance with Section 3(b).
(5) REDEMPTION. (a) REDEMPTION AT THE OPTION OF THE CORPORATION. On and
after November 17, 1999 (but not including from November 17, 2002 to November
17, 2004), to the extent the Corporation shall have funds legally available for
such payment, the Corporation may, at its option, redeem shares of Senior
Preferred Stock, in whole but not in part, at redemption prices per share in
cash set forth in the table below, together with accrued and unpaid cash
dividends thereon to the date fixed for redemption, without interest:
Year Beginning
November 17 PERCENTAGE OF LIQUIDATION VALUE
-------------------------------
1999 115.000%
2000 115.000
2001 115.000
2002 Not applicable
2003 Not applicable
2004 107.500
2005 105.625
2006 103.750
2007 101.875
2008 100.000
8
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(b) REDEMPTION IN THE EVENT OF A CHANGE OF CONTROL. In the event of a
Change of Control, the Corporation shall, to the extent it shall have funds
legally available for such payment and to the extent permitted pursuant to the
Indenture, offer to redeem all of the shares of Senior Preferred Stock then
outstanding, and shall redeem the shares of Senior Preferred Stock of any holder
of such shares that shall consent to such redemption, upon a date no later than
30 days (or, if a later date is required in order to comply with the federal
securities laws, the first date thereafter on which such redemption is permitted
under the federal securities laws) (such date being referred to as the "CHANGE
OF CONTROL REDEMPTION DATE") following the Change in Control, at a redemption
price per share in cash set forth in the table below, together with accrued and
unpaid cash dividends thereon to the date fixed for redemption, without
interest.
Year Beginning
November 17 PERCENTAGE OF LIQUIDATION VALUE
-------------------------------
1999 107.5000%
2000 107.5000
2001 107.5000
2002 100.0000
2003 100.0000
2004 103.7500
2005 102.8125
2006 101.8750
2007 100.9375
2008 100.0000
"CHANGE OF CONTROL" means the occurrence of any of the following (i) the
direct or indirect sale, transfer or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the properties or assets of the Corporation and its
Subsidiaries (other than JLC Learning Corporation) taken as a whole to any
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) other than a
Principal or a Related Party; (ii) the adoption of a plan of liquidation or
dissolution of the Corporation or Weekly Reader Corporation; (iii) the
consummation of any transaction (including without limitation any merger or
consolidation) the result of which is that any "person" or "group" (as defined
above), other than a Principal or a Related Party, becomes the Beneficial Owner,
directly or indirectly of more than 50% of the Voting Stock of either of the
Corporation or Weekly Reader Corporation, measured by voting power rather than
number of shares; or (iv) the first day on
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which a majority of the members of the board of directors of the Corporation or
Weekly Reader are not Continuing Directors.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition.
"CONTINUING DIRECTORS" means, as of the date of any determination, any
member of the board of directors of the relevant company who (i) was a member of
such board of directors on November 17, 1999 or (ii) was nominated for election
or elected to such board of directors with the approval of a majority of the
Continuing Directors who were members of such board at the time of such
nomination or election.
"PRINCIPAL" means Ripplewood Partners, L.P., DLJ Merchant Banking Partners
II, L.P. and any member of management of any of the Corporation, Weekly Reader
Corporation or JLC Learning Corporation as of November 17, 1999.
"RELATED PARTY" means (i) any controlling stockholder, Subsidiary, or
immediate family member (in the case of an individual) of any Principal, (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a majority or
more controlling interest of which consist of any one or more Principals and/or
such other Persons referred to in the immediately preceding clause (i) or (iii)
any Affiliate (as such term is defined in the Shareholders Agreement) of DLJ
Merchant Banking Partners II, L.P.
"SUBSIDIARY" means, with respect to any specified person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of capital stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such person or one or more of the other Subsidiaries of the person and (ii) any
partnership the sole general partner or the managing general partner of which is
such person or a Subsidiary of such person or the only general partners of which
are such person or one or more Subsidiaries of such person.
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"INDENTURE" means that certain Indenture dated November 17, 1999 by and
between the Corporation and The Bankers Trust Company with respect to the
Corporation's 123/4% Senior Subordinated Notes due 2009.
(c) MANDATORY REDEMPTION. To the extent the Corporation shall have funds
legally available for such payment, on November 17, 2011, if any shares of the
Senior Preferred Stock shall be outstanding, the Corporation shall redeem all
outstanding shares of the Senior Preferred Stock, at a redemption price equal to
the aggregate Liquidation Value, in cash, together with any accrued and unpaid
cash dividends thereon to the date fixed for redemption, without interest.
(d) REDEMPTION FOR WEEKLY READER CORPORATION PREFERRED STOCK. The
Corporation, at its option but only in connection with the Reorganization, may
redeem all of the shares of Senior Preferred Stock then outstanding in exchange
for an equivalent number of shares of preferred stock of Weekly Reader
Corporation, of identical type and liquidation preference, having identical
terms and conditions as the Senior Preferred Stock (except that the issuer of
such preferred stock shall be Weekly Reader Corporation) and with equal amounts
of accrued and unpaid cash dividends, if any (the "EXCHANGE PREFERRED STOCK").
"REORGANIZATION" means a reorganization completed in connection with an
initial public offering, pursuant to which the Corporation shall transfer, or
cause to be transferred, all or substantially all of its assets to Weekly Reader
Corporation in exchange for the assumption by Weekly Reader Corporation of all
or substantially all of the liabilities of the Corporation, the issuance to the
Corporation by Weekly Reader Corporation of new common stock and a number of
shares of Exchange Preferred Stock equal to the number of shares of Senior
Preferred Stock then outstanding, and, at the option of the Corporation, the
distribution by the Corporation of an equivalent number of shares of the
Exchange Preferred Stock to the holders of the Senior Preferred Stock in
exchange for the Senior Preferred Stock, PROVIDED that after giving effect to
such reorganization, the overall economic position of a holder of Exchange
Preferred Stock with respect to its investment in Weekly Reader Corporation (and
relative to other creditors, lenders and equity holders of Weekly Reader
Corporation) shall not be worse than, immediately prior to such reorganization,
the overall economic position of a holder of Senior Preferred Stock with respect
to the investment by that holder in the Corporation (and relative to other
creditors, lenders and equity holders of the Corporation).
(e) STATUS OF REDEEMED SHARES. Shares of Senior Preferred Stock which have
been issued and reacquired in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) have the status of authorized and unissued shares of the
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<PAGE>
class of Preferred Stock undesignated as to series and may be redesignated and
reissued as part of any series of the Preferred Stock, PROVIDED that no such
issued and reacquired shares of Senior Preferred Stock shall be reissued or sold
as Senior Preferred Stock.
(f) FAILURE TO REDEEM. If the Corporation is unable or shall fail to
discharge its obligation to redeem all outstanding shares of Senior Preferred
Stock pursuant to Section (5)(b) or 5(c) (each, a "MANDATORY REDEMPTION
OBLIGATION"), such Mandatory Redemption Obligation shall be discharged as soon
as the Corporation is able to discharge such Mandatory Redemption Obligation. If
and so long as any Mandatory Redemption Obligation with respect to the Senior
Preferred Stock shall not be fully discharged, the Corporation shall not (i)
directly or indirectly, redeem, purchase, or otherwise acquire any Parity
Security or discharge any mandatory or optional redemption, sinking fund or
other similar obligation in respect of any Parity Securities (except in
connection with a redemption, sinking fund or other similar obligation to be
satisfied pro rata with the Senior Preferred Stock) or (ii) in accordance with
Section 3(e), declare or make any Junior Securities Distribution, or, directly
or indirectly, discharge any mandatory or optional redemption, sinking fund or
other similar obligation in respect of the Junior Securities.
(g) FAILURE TO PAY DIVIDENDS. Notwithstanding the foregoing provisions of
this Section (5), unless full cumulative cash dividends (whether or not
declared) on all outstanding shares of Senior Preferred Stock shall have been
paid or contemporaneously are declared and paid or set apart for payment for all
Dividend Periods terminating on or prior to the applicable redemption date, none
of the shares of Senior Preferred Stock shall be redeemed, and no sum shall be
set aside for such redemption, unless shares of Senior Preferred Stock are
redeemed pro rata.
(6) PROCEDURE FOR REDEMPTION. (a) In the event the Corporation shall
redeem shares of Senior Preferred Stock pursuant to Section 5(a) or (c), notice
of such redemption shall be given by first class mail, postage prepaid, mailed
not less than 30 days nor more than 60 days prior to the redemption date, to
each holder of record of the shares to be redeemed at such holder's address as
the same appears on the stock register of the Corporation, PROVIDED that neither
the failure to give such notice nor any defect therein shall affect the validity
of the giving of notice for the redemption of any share of Senior Preferred
Stock to be redeemed except as to the holder to whom the Corporation has failed
to give said notice or except as to the holder whose notice was defective. Each
such notice shall state: (i) the redemption date; (ii) that all shares of Senior
Preferred Stock are to be redeemed; (iii) the redemption price; (iv) the place
or places where certificates for such shares are to be surrendered for payment
of the redemption price; and (v)
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<PAGE>
that dividends on the shares to be redeemed will cease to accrue on such
redemption date.
(b) In the case of any redemption pursuant to Sections 5(a) or (c), notice
having been mailed as provided in Section 6(a), from and after the redemption
date (unless default shall be made by the Corporation in providing money for the
payment of the redemption price of the shares), dividends on the shares of
Senior Preferred Stock shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender in accordance with
said notice of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and the notice shall so state), such shares shall be redeemed by the
Corporation at the redemption price aforesaid.
(c) In the case of a redemption pursuant to Section 5(b), notice of such
redemption shall be given by first class mail, postage prepaid, mailed not more
than 10 days following the occurrence of the Change of Control and not less than
20 days prior to the Change of Control Redemption Date, to each holder of record
of the shares to be redeemed at such holder's address as the same appears on the
stock register of the Corporation, PROVIDED that neither the failure to give
such notice nor any defect therein shall affect the validity of the giving of
notice for the redemption of any share of Senior Preferred Stock to be redeemed
except as to the holder to whom the Corporation has failed to give said notice
or except as to the holder whose notice was defective. Each such notice shall
state: (i) that a Change of Control has occurred; (ii) the Change of Control
Redemption Date; (iii) the redemption price; (iv) that such holder may elect to
cause the Corporation to redeem all or any of the shares of Senior Preferred
Stock held by such holder; (v) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (vi) that
dividends on the shares the holder elects to cause the Corporation to redeem
will cease to accrue on such redemption date.
Upon receipt of such notice, the holder shall, within the time period
specified therein, return such notice to the Corporation indicating the number
of shares of Senior Preferred Stock such holder shall elect to cause the
Corporation to redeem, if any. The failure of any holder to timely return such
notice shall be deemed an election by such holder not to cause the Corporation
to redeem any of such holder's shares of Senior Preferred Stock.
(d) In the case of a redemption pursuant to Section 5(b), notice having
been mailed as provided in Section 6(c), from and after the Change of Control
Redemption Date (unless default shall be made by the Corporation in providing
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<PAGE>
money for the payment of the redemption price of the shares called for
redemption), dividends on such shares of Senior Preferred Stock as the holder
elects to cause the Corporation to redeem shall cease to accrue, and all rights
of the holders thereof as stockholders of the Corporation (except the right to
receive from the Corporation the redemption price) shall cease. Upon surrender
in accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such share shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
(e) In the case of a redemption pursuant to Section 5(d), notice of such
redemption shall be given by first class mail, postage prepaid, mailed not less
than 10 days nor more than 60 days prior to the redemption date, to each holder
of record of the shares to be redeemed at such holder's address as the same
appears on the stock register of the Corporation, PROVIDED that neither the
failure to give such notice nor any defect therein shall affect the validity of
the giving of notice for the redemption of any share of Senior Preferred Stock
to be redeemed except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was defective. Each
such notice shall state: (i) the redemption date; (ii) that all shares of Senior
Preferred Stock are to be redeemed; (iii) the place or places where certificates
for such shares of Senior Preferred Stock are to be surrendered for certificates
for shares of Exchange Preferred Stock; (iv) that dividends on the shares to be
redeemed will cease to accrue on such redemption date and (v) the proposed terms
of the Reorganization.
(f) In the case of a redemption pursuant to Section 5(d), notice having
been mailed as provided in Section 6(e), from and after the redemption date
(unless default shall be made by the Corporation in distributing the required
shares of Exchange Preferred Stock in exchange for the shares of Senior
Preferred Stock), dividends on the shares of Senior Preferred Stock shall cease
to accrue, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the required
shares of Exchange Preferred Stock) shall cease. Upon surrender in accordance
with said notice of the certificates for any shares of Senior Preferred Stock
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares shall
be exchanged by the Corporation for the required shares of Exchange Preferred
Stock.
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<PAGE>
(7) VOTING RIGHTS. (a) The holders of record of shares of Senior Preferred
Stock shall not be entitled to any voting rights except as hereinafter provided
in this Section (7) or as otherwise provided by law.
(b) If and whenever (i) four consecutive or six quarterly cash dividends
payable on the Senior Preferred Stock have not been paid in full, (ii) for any
reason (including the reason that funds are not legally available for a
redemption), the Corporation shall have failed to discharge any Mandatory
Redemption Obligation, (iii) the Corporation shall have failed to provide the
notice required by Section 6(c) within the time period specified in such section
or (iv) the Corporation shall have failed to comply with Sections 3(d), 3(e) or
7(c), (1) the number of directors then constituting the Board of Directors shall
be increased by one and the holders of a majority of the outstanding shares of
Senior Preferred Stock, together with the holders of shares of every other
series of preferred stock upon which like rights have been conferred and are
exercisable (resulting from either the failure to pay dividends or the failure
to redeem) (any such series is referred to as the "PREFERRED SHARES"), voting as
a single class regardless of series, shall be entitled to elect the one
additional director to serve on the Board of Directors at any annual meeting of
stockholders or special meeting held in place thereof, or at a special meeting
of the holders of the Senior Preferred Stock and the Preferred Shares called as
hereinafter provided.
(c) Whenever (i) all arrears in cash dividends on the Senior Preferred
Stock and the Preferred Shares then outstanding shall have been paid and cash
dividends thereon for the current quarterly dividend period shall have been paid
or declared and set apart for payment, (ii) the Corporation shall have fulfilled
its Mandatory Redemption Obligation, (iii) the Corporation shall have fulfilled
its obligation to provide notice as specified in subsection (b)(iii), or (iv)
the Corporation shall have complied with Sections 3(d), 3(e) and 7(c), as the
case may be, then the right of the holders of the Senior Preferred Stock to
elect such additional director shall cease (but subject always to the same
provisions for the vesting of such voting rights in the case of any similar
future (i) arrearage in four consecutive or six quarterly cash dividends, (ii)
failure to fulfill any Mandatory Redemption Obligation, (iii) failure to fulfill
the obligation to provide the notice required by Section 6(c) within the time
period specified in such section or (iv) failure to comply with Sections 3(d),
3(e) or 7(c)), the terms of office of the person elected as director by the
holders of the Senior Preferred Stock shall forthwith terminate and the number
of the Board of Directors shall be reduced accordingly. At any time after such
voting power shall have been so vested in the holders of shares of Senior
Preferred Stock and the Preferred Shares, the secretary of the Corporation may,
and upon the written request of any holder of Senior Preferred Stock (addressed
to the secretary at the principal office of the Corporation) shall, call a
special meeting of the holders of the Senior Preferred
15
<PAGE>
Stock and of the Preferred Shares for the election of the director to be elected
by them as herein provided, such call to be made by notice similar to that
provided in the Bylaws of the Corporation for a special meeting of the
stockholders or as required by law. If any such special meeting required to be
called as above provided shall not be called by the secretary within 20 days
after receipt of any such request, then any holder of shares of Senior Preferred
Stock may call such meeting, upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation. The director
elected at any such special meeting shall hold office until the next annual
meeting of the stockholders or special meeting held in lieu thereof if such
office shall not have previously terminated as above provided. If any vacancy
shall occur with respect to the director elected by the holders of the Senior
Preferred Stock and the Preferred Shares, a successor shall be elected in
accordance with the procedures of Section 7(b) to serve until the next annual
meeting of the stockholders or special meeting held in place thereof, if such
office shall not have previously terminated as provided above.
(d) Without the written consent of a majority of the outstanding shares of
Senior Preferred Stock or the vote of holders of a majority of the outstanding
shares of Senior Preferred Stock at a meeting of the holders of Senior Preferred
Stock called for such purpose, the Corporation will not (i) amend, alter or
repeal any provision of the Certificate of Incorporation (by merger or
otherwise) so as to adversely affect the preferences, rights or powers of the
Senior Preferred Stock, PROVIDED that any such amendment that decreases the
dividend payable on or the Liquidation Value of the Senior Preferred Stock shall
require the affirmative vote of holders of each share of Senior Preferred Stock
at a meeting of holders of Senior Preferred Stock called for such purpose or
written consent of the holder of each share of Senior Preferred Stock; (ii)
create, authorize or issue any class of stock ranking prior to, or on a parity
with, the Senior Preferred Stock with respect to dividends or upon liquidation,
dissolution, winding up or otherwise, or increase the authorized number of
shares of any such class or series, or reclassify any authorized stock of the
Corporation into any such prior or parity shares or create, authorize or issue
any obligation or security convertible into or evidencing the right to purchase
any such prior or parity shares, except that the Corporation may, without such
approval, create, authorize and issue Parity Securities for the purpose of
utilizing the proceeds from the issuance of such Parity Securities for the
redemption of all outstanding shares of Senior Preferred Stock in accordance
with the terms hereof or (iii) merge or consolidate, or sell, exchange or convey
all or substantially all of the assets, property or business of the Corporation
unless, in the case of a merger or consolidation, (A) if the Corporation is not
the surviving corporation, the seniority, rights, powers and preferences of the
Senior Preferred Stock continue unimpaired and on identical terms after such
transaction and (B) the surviving corporation has a Consolidated Net Worth
(immediately following
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<PAGE>
any such transaction) at least equal to that of the Corporation immediately
prior to such transaction. The previous sentence shall not be construed to
prohibit any Reorganization consummated in compliance with the terms of this
Senior Preferred Stock.
"CONSOLIDATED NET WORTH" means at any date and with respect to any Person,
the consolidated stockholders' equity of such Person and its consolidated
subsidiaries less their consolidated Intangible Assets, all determined as of
such date. For purposes of this definition, "Intangible Assets" means the amount
(to the extent reflected in determining such consolidated stockholders' equity)
of (i) all write-ups (other than write-ups of assets of a going concern business
made within twelve months after the acquisition of such business) subsequent to
November 17, 1999 in the book value of any asset owned by such Person or a
consolidated subsidiary, (ii) all investments in unconsolidated subsidiaries and
all equity investments in Persons which are not subsidiaries and (iii) all
unamortized debt discount and expense, unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, anticipated future benefit of
tax loss carry-forwards, copyrights, organization or developmental expenses and
other intangible assets.
(e) In exercising the voting rights set forth in this Section (7), each
share of Senior Preferred Stock shall have one vote per share, except that when
any other series of Preferred Stock shall have the right to vote with the Senior
Preferred Stock as a single class on any matter, then the Senior Preferred Stock
and such other series shall have with respect to such matters one vote per
$25.00 of Liquidation Value or other liquidation preference. Except as otherwise
required by applicable law or as set forth herein, the shares of Senior
Preferred Stock shall not have any relative, participating, optional or other
special voting rights and powers and the consent of the holders thereof shall
not be required for the taking of any corporate action.
(8) REPORTS. So long as any of the Senior Preferred Stock is outstanding,
the Corporation will furnish the holders thereof with the quarterly and annual
financial reports that the Corporation is required to file with the Securities
and Exchange Commission pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 or, in the event the Corporation is not required
to file such reports, reports containing the same information as would be
required in such reports.
(9) GENERAL PROVISIONS. (a) The term "PERSON" as used herein means any
corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
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<PAGE>
(b) The term "OUTSTANDING", when used with reference to shares of stock,
shall mean issued shares, excluding shares held by the Corporation or a
subsidiary.
(c) The headings of the sections, subsections, paragraphs, subparagraphs,
clauses and subclauses used herein are for convenience of reference only and
shall not define, limit or affect any of the provisions hereof.
(d) Each holder of Senior Preferred Stock, by acceptance thereof,
acknowledges and agrees that payments of dividends, interest, premium and
principal on, and exchange, redemption and repurchase of, such securities by the
Corporation are subject to restrictions on the Corporation contained in certain
credit and financing agreements, including the Indenture.
18
<PAGE>
IN WITNESS WHEREOF, WRC Media Inc. has caused this Amended and Restated
Certificate of Designations to be signed and attested by the undersigned this
____ day of May, 2000.
WRC MEDIA INC.
By:
-------------------------------
Name:
Title:
ATTEST:
- ----------------------------
Name:
Title:
19
<PAGE>
EXHIBIT 5.1
[Draft--5/26/00]
[Letterhead of]
CRAVATH, SWAINE & MOORE
[New York Office]
June [ ], 2000
WRC MEDIA INC.
WEEKLY READER CORPORATION
COMPASSLEARNING CORPORATION
12 3/4% SENIOR SUBORDINATED NOTES DUE 2009
AND
WRC MEDIA INC.
15% SENIOR PREFERRED STOCK DUE 2011
FORM S-4 REGISTRATION STATEMENT
Ladies and Gentlemen:
We have acted as counsel for WRC Media Inc., a Delaware corporation,
Weekly Reader Corporation, a Delaware corporation, and CompassLearning
Corporation, a Delaware corporation (collectively the "Issuers"), in connection
with the filing by the Issuers with the Securities and Exchange Commission (the
"Commission") of a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933 (the "Act"), relating to the
proposed issuance, in exchange (the "Exchange Offer") for up to $152,000,000
aggregate principal amount of the Issuers' 12 3/4% Senior Subordinated Notes due
2009 (the "Old Notes") and up to $75,000,000 aggregate principal amount of WRC
Media Inc.'s 15% Senior Preferred Stock due 2011, par value $0.01 per share (the
"Old Senior Preferred Stock"), of a like principal amount of the Issuers'
12 3/4% Senior Subordinated Notes due 2009 (the "New Notes"), in the case of the
Old Notes, and 15% Series B Senior Preferred Stock due 2011 (the "New Senior
Preferred Stock"), in the case of the Old Senior
<PAGE>
2
Preferred Stock. The New Notes are to be issued pursuant to the Indenture dated
as of November 17, 1999 (the "Indenture"), among the Issuers, the subsidiaries
of the Issuers listed on Schedule I (the "Note Guarantors") and Bankers Trust
Company, as trustee (the "Trustee"). The New Senior Preferred Stock is to be
issued pursuant to the Amended Certificate of Designations which was filed with
the Secretary of State of the State of Delaware on June [ ], 2000 (the "Amended
Certificate of Designations"). Capitalized terms used herein and not otherwise
defined shall have the meaning ascribed thereto in the Indenture or the Amended
Certificate of Designations, as applicable.
In that connection, we have examined originals, or copies certified
or otherwise identified to our satisfaction, of such documents, corporate
records and other instruments as we have deemed necessary or appropriate for
purposes of this opinion, including the Indenture and the Amended Certificate of
Designations.
Based on the foregoing, we are of opinion as follows:
1. The New Senior Preferred Stock has been duly and validly
authorized by WRC Media Inc. and, when issued and delivered in exchange for the
Old Senior Preferred Stock pursuant to the Shareholders Agreement, will be
validly issued, fully paid and non-assessable.
2. The Indenture has been duly authorized, executed and delivered by
the Issuers and the Note Guarantors, and assuming due authorization, execution
and delivery of the Indenture by the Trustee, constitutes a valid and binding
obligation of the Issuers and the Note Guarantors, enforceable against the
Issuers and the Note Guarantors in accordance with its terms (subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, including concepts of
materiality, reasonableness, good faith and fair dealing, regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3. The New Notes and the new guarantees thereof to be issued by the
Note Guarantors have been duly authorized and, when the New Notes are executed
and authenticated in accordance with the provisions of the
<PAGE>
3
Indenture and delivered in exchange for the Old Notes pursuant to the Exchange
Offer, the New Notes and the Note Guarantees will constitute valid and binding
obligations of the Issuers and the Note Guarantors entitled to the benefits of
the Indenture and enforceable against the Issuers and the Note Guarantors in
accordance with their terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity, including concepts of materiality, reasonableness, good
faith and fair dealing, regardless of whether such enforceability is considered
in a proceeding in equity or at law); in expressing the opinion set forth in
this paragraph 2, we have assumed that the form of the New Notes will conform to
that included in the Indenture.
We hereby consent to the filing of this opinion with the Commission
as exhibit 5.1 to the Registration Statement. We also consent to the reference
to our firm under the caption "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission.
We are admitted to practice in the State of New York and we express
no opinion as to any matters governed by any law other than the law of the State
of New York, the General Corporation Law of the State of Delaware and the
Federal law of the United States of America.
In rendering this opinion, we have, with your approval, relied upon
the opinions dated June [ ], 2000, of Leonard, Street and Deinard Professional
Association and Foley & Lardner, copies of which have been delivered to you, as
to all matters of law covered therein relating to the laws of the States of
Minnesota and Wisconsin, respectively, and we do not express any opinion with
respect to such laws.
Very truly yours,
/s/ Cravath, Swaine & Moore
<PAGE>
4
WRC Media Inc.
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
Weekly Reader Corporation
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
Compass Learning Corporation
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
486A
<PAGE>
SCHEDULE I
NOTE GUARANTORS
World Almanac Education Group, Inc.
Funk & Wagnalls Yearbook Corp.
Lifetime Learning Systems, Inc.
Gareth Stevens, Inc.
American Guidance Service, Inc.
AGS International Sales, Inc.
<PAGE>
Exhibit 5.2
[Draft]
[Letterhead of Leonard, Street and Deinard Professional Association]
June ___, 2000
WRC Media Inc. Weekly Reader Corporation
1 Rockefeller Plaza, 3rd Floor 1 Rockefeller Plaza, 32nd Floor
New York, New York 10020 New York, New York 10020
Compass Learning Corporation
1 Rockefeller Plaza, 32nd Floor
New York, New York 10020
Ladies and Gentlemen:
We have acted as special counsel for American Guidance Service, Inc. a Minnesota
corporation ("AGS") and AGS International Sales, Inc. a Minnesota corporation
("AGSIS"), in connection with the filing by WRC Media Inc., a Delaware
corporation, Weekly Reader Corporation, a Delaware corporation, and
CompassLearning Corporation, a Delaware corporation (collectively the
"Issuers"), with the Securities and Exchange Commission (the "Commission") of a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933 (the "Act"), relating to the proposed issuance, in
exchange (the "Exchange Offer") for up to $152,000,000 aggregate principal
amount of the Issuers' 12 3/4% Senior Subordinated Notes due 2009 (the "Old
Notes") and up to $75,000,000 aggregate principal amount of WRC Media Inc.'s 15%
Senior Preferred Stock due 2011, par value $0.01 per share (the "Old Senior
Preferred Stock"), of a like principal amount of the Issuers' 12 3/4% Senior
Subordinated Notes due 2009 (the "New Notes"), in the case of the Old Notes, and
15% Series B Senior Preferred Stock due 2011 (the "New Senior Preferred Stock"),
in the case of the Old Senior Preferred Stock. The New Notes are to be issued
pursuant to the Indenture, dated as of November 17, 1999 (the "Indenture"),
among the Issuers, the subsidiaries of the Issuers listed on Schedule I (the
"Note Guarantors"), AGS, AGSIS and Bankers Trust Company, as trustee (the
"Trustee"). The New Senior Preferred Stock is to be issued pursuant to the
Amended Certificate of Designations which was filed with the Secretary of State
of the State of Delaware on June ___, 2000 (the "Amended Certificate of
Designations"). Capitalized terms used herein and not otherwise defined shall
have the meaning ascribed thereto in the Indenture or the Amended Certificate of
Designations, as applicable.
In that connection, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of such documents, corporate records and other
instruments as we have deemed necessary or appropriate for purposes of this
opinion, including the Indenture and the Amended
<PAGE>
Certificate of Designations. We have also examined relevant provisions of the
Constitution of the State of Minnesota and the Minnesota Statutes, and reported
judicial decisions.
Based on the foregoing, we are of opinion as follows:
1. The Indenture has been duly authorized, executed and delivered by each of AGS
and AGSIS.
2. The guarantees of the New Notes to be issued by AGS and AGSIS have been duly
authorized.
We hereby consent to the filing of this opinion with the Commission as Exhibit
5.2 to the Registration Statement. We also consent to the reference to our firm
under the caption "Legal Matters" in the Registration Statement. In giving this
consent, we do not thereby admit that we are included in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
This opinion may only be relied upon by the persons to whom this opinion is
addressed and by Cravath, Swaine & Moore in giving its opinion of even date
herewith to such addresses.
We are admitted to practice in the State of Minnesota and we express no opinion
as to any matters governed by any law other than the law of the State of
Minnesota (including the statutory provisions and also applicable provisions of
the Minnesota Constitution and reported judicial decisions interpreting these
laws) and the Federal law of the United States of America (including the
statutory provisions and also applicable provisions of the United States
Constitution and reported judicial decisions interpreting these laws).
Very truly yours,
LEONARD, STREET AND DEINARD
PROFESSIONAL ASSOCIATION
/s/ Leonard, Street and Deinard
Professional Association
<PAGE>
Schedule I
NOTE GUARANTORS
World Almanac Education Group, Inc.
Funk & Wagnalls Yearbook Corp.
Lifetime Learning Systems, Inc.
Gareth Stevens, Inc.
<PAGE>
EXHIBIT 5.3
[Letterhead of] [Draft]
FOLEY & LARDNER
June [ ], 2000
WRC MEDIA INC.
WEEKLY READER CORPORATION
COMPASSLEARNING CORPORATION
12-3/4% SENIOR SUBORDINATED NOTES DUE 2009
AND
WRC MEDIA INC.
15% SENIOR PREFERRED STOCK DUE 2011
FORM S-4 REGISTRATION STATEMENT
Ladies and Gentlemen:
We have acted as special Wisconsin counsel for Gareth Stevens, Inc.,
a Wisconsin corporation ("Gareth Stevens"), in connection with the filing by WRC
Media Inc., a Delaware corporation, Weekly Reader Corporation, a Delaware
corporation, and CompassLearning Corporation, a Delaware corporation
(collectively the "Issuers"), with the Securities and Exchange Commission (the
"Commission") of a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933 (the "Act"), relating to the
proposed issuance, in exchange (the "Exchange Offer") for up to $152,000,000
aggregate principal amount of the Issuers' 12-3/4% Senior Subordinated Notes due
2009 (the "Old Notes"), of a like principal amount of the Issuers' 12-3/4%
Senior Subordinated Notes due 2009 (the "New Notes"). The Registration Statement
also relates to an exchange of shares of preferred stock of WRC Media, Inc. The
New Notes are to be issued pursuant to the Indenture dated as of November 17,
1999 (the "Indenture"), among the Issuers, certain subsidiaries of the issuers,
including Gareth Stevens, and Bankers Trust Company, as trustee (the "Trustee").
Capitalized terms used herein and not otherwise defined shall have the meaning
ascribed thereto in the Indenture.
In that connection, we have examined copies certified or otherwise
identified to our satisfaction, of such documents, corporate records and other
instruments as we have deemed necessary or appropriate for purposes of this
opinion, including the Indenture.
Based on the foregoing, we are of opinion as follows:
1. The Indenture has been duly authorized, executed and delivered
by Gareth Stevens.
<PAGE>
June [ ], 2000
Page 2
2. The guarantee of the New Notes to be issued by Gareth Stevens
has been duly authorized.
We hereby consent to the filing of this opinion with the Commission
as exhibit 5.3 to the Registration Statement. We also consent to the reference
to our firm under the caption "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission.
The law covered by the opinions expressed herein is limited to the
law of the State of Wisconsin including constitution and statutes of the State
of Wisconsin and reported judicial decisions interpreting the constitution and
statutes of the State of Wisconsin (collectively "Wisconsin Law"). We express no
opinion as to any matters governed by any law other than Wisconsin law.
Cravath, Swaine & Moore may rely upon this opinion in rendering
their opinion dated June [ ], 2000 in connection with the Registration
Statement.
Very truly yours,
WRC Media Inc.
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
Weekly Reader Corporation
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
Compass Learning Corporation
One Rockefeller Plaza, 32nd Floor
New York, NY 10020
<PAGE>
Exhibit 10.26.1
SHAREHOLDER AGREEMENT dated as of January 1,
2000 (this "Agreement"), among EAC III L.L.C., a
Delaware limited liability company (the "Ripplewood
Shareholder"), each individual (each a "Management
Shareholder" and, collectively with the Ripplewood
Shareholder, the "Shareholders") listed on Schedule I
attached hereto ("Schedule I") and WRC Media Inc.
(formerly named EAC II Inc.), a Delaware corporation
(the "Company").
In consideration of the mutual agreements herein contained,
and other good and valuable consideration the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS, USAGE AND EQUITY INVESTMENT
SECTION 1.01. DEFINED TERMS. The following terms
shall have the following meanings:
"Affiliate" means, with respect to any specified Person, any
other Person that directly or indirectly, through one or more intermediaries,
Controls, is Controlled by, or is under Common Control with, such specified
Person. For purposes of this definition, "Control (including, with correlative
meanings, the terms "Controlled by" and "under Common Control with"), as used
with respect to any Person, means the direct or indirect possession of the power
to direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
"Agreement" has the meaning set forth in the preamble to this
Agreement.
"Board of Directors" means the Board of Directors of the
Company.
"Change of Control" has the meaning set forth in Section 1.03.
"Closing Date" means November 17, 1999.
"Company Common Stock" has the meaning set forth in Section
1.03.
<PAGE>
2
"Direct Transfer" means a Transfer (without giving effect to
the second sentence of the definition of "Transfer").
"Drag-Along Notice" has the meaning set forth in Section
2.01(f).
"Employment Agreement" means, with respect to each Management
Shareholder, the Employment Agreement between such Management Shareholder and
the Company or that subsidiary of the Company employing such Management
Shareholder.
"Executive" has the meaning set forth in the Executive
Shareholder Agreement.
"Executive Shareholder Agreement" means the Shareholder
Agreement dated as of November 17, 1999, among the Ripplewood Shareholder,
Martin Kenney and the Company.
"Fair Market Value" means the fair market value of a Share,
determined in accordance with Section 2.01(g).
"GCL" means the General Corporation Law of the State of
Delaware (8 Del. C. Section 101, ET SEQ.), as amended from time to time and
any successor statute thereto.
"Involuntary Transfer" means any Transfer by any Shareholder
of any Shares, or of any beneficial ownership thereof, upon death, appointment
of a guardian, default, foreclosure, forfeit, bankruptcy (voluntary or
involuntary), court order, levy of attachment, execution or otherwise than
voluntarily by the Transferor; PROVIDED that a Transfer required pursuant to
Section 2.01(f) shall not be deemed an Involuntary Transfer.
"Management Shareholder" has the meaning set forth in the
preamble to this Agreement.
"Other Management Shareholders" means those persons listed on
Schedule I to the Other Management Shareholder Agreement.
"Other Management Shareholder Agreement" means the Shareholder
Agreement dated as of November 17, 1999, among the Ripplewood Shareholder, the
Other Management Shareholders and the Company.
"Permitted Transferee" means, (i) with respect to the
Ripplewood Shareholder, (A) Ripplewood or an Affiliate of Ripplewood, (B) a
shareholder, partner, member or
<PAGE>
3
employee of Ripplewood or any Affiliate of Ripplewood or (C) an employee of the
Company or a Subsidiary of the Company and (ii) with respect to each Management
Shareholder, (A) another Shareholder, (B) the Executive, (C) the Company or (D)
such Management Shareholder's spouse or lineal descendants or any trust the
beneficiaries of which include only such Management Shareholder's spouse or
lineal descendants.
"Person" means any individual, corporation, partnership,
trust, association, limited liability company, joint venture, joint-stock
company or any other entity or organization, including a government or
governmental agency.
"Preferred Stock" means the 15% Senior Exchangeable Preferred
Stock Due 2011, par value $0.01 per share, of the Company.
"Purchase Agreement" means the Redemption, Stock Purchase and
Recapitalization Agreement dated as of August 13, 1999, between PRIMEDIA Inc., a
Delaware corporation, and the Company, as amended.
"Ripplewood" means Ripplewood Partners, L.P.
"Ripplewood Shareholder" has the meaning set forth in the
preamble to this Agreement.
"Shares" means the shares of Company Common Stock held by a
Shareholder.
"Shareholders" has the meaning set forth in the preamble to
this Agreement.
"Subsidiary" means, with respect to any specified Person,
another Person, an amount of the voting securities, other voting ownership or
voting partnership interests of which is sufficient to elect at least a majority
of its board of directors or other governing body (or, if there are no such
voting interests, 50% or more of the equity interests of which) is owned
directly or indirectly by such first Person or by another Subsidiary of such
first Person.
"Tag-Along Notice" has the meaning set forth in Section
2.01(e).
"Third Party Purchaser" means, with respect to any proposed
sale of Shares by a Shareholder, a Person, other than an Affiliate of such
Shareholder, who offers to purchase from such Shareholder such Shares pursuant
to a bona fide written offer.
<PAGE>
4
"Transfer" means any transfer, sale, conveyance, assignment,
gift, hypothecation, pledge or other disposition, whether voluntary or by
operation of law, of a Share. Notwithstanding the foregoing, any transfer, sale,
conveyance, assignment, gift, hypothecation, pledge or other disposition,
whether voluntary or by operation of law, of any stock, partnership interest,
membership interest or any other ownership interest in any entity that is a
direct or indirect beneficial or record owner of any Share (including any
disposition by means of a merger, consolidation or similar transaction) or any
other transaction that has the economic effect of a Transfer of a Share
(including the designation of any beneficiary of any trust that is a direct or
indirect beneficial or record owner of any Share) shall be deemed to be a
Transfer of such Share by the Shareholder directly owning such Share.
"Transferee" means the transferee in a Transfer.
"Transferor" means the transferor in a Transfer.
SECTION 1.02. OTHER DEFINITION PROVISIONS. Wherever required
by the context of this Agreement, the singular shall include the plural, and
vice versa, and the masculine gender shall include the feminine and neuter
genders, and vice versa, and references to any agreement, document or instrument
shall be deemed to refer to such agreement, document or instrument as amended,
supplemented or modified from time to time. When used herein, (i) the word "or"
is not exclusive and (ii) the words "including," "includes," "included" and
"include" are deemed to be followed by the words "without limitation."
SECTION 1.03. (a) EQUITY INVESTMENT. As of the date hereof,
pursuant to each Management Shareholder's Employment Agreement, each Management
Shareholder is purchasing from EAC IV L.L.C., a Delaware limited liability
company, at a price of $18.60065 per share in cash the number of shares of
common stock, par value $0.01 per share ("Company Common Stock"), of the Company
set forth opposite such Management Shareholder's name under the column entitled
"Shares of Company Common Stock" on Schedule I.
(b) VOTING AGREEMENTS. Each Management Shareholder hereby
agrees with the Ripplewood Shareholder that from and after the date hereof: (a)
such Management Shareholder shall vote all of the Shares held by such Management
Shareholder (including shares acquired after the date hereof) in the same manner
as the Shares held by the Ripplewood Shareholder are voted on all matters acted
upon at any annual or special meeting of shareholders or by
<PAGE>
5
written consent in lieu of a meeting and (b) such Management Shareholder
irrevocably constitutes and appoints the Ripplewood Shareholder such Management
Shareholder's proxy to vote all of the Shares held by such Management
Shareholder in the same manner as the Shares held by the Ripplewood Shareholder
are voted on all matters acted upon at any annual or special meeting of
shareholders or by written consent in lieu of a meeting; PROVIDED that this
Section 1.03(b) shall be inapplicable with respect to any matters which would
both adversely affect the rights of the Shares held by such Management
Shareholder and treat such Management Shareholder differently from other holders
of shares of Company Common Stock. The voting agreements and proxies granted
pursuant to this Section 1.03(b) are coupled with an interest and shall be valid
for the term of this Agreement. Each Management Shareholder represents that such
Management Shareholder has not granted and is not a party to any proxy, voting
trust or other agreement which in each case is inconsistent with or conflicts
with the provisions of this Agreement, and such Management Shareholder shall not
grant any proxy or become a party to any voting trust or other agreement which
in each case is inconsistent with or conflicts with the provisions of this
Agreement. The provisions of this Section 1.03(b) shall terminate as to any
Shares held by a Management Shareholder upon any Transfer of such Shares after,
or upon, completion of an initial public offering of shares of Company Common
Stock and the termination of any lock up period agreed to by such Management
Shareholder with the underwriters in connection therewith.
(c) OPTIONS. Each Management Shareholder is hereby granted a
nonqualified option to purchase that number of shares of Company Common Stock
set forth opposite such Management Shareholder's name under the column entitled
"Options" on Schedule I, at an exercise price per share of $18.60065 per share.
To the extent such Management Shareholder continues employment under the
Employment Agreement of such Management Shareholder, such option shall vest 33%
immediately, 33% on December 31, 2000 and, if the Company renews such Management
Shareholder's Employment Agreement as set forth in Section 2 of such Employment
Agreement for an additional one-year period ending on December 31, 2002, 34% on
December 31, 2001; PROVIDED that such option shall terminate in its entirety in
the event that such Management Shareholder's employment by the Company or the
applicable subsidiary of the Company is terminated by the Company or such
subsidiary with Good Cause (as defined in such Management Shareholder's
Employment Agreement) (other than pursuant to clause (v) thereof). Such option
shall vest immediately in the event that such Management
<PAGE>
6
Shareholder's employment under such Employment Agreement is terminated (x)
pursuant to clause (v) of the definition of Good Cause in such Employment
Agreement or (y) prior to December 31, 2001 by the Company for any reason other
than Good Cause following a Change of Control (as defined below). Such
Management Shareholder may exercise the vested portion of such option either (i)
by notifying the Company of the number of shares of Company Common Stock to be
purchased under such option and delivering with such notice an amount equal to
the aggregate exercise price for such number of shares in cash or (ii) by
notifying the Company that such Management Shareholder desires to make a
cashless exercise of such option with respect to a specified number of shares of
Company Common Stock, in which case such option shall be deemed exercised with
respect to such specified number of shares but such Management Shareholder shall
only be entitled to receive a number of shares of Company Common Stock equal to
the product of (A) such specified number multiplied by (B) the quotient of (1)
the aggregate Fair Market Value of such specified number of shares of Company
Common Stock (determined as of the date the Company receives such notice in
accordance with Section 2.01(g)) minus the aggregate exercise price for such
specified number of shares divided by (2) such aggregate Fair Market Value. Such
option shall not be transferable or assignable by such Management Shareholder,
otherwise than by will or the laws of descent and distribution, and no such
option shall be subject to execution, attachment or other similar process. In no
event shall any such option be exercisable on or after the tenth anniversary of
the Closing Date. In the event of changes in outstanding Company Common Stock by
reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, reorganizations, mergers, consolidations, combinations or
other changes in capitalization occurring after the date hereof, the number of
shares and exercise price under such option shall be equitably adjusted by the
Board of Directors of the Company. Any amount payable under such option shall be
subject to applicable withholding taxes. "CHANGE OF CONTROL" shall mean the
acquisition of direct or indirect Control of the Company by any Person (other
than the Ripplewood Shareholder, SGC Partners II LLC ("SGC") or any of their
Affiliates or any group (other than any group including the Ripplewood
Shareholder or SGC or any of their Affiliates).
(d) RULE 701. To the extent permitted by applicable law, the
shares of Company Common Stock to be issued to each Management Shareholder upon
exercise of the options granted to such Management Shareholder pursuant to
Section 1.03(c) shall be offered and sold to such Management Shareholder
pursuant to the exemption from the registration
<PAGE>
7
requirements of the Securities Act of 1933, as amended (the "Securities Act")
provided for by Rule 701 ("Rule 701") of the Securities Act.
ARTICLE II
TRANSFERS OF SHARES; TRANSACTIONS
BETWEEN RIPPLEWOOD SHAREHOLDER AND THE COMPANY
SECTION 2.01. TRANSFERS OF THE COMPANY SHARES.
(a) GENERALLY. (i) No Shareholder may Transfer all or any
portion of its Shares (or any beneficial ownership thereof) unless (A) such
Transfer is in accordance with this Section 2.01, (B) in the case of a Direct
Transfer (other than pursuant to Section (e) or (f) or if the Board of Directors
shall otherwise agree), the Transferee executes and delivers a counterpart of
the signature page of this Agreement (or other appropriate assumption agreement)
in which the Transferee agrees to be bound by the provisions of this Agreement
to the same extent as the Transferor and providing the address for notices of
such Transferee and (C) the Transferee executes and delivers any other
agreements, documents or instruments reasonably specified by the Board of
Directors. Any Transfer made in violation of this Section 2.01(a) shall be null
and void and shall be subject to Section 2.01(d).
(ii) Whenever a Transfer is to be consummated by any Person on
a specified date under this Section 2.01, such Transfer shall take place at
10:00 a.m. Eastern Time on such date (or, if such date is not a business day,
the next following business day) at the principal office of Ripplewood,
presently located at One Rockefeller Plaza, New York, New York, or at such other
time, date and place as the Company and the parties to such Transfer may agree.
The consideration for such Transfer shall be paid by delivery to the applicable
Transferor of a certified or bank check made payable to such Transferor or by
wire transfer of immediately available funds to a bank account designated by
such Transferor, against due execution and delivery of the agreements, documents
and instruments specified in Section 2.01(a)(i), such other agreements,
documents and instruments as the parties to such Transfer may reasonably require
including certificates or other instruments representing the Shares so
purchased, appropriately endorsed by such Shareholder, free and clear of all
security interests, liens, claims, encumbrances, charges, options, restrictions
on transfer, proxies and voting and other
<PAGE>
8
agreements of whatever nature other than those created hereunder.
(iii) The provisions of this Section 2.01, other than Section
2.01 (e), (f), (g), (h) and (i), shall terminate upon the completion of an
initial public offering of shares of Company Common Stock by the Company and the
termination of any lockup period agreed to by the Management Shareholders with
the underwriters in connection therewith.
(b) TRANSFERS BY THE RIPPLEWOOD SHAREHOLDER. Subject to
Section 2.01(a) and, with respect to a Transfer to any Person other than a
Permitted Transferee of the Ripplewood Shareholder, Section 2.01(e), the
Ripplewood Shareholder (and its Permitted Transferees) shall have the right to
Transfer at any time all or any portion of its Shares (including any beneficial
ownership thereof) to any Person without the prior consent of any Person.
(c) TRANSFERS BY OTHER SHAREHOLDERS. (i) Subject to Section
2.01(a), any other Shareholder (and its Permitted Transferees) shall have the
right to Transfer at any time all or any portion of its Shares (including any
beneficial ownership thereof) to any of its Permitted Transferees without the
prior consent of any Person.
(ii) No Shareholder other than the Ripplewood Shareholder (or
the Ripplewood Shareholder's Permitted Transferees) shall have the right to
Transfer all or any portion of its Shares (including any beneficial ownership
thereof) to any Person other than another Shareholder or the Company except in
accordance with Section 2.01(a) and (A) pursuant to Section 2.01(c)(i), (e) or
(f) or (B) with the prior written consent of the Ripplewood Shareholder.
(d) INVOLUNTARY AND IMPERMISSIBLE TRANSFERS. If an Involuntary
Transfer or a Transfer in violation of this Agreement shall occur with respect
to any Shareholder other than the Ripplewood Shareholder and, in the case of a
Transfer in violation of this Agreement, such violation has not been cured
within 30 days after notice to the applicable Transferor or Transferee, the
Company shall give notice to the Ripplewood Shareholder, offering the Ripplewood
Shareholder (or its designee) the right, exercisable by delivery of written
notice to the Transferee with respect to such Involuntary Transfer or Transfer
in violation of this Agreement, within 90 days following the day on which such
notice is given, to purchase all of the Shares acquired by such Transferee at a
purchase price equal to, in the case of an Involuntary Transfer, 100% or, in the
case of a Transfer in violation of this Agreement, 90% of the Fair Market Value
<PAGE>
9
thereof, determined in accordance with Section 2.01(g) as of the date of such
Transfer (or, if lower, as of the date of such determination). The closing date
of any purchase described in this Section 2.01 shall be on the date specified by
the Company that shall not be later than the 30th day after a determination of
the Fair Market Value of the Shares to be purchased is made. The Ripplewood
Shareholder may assign its rights under this Section 2.01(d) to any person.
(e) TAG-ALONG RIGHTS. If the Ripplewood Shareholder desires to
Transfer in excess of 5% of its Shares to a prospective Transferee (or
Transferees) other than to a Permitted Transferee of the Ripplewood Shareholder
and, after giving effect to such Transfer, the Ripplewood Shareholder shall have
Transferred in excess of 35% in the aggregate of its Shares to a Transferee (or
Transferees) other than Permitted Transferees of the Ripplewood Shareholder, the
Ripplewood Shareholder shall, as a condition to such Transfer, (i) provide a
notice to all other Shareholders in writing (a "Tag-Along Notice") of the
material terms of the proposed Transfer at least 15 days prior to such Transfer
and (ii) permit all other Shareholders (or cause all other Shareholders to be
permitted) to sell (either to the prospective Transferee of the Ripplewood
Shareholder's Shares or to another financially reputable Transferee reasonably
acceptable to such other Shareholders) the same portion of their respective
Shares as that Transferred by the Ripplewood Shareholder in the aggregate to
Transferees other than Permitted Transferees of the Ripplewood Shareholder
(after giving effect to such proposed Transfer) on the same terms and
conditions, subject to the same agreements and at the same price as the proposed
sale by the Ripplewood Shareholder, which sale shall take place on the date the
Ripplewood Shareholder's Shares (or such portion) are Transferred to such
Transferee (or Transferees). Each other Shareholder shall have five days from
the date of receipt of a Tag-Along Notice to exercise its right to sell pursuant
to clause (ii) above by delivering written notice to the Ripplewood Shareholder
of its intent to exercise such right. The right of the other Shareholders to
sell pursuant to clause (ii) above shall terminate if not exercised within such
five-day period. Each other Shareholder electing to exercise its right to sell
pursuant to clause (ii) shall share, on a pro rata basis, the legal, investment
banking and other expenses of the Ripplewood Shareholder incurred in connection
with such Transfer.
(f) DRAG-ALONG RIGHTS. If at any time the Ripplewood
Shareholder desires to Transfer all (or any portion in excess of 35%) of its
Shares to any Third Party Purchaser (or Purchasers), the Ripplewood Shareholder
shall
<PAGE>
10
have the right to require that all other Shareholders Transfer the same portion
of their respective Shares to such Third Party Purchaser (or Purchasers) on the
same terms and conditions, subject to the same agreements and at the same price
as the sale by the Ripplewood Shareholder. The Ripplewood Shareholder shall
provide a notice to all other Shareholders in writing (a "Drag-Along Notice") of
such sale at least 10 days prior to such Transfer, and the Drag-Along Notice
shall identify such Third Party Purchaser (or Purchasers), all material terms of
the sale and the date of closing. Upon the closing of any sale by the Ripplewood
Shareholder of all (or such portion) of its Shares as described in a Drag-Along
Notice, such Third Party Purchaser (or Purchasers) shall pay to each other
Shareholder the consideration payable to such Shareholder in connection with
such sale of all (or such portion) of its Shares to such Purchaser (or
Purchasers), net of such Shareholders' proportionate share of the legal,
investment banking and other expenses of the Ripplewood Shareholder incurred in
connection with such sale, and the Shares (or such portion) of all such other
Shareholders shall be deemed Transferred to such Third Party Purchaser (or
Purchasers).
(g) FAIR MARKET VALUE. (i) If a determination of the Fair
Market Value of any shares of Company Common Stock is required by this Agreement
when there is no public trading market for the shares of Company Common Stock,
such "Fair Market Value" shall be such amount as is determined in good faith by
the Board of Directors as of the date such Fair Market Value is required to be
determined hereunder. In making a determination of such Fair Market Value, the
Board of Directors shall give due consideration to such factors as it deems
appropriate, including, without limitation, the earnings and certain other
financial and operating information of the Company and its subsidiaries in
recent periods, its potential value and that of its subsidiaries as a whole, its
future prospects and that of its subsidiaries and the industries in which they
compete, its history and management and that of its subsidiaries, the general
condition of the securities markets and the fair market value of securities of
privately owned companies (with transfer restrictions) engaged in businesses
similar to those of the Company and its subsidiaries, if any. The Fair Market
Value, as determined by the Board of Directors in good faith, shall be binding
and conclusive upon all parties hereto.
(ii) If a determination of the Fair Market Value of any shares
of Company Common Stock is required by this Agreement when there is a public
trading market for shares of Company Common Stock, such "Fair Market Value"
shall mean the average daily closing sales price of the shares of Company
<PAGE>
11
Common Stock for the ten consecutive trading days preceding the date the Fair
Market Value of the shares of Company Common Stock is required to be determined
hereunder. The closing price for each day shall be the last reported sales price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the principal national securities exchange on which the shares of Company
Common Stock are listed and admitted to trading, or, if not listed and admitted
to trading on any such exchange, on the NASDAQ National Market System, or, if
not quoted on the National Market System, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm selected from time to time by the Board of Directors for
that purpose.
(h) COMPANY OPTION UPON TERMINATION. In the event that any
Management Shareholder's employment by the Company or the applicable subsidiary
of the Company is terminated for any reason, including the nonrenewal of such
Management Shareholder's Employment Agreement, the Company or its designees
shall have an option to purchase (the "Company Option") all or any portion of
(i) the Shares then held by such Management Shareholder (including any of such
Shares acquired upon exercise of the nonqualified option granted to such
Management Shareholder pursuant to Section 1.03(c)) at a purchase price equal to
the Fair Market Value of such Shares, as determined in accordance with Section
2.01(g) as of the date of such termination, and (ii) the nonqualified option
granted to such Management Shareholder pursuant to Section 1.03(c) at a purchase
price equal to the product of (A) the number of shares of Company Common Stock
with respect to which such option has vested and the Company has elected to
exercise the Company Option and (B) the greater of (1) the difference between
the Fair Market Value of a share of Company Common Stock (determined in
accordance with Section 2.01(g) as of the date of such termination) and
$18.60065 and (2) $0. The Company must exercise its rights arising under the
Company Option, if at all, within 90 days of such date of termination; PROVIDED
that, if such rights arise as a result of the death of a Management Shareholder,
such rights must be exercised by the Company, if at all, within 9 months of such
termination. If the Company elects to exercise the Company Option, the Company
shall within 90 days (9 months in the case of the death of a Management
Shareholder) of such date of termination give notice in writing to such
Management Shareholder of its election to exercise the Company Option, which
notice shall set forth the portion, if any, of the Shares and such nonqualified
option that the Company elects to purchase. The purchase of the Shares and such
nonqualified option shall take place on the
<PAGE>
12
date specified by the Company (not later than the later of the twentieth
business day following the receipt by such Management Shareholder of the
required notice from the Company and the satisfaction of any legal requirements
to the purchase of the Shares and such nonqualified option).
(i) MANAGEMENT SHAREHOLDER OPTION UPON TERMINATION. In the
event that (i) any Management Shareholder suffers from financial hardship,
determined in good faith by the Board of Directors, or (ii) any Management
Shareholder's employment by the Company or the applicable subsidiary of the
Company is terminated (A) by the Company or such subsidiary other than with Good
Cause (as defined in such Management Shareholder's Employment Agreement) (OTHER
THAN PURSUANT TO CLAUSE (v) THEREOF) or (B) because of a notice of nonrenewal
given by the Company or such subsidiary, such Management Shareholder or, in the
case of termination of employment by death, such Management Shareholder's estate
shall have the right to require the Company to purchase all or any portion of
such Management Shareholder's Shares (other than, in the case of the foregoing
clause (i), any of such Shares acquired upon exercise of the nonqualified-option
granted to such Management Shareholder pursuant to Section 1.03(c) the exercise
date of which was within six months of the date that such Management Shareholder
makes a claim of financial hardship to the Company) at a purchase price equal to
the Fair Market Value of such Shares, determined as of the date of such
determination of financial hardship or termination in accordance with Section
2.01(g); PROVIDED that, if the Board of Directors determines in good faith that
the Company has insufficient cash flow, and cannot obtain third party financing
on terms reasonably acceptable to the Board of Directors, to purchase such
Management Shareholder's Shares for cash, the Company may purchase such
Management Shareholder's Shares in exchange for junior subordinated notes of the
Company which (1) bear interest at a variable rate per annum equal to The Chase
Manhattan Bank's prime lending rate per annum, payable quarterly in arrears, (2)
provide for the repayment in full of principal on the earlier of the fifth
anniversary of the issuance of such notes and the date on which the Board of
Directors determines in good faith that the Company has sufficient cash flow, or
can obtain third party financing on terms reasonably acceptable to the Board of
Directors, to repay in full such principal and (3) are otherwise on terms
reasonably acceptable to such Management Shareholder; PROVIDED FURTHER that, to
the extent that the Board of Directors reasonably determines that such purchase,
if made, would (x) cause the Company to be or remain in default under any
agreements with lenders, despite commercially reasonable efforts by the Company
to obtain consents or amendments necessary to permit
<PAGE>
13
such purchase, or (y) conflict with the terms (including with respect to
priority of payment) of the Preferred Stock, the Company shall be relieved of
its obligations to make such purchase under this Section 2.01(i) while and to
the extent such conditions continue to exist. Such Management Shareholder or, if
applicable, such Management Shareholder's estate shall have 90 days from the
date of such termination during which to give notice in writing to the Company
of its election to exercise or not to exercise such right (unless such right
arises as a result of the death of such Management Shareholder, in which case
such right must be exercised, if at all, within 9 months of such termination),
which notice must set forth the portion, if any, of the Shares that such
Management Shareholder or, if applicable, such Management Shareholder's estate
elects to sell. If no such notice has been given within such 90 days (or, if
applicable, nine months), such Management Shareholder or, if applicable, such
Management Shareholder's estate shall be deemed to not have exercised such
option. Such Management Shareholder may withdraw his election to exercise such
right for any reason up until the time that such Management Shareholder tenders
to the Company, pursuant to this Section, any Shares held by such Management
Shareholder. The purchase of such Shares shall take place on or prior to the
90th day, as determined by the Board of Directors, following the receipt by the
Company of such notice. Subject to any restriction in this Agreement or any
other agreement to which the Company or any of its Affiliates are party, the
Company may designate any other Person to fulfill its obligation under this
Section 2.01(i).
ARTICLE III
STOCK REGISTRATION; LEGEND; CAPITAL STOCK
SECTION 3.01. STOCK REGISTRATION. (a) Each Management
Shareholder hereby represents and warrants to the Ripplewood Shareholder and the
Company that:
(i) Such Management Shareholder has had access to all
information that such Management Shareholder deemed necessary to
adequately evaluate whether to purchase any shares of Company Common
Stock;
(ii) Such Management Shareholder understands that the Company
Common Stock has not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and shares of Company Common Stock
will be offered and sold to such Management Shareholder (including upon
exercise of stock options) in reliance
<PAGE>
14
upon an exemption from the registration requirements of the Securities
Act afforded by Rule 701; and
(iii) any shares of Company Common Stock acquired by such
Management Shareholder shall be acquired only for such Management
Shareholder's own account, for investment purposes only and not with a
view to its resale, distribution or other disposition.
(b) Each Management Shareholder agrees that such Management
Shareholder will not offer, sell, transfer, pledge, hypothecate or otherwise
dispose of any Shares except:
(i) pursuant to an exemption from registration under the
Securities Act, as confirmed in a satisfactory opinion of legal counsel
delivered to the Company, and in accordance with any applicable laws of
any state of the United States governing the offer and sale of
securities; or
(ii) pursuant to an effective registration statement under the
Securities Act (it being understood that the Company, the Ripplewood
Shareholder and their Affiliates are under no obligation to effect such
registration) and in accordance with any applicable state laws.
(c) In the event that the Company files a registration
statement on Form S-8 of the Securities and Exchange Commission, the Company
shall, to the extent permitted by applicable law, include in such registration
statement shares of Company Common Stock issuable upon exercise of the then
unexercised options that were granted to each Management Shareholder pursuant to
Section 1.03(c) of this Agreement.
SECTION 3.02. LEGEND. Each Shareholder agrees that any and all
certificates representing such Shareholder's Shares will have inscribed
conspicuously on the front or back of such certificates the following legend:
"THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF WRC MEDIA INC.
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ONE OR MORE AGREEMENTS AMONG
SHAREHOLDERS OR AGREEMENTS BETWEEN SHAREHOLDERS AND WRC MEDIA INC. AND MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE THEREWITH. COPIES OF SUCH
AGREEMENT OR AGREEMENTS MAY BE OBTAINED FROM THE SECRETARY OF WRC MEDIA INC. AT
THE PRINCIPAL EXECUTIVE OFFICES OF RIPPLEWOOD HOLDINGS L.L.C. THESE SHARES HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE REOFFERED OR RESOLD, DIRECTLY OR INDIRECTLY,
EXCEPT IN ACCORDANCE WITH THE
<PAGE>
15
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION
THEREFROM AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES."
SECTION 3.03. CAPITAL STOCK; PRICE. The Company hereby
represents and warrants to each Management Shareholder that: The authorized
capital stock of the Company consists of 20,000,000 shares of Company Common
Stock, of which 6,855,853 shares are issued and outstanding (including 4,848,635
shares owned by the Ripplewood Shareholder) and 20,000,000 shares of Preferred
Stock, of which 3,000,000 shares are issued and outstanding. Except for the
shares specified in the preceding sentence, shares reserved for issuance
pursuant to options granted to the Management Shareholders, the Other Management
Shareholders and to the Executive and shares reserved for issuance pursuant to
the Preferred Stock and Warrants Subscription Agreement dated November 17, 1999,
among the Corporation, Weekly Reader Corporation, JLC Learning Corporation and
the purchasers named therein, there are no shares of capital stock or other
equity securities of the Company issued, reserved for issuance or outstanding.
The purchase price per share for the shares of Company Common Stock being
acquired by the Management Shareholders pursuant to Section 1.03(a) is the same
as the purchase price per share paid by the Ripplewood Shareholder and other
Persons who acquired shares of Company Common Stock simultaneously with the
Ripplewood Shareholder.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION 4.01. ENTIRE AGREEMENT. This Agreement sets forth the
entire understanding among the parties relating to the subject matter contained
herein and merges all prior discussions among them. This Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
SECTION 4.02. AMENDMENTS. This Agreement may not be amended
except by an instrument in writing signed by the Ripplewood Shareholder and
Management Shareholders holding a majority of the Shares held by all Management
Shareholders.
SECTION 4.03. NOTICES. All notices and other communications
required or permitted by this Agreement shall be made in writing and any such
notice or communication shall be deemed delivered when delivered in person,
transmitted by telex or telecopier, confirmation of transmission received, or
one business day after it has been sent by a nationally
<PAGE>
16
recognized overnight courier, at the address or addresses for notices to the
recipient designated on Schedule II attached hereto. Communications by telex or
telecopier also shall be sent concurrently by first class mail or overnight
courier, but shall in any event be effective as stated above. Any Shareholder or
the Company may from time to time change its address for notices under this
Section 4.03 by giving at least five days' notice of such changed address to the
other Shareholders.
SECTION 4.04. INTERPRETATION. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this Agreement
unless otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 4.05. SEVERABILITY. If any one or more of the
provisions contained in this Agreement or in any document executed in connection
herewith shall be invalid, illegal or unenforceable in any respect under any
applicable law, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired;
PROVIDED, HOWEVER, that in such case the parties hereto shall endeavor to amend
or modify this Agreement to achieve to the extent reasonably practicable the
purpose of the invalid provision.
SECTION 4.06. GOVERNING LAW. This Agreement and all actions
contemplated hereby shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York (without regard to conflict
of laws principles), except to the extent that the provisions of the GCL may be
mandatorily applicable.
SECTION 4.07. COUNTERPARTS. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement. This Agreement shall become effective against the Ripplewood
Shareholder when one or more counterparts have been signed by the Ripplewood
Shareholder and delivered to each other Shareholder. This Agreement shall become
effective against any other Shareholder when one or more counterparts have been
executed by such Shareholder and delivered to the Ripplewood Shareholder. This
Agreement shall become effective against the Company when one or more
counterparts have been signed by the Company and delivered to each other
Shareholder. Each party need not sign the same counterpart.
SECTION 4.08. ASSIGNMENT. Except pursuant to
Section 2.01(a),(d),(h) and (i) neither this Agreement nor
any of the rights, interests or obligations under this
<PAGE>
17
Agreement shall be assigned, in whole or in part, by the Ripplewood Shareholder
without the prior written consent of the Ripplewood Shareholder and Management
Shareholders holding a majority of the Shares held by all Management
Shareholders or by any other Shareholder without the prior written consent of
the Ripplewood Shareholder, and any purported assignment without such consent
shall be void. Subject to the preceding sentences, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
SECTION 4.09. SPECIFIC PERFORMANCE. The parties hereby declare
that irreparable damage would occur as a result of the failure of any party
hereto to perform any of its obligations under this Agreement in accordance with
the specific terms hereof. Therefore, all parties hereto shall have the right to
specific performance of the obligations of the other parties under this
Agreement and if any party hereto shall institute any action or proceeding to
enforce the provisions hereof, any Person against whom such action or proceeding
is brought hereby waives the claim or defense therein that such party has or
have an adequate remedy at law exists. The right to specific performance shall
be in addition to any other remedy to which a party hereto may be entitled at
law or in equity.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
EAC III L.L.C.,
by RIPPLEWOOD PARTNERS, L.P.,
its Member,
by RIPPLEWOOD HOLDINGS L.L.C.,
its General Partner,
by________________________
Name:
Title:
________________________
Lester Rackoff
________________________
Sandy Maccarone
<PAGE>
18
________________________
Ted Kozlowski
________________________
Eric Ecker
________________________
Terry Bromberg
________________________
Gerald Adams
________________________
Linda Hein
________________________
Janice Bailey
________________________
David Press
________________________
Robert Famighetti
________________________
Cindy Buckosh
________________________
Ken Park
<PAGE>
19
WRC MEDIA INC.,
by________________________
Name:
Title:
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Shares of
Company
Shareholder Common Stock Options
- -------------------------------------------------------------------
<S> <C> <C>
Lester Rackoff 4,032 2,688
- -------------------------------------------------------------------
Sandy Maccarone 538 358
- -------------------------------------------------------------------
Ted Kozlowski 538 358
- -------------------------------------------------------------------
Eric Ecker 452 301
- -------------------------------------------------------------------
Terry Bromberg 538 358
- -------------------------------------------------------------------
Gerald Adams 1,075 717
- -------------------------------------------------------------------
Linda Hein 1,344 896
- -------------------------------------------------------------------
Janice Bailey 2,150 1,434
- -------------------------------------------------------------------
David Press 2,688 1,792
- -------------------------------------------------------------------
Cindy Buckosh 1,075 717
- -------------------------------------------------------------------
Robert Famighetti 1,613 1,075
- -------------------------------------------------------------------
Ken Park 1,613 1,075
- -------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Shareholder Address
- ----------- --------
<S> <C>
EAC III L.L.C. c/o Ripplewood Holdings L.L.C.
One Rockefeller Plaza, 32nd Floor
New York, New York 10020
Attn: Mr. Timothy C. Collins
Mr. Charles L. Laurey
Fax: 212) 582-4110
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attn: Peter S. Wilson, Esq.
Fax: (212) 765-0978
WRC Media Inc. c/o Ripplewood Holdings L.L.C.
One Rockefeller Plaza, 32nd Floor
New York, New York 10020
Attn: Mr. Timothy C. Collins
Mr. Charles L. Laurey
Fax: (212) 582-4110
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attn: Peter S. Wilson, Esq.
Fax: (212) 765-0978
Mr. Lester Rackoff 200 First Stamford Place
PO Box 120023
Stamford, CT 06912-0023
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
<PAGE>
Ms. Sandy Maccarone 200 First Stamford Place
PO Box 120023
Stamford, CT 06912-0023
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Mr. Ted Kozlowski 200 First Stamford Place
PO Box 120023
Stamford, CT 06912-0023
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Mr. Eric Ecker 200 First Stamford Place
PO Box 120023
Stamford, CT 06912-0023
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Terry Bromberg 200 First Stamford Place
PO Box 120023
Stamford, CT 06912-0023
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
<PAGE>
Mr. Gerald Adams 4201 Woodland Road
Circle Pines, MN 55014
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Ms. Janice Bailey 1 International Boulevard, Suite 630
Mahwah, NJ 07495
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Mr. David Press 1555 North River Center Drive
Suite 201
Milwaukee, WI 53212
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Mr. Robert Famighetti 1555 North River Center Drive,
Suite 201
Milwaukee, WI 53212
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
<PAGE>
Ms. Cindy Buckosh 15355 Neo Parkway
Cleveland, OH 44128
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
Mr. Ken Park 11 Penn Plaza
New York, NY 10001
with a copy to:
Rubin, Baum, Levin, Constant &
Friedman
30 Rockefeller Plaza
New York, NY 10312
Attn: Mr. Robert J. Benowitz
Fax: (212) 698-7825
</TABLE>
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
WRC MEDIA AND ITS
SUBSIDIARIES
PRO FORMA
YEAR ENDED
DECEMBER 31, 1999
-----------------
(DOLLARS IN THOUSANDS)
<S> <C>
CASH INTEREST EXPENSE
Term loan A facility (estimated at 10.75%).................. $ 3,333
Term loan B facility (estimated at 10.02%).................. 10,020
12.75% Senior Subordinated Debenture........................ 19,380
Commitment fee of 0.5% on unutilized revolving credit
facility.................................................. 150
--------
Cash Interest Expense....................................... $ 32,883
========
</TABLE>
<PAGE>
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES COMPUTATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, THREE MONTHS ENDED
1999 1999 MARCH 31, 2000
------------ ------------- -------------------
<S> <C> <C> <C>
WRC MEDIA AND ITS SUBSIDIARIES
Fixed Charges:
Interest expensed & capitalized........................... $ 7,823 $ 33,182 $ 8,227
Amortization of Deferred Financing Fee.................... 184 944 172
Estimated of interest in rental expense................... 260 260 65
-------- -------- --------
8,267 34,386 8,464
======== ======== ========
Preferred Dividends (0% effective tax rate)............... 1,518 12,266 3,091
======== ======== ========
Earnings:
Pretax income from continuing operations.................. (15,995) (21,718) (11,171)
Add Back Fixed charges.................................... 9,785 46,652 11,555
-------- -------- --------
$ (6,210) $ 24,934 $ 384
======== ======== ========
Earnings to Fixed Charges and preferred dividends and
accretion................................................. (.63) (.53) (.03)
======== ======== ========
Deficiency.................................................. $(15,995) $(21,718) $(11,171)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
WEEKLY READER CORPORATION
Fixed Charges:
Interest expenses & capitalized.................... $6,134 $ 5,861 $ 6,968 $ 9,232 $14,637 $ 3,289 $ 8,228
Amortization of Deferred Financing Fees............ 268 963 563 184 184 44 --
------ ------- ------- ------- ------- ------- -------
6,402 6,814 7,631 9,416 14,821 3,333 8,228
Earnings:
Pretax income from continuing operations before
minority interest................................ 43 (2,863) 4,005 5,807 7,648 314 (2,716)
Fixed charges...................................... 6,402 6,814 7,631 9,416 14,821 3,333 8,228
------ ------- ------- ------- ------- ------- -------
$6,445 $ 3,951 $11,636 $15,223 $22,469 $ 3,647 $ 5,512
Earnings to Fixed Charges............................ 1.01 (0.58) 1.52 1.62 1.52 1.09 0.67
------ ------- ------- ------- ------- ------- -------
Surplus (Deficiency)................................. $ 43 $(2,863) $ 4,005 $ 5,807 $ 7,648 $ 314 $ 2,716
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRE-PREDECESSOR PREDECESSOR SUCCESSOR
--------------- --------------------------------------------------------- ----------------
6/30-12/31
7/8/94-6/28/95 1995 1996 1997 1998 1/1-7/13/99 7/14/99-12/31/99
--------------- ---------- -------- -------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPASS LEARNING
Fixed Charges:
Interest expensed &
capitalized................... $ -- $ 1,717 $ 3,955 $ 2,711 $ 4,000 $ 2,650 $ 5,357
Amortization of Deferred
Financing Fee................. -- 180 365 1,322 286 204 297
Amortization of Debt Discount... -- 10 270 980 -- -- --
Estimated of interest in rental
expense......................... 1,794 655 1,268 1,442 1,010 489 260
-------- -------- -------- -------- ------- ------- --------
1,794 2,562 5,858 6,455 5,296 3,343 5,914
Earnings:
Pretax income from continuing
operations before minority
interest...................... (12,399) (21,273) (22,279) (56,204) (7,773) (778) (10,296)
Fixed charges................... 1,794 2,562 5,858 6,455 5,296 3,343 5,914
-------- -------- -------- -------- ------- ------- --------
$(10,605) $(18,711) $(16,421) $(49,749) $(2,477) $(2,565) $ (4,382)
Earnings to Fixed Charges......... (5.91) (7.30) (2.80) (7.71) (0.47) (0.77) (0.74)
======== ======== ======== ======== ======= ======= ========
Deficiency........................ $(12,399) $(21,273) $(22,279) $(56,204) $(7,773) $ (778) $(10,296)
======== ======== ======== ======== ======= ======= ========
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
PREDECESSOR SUCCESSOR
1999 2000
----------- ---------
<S> <C> <C>
COMPASS LEARNING
Fixed Charges:
Interest expensed &
capitalized................... $ 1,309 $ 8,227
Amortization of Deferred
Financing Fee................. 96 --
Amortization of Debt Discount... -- --
Estimated of interest in rental
expense......................... 247 165
------- --------
1,652 8,392
Earnings:
Pretax income from continuing
operations before minority
interest...................... (2,346) (13,698)
Fixed charges................... 1,652 8,392
------- --------
$ (694) $ (5,306)
Earnings to Fixed Charges......... (0.42) (0.63)
======= ========
Deficiency........................ $(2,346) $(13,698)
======= ========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
covering WRC Media, Inc. and subsidiaries, Weekly Reader Corporation and
Subsidiaries and CompassLearning, Inc., each dated March 20, 2000, and to all
references to our firm included in or made a part of this registration
statement.
Arthur Andersen LLP
Roseland, New Jersey
May 26, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement
No. 333-96119 of WRC Media Inc., Weekly Reader Corporation and CompassLearning,
Inc. on Form S-4 of our report dated August 30, 1999 (November 17, 1999 as to
Note 1) relating to our audit of Weekly Reader Corporation and subsidiaries and
our report dated July 31, 1998 (August 5, 1998 as to Note 14) relating to our
audit of American Guidance Service, Inc. appearing in the Prospectus, which is a
part of this Registration Statement, and of our report dated August 30, 1999
relating to the financial statement schedules of Weekly Reader Corporation and
subsidiaries appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Independent Public
Accountants" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
May 26, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 4 to the Registration
Statement on Form S-4 (File No. 333-96119) of our report dated July 14, 1999
relating to the financial statements of JLC Learning Corporation (prior to being
acquired by WRC Media Inc.) as of December 31, 1998 and for each of the two
years in the period ended December 31, 1998, which appears in such Registration
Statement. We also consent to the reference to our firm under the caption
"Independent Public Accountants" in such Registration Statement.
PricewaterhouseCoopers LLP
Phoenix, Arizona
May 26, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001102329
<NAME> WRC MEDIA & SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 MAR-31-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 15,521 4,561
<SECURITIES> 0 0
<RECEIVABLES> 47,394 42,136
<ALLOWANCES> 0 0
<INVENTORY> 14,682 13,507
<CURRENT-ASSETS> 100,816 83,982
<PP&E> 7,898 7,690
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 572,229 548,660
<CURRENT-LIABILITIES> 110,806 97,831
<BONDS> 276,556 278,025
0 0
64,767 67,858
<COMMON> 69 69
<OTHER-SE> 105,214 90,498
<TOTAL-LIABILITY-AND-EQUITY> 572,229 548,660
<SALES> 50,570 48,439
<TOTAL-REVENUES> 50,570 48,439
<CGS> 16,102 15,639
<TOTAL-COSTS> 42,038 35,628
<OTHER-EXPENSES> (32) (56)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,457 8,399
<INCOME-PRETAX> (15,995) (11,171)
<INCOME-TAX> 0 450
<INCOME-CONTINUING> (15,995) (11,621)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (3,336) 0
<CHANGES> 0 0
<NET-INCOME> (19,331) (11,621)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000884403
<NAME> WEEKLY READER & SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 MAR-31-2000
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 MAR-31-2000
<CASH> 0 1,962 14,143 3,430
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 24,933 27,440 26,802
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 13,641 13,952 12,785
<CURRENT-ASSETS> 0 67,451 77,911 71,222
<PP&E> 0 6,608 6,245 5,884
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 0 237,276 236,341 227,953
<CURRENT-LIABILITIES> 0 69,217 77,693 64,305
<BONDS> 0 0 276,556 278,025
0 0 76,406 77,866
0 0 0 0
<COMMON> 0 100 28 28
<OTHER-SE> 0 167,292 (191,403) (188,946)
<TOTAL-LIABILITY-AND-EQUITY> 0 237,276 236,341 227,953
<SALES> 92,904 118,236 148,287 35,708
<TOTAL-REVENUES> 92,904 118,236 148,287 35,708
<CGS> 23,825 30,646 40,211 9,703
<TOTAL-COSTS> 58,988 72,183 85,037 20,538
<OTHER-EXPENSES> (1,545) (184) (570) (45)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 7,631 9,416 14,821 8,228
<INCOME-PRETAX> 4,005 5,807 7,648 (2,716)
<INCOME-TAX> 5,772 3,942 4,459 450
<INCOME-CONTINUING> (1,767) 1,865 3,189 (3,166)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,767) 1,865 3,189 (3,166)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001028115
<NAME> COMPASS LEARNING
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 MAR-31-2000
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 MAR-31-2000
<CASH> 0 0 102 1,131
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 21,087 19,954 15,334
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 1,011 730 722
<CURRENT-ASSETS> 0 25,155 22,727 18,471
<PP&E> 0 2,090 1,653 1,806
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 0 31,753 79,102 72,395
<CURRENT-LIABILITIES> 0 57,098 39,608 34,772
<BONDS> 0 11,461 276,556 278,025
0 11,230 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 0 (51,755) (238,078) (240,979)
<TOTAL-LIABILITY-AND-EQUITY> 0 31,753 79,102 72,395
<SALES> 71,812 68,898 65,801 12,731
<TOTAL-REVENUES> 71,812 68,898 65,801 12,731
<CGS> 59,384 29,400 25,033 5,936
<TOTAL-COSTS> 61,491 43,018 48,831 12,277
<OTHER-EXPENSES> 2,128 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 5,013 4,286 8,508 8,227
<INCOME-PRETAX> (56,204) (7,773) (16,150) (13,698)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (56,204) (7,773) (19,486) (13,698)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 3,336 0
<CHANGES> 0 0 0 0
<NET-INCOME> (56,204) (7,773) (19,486) (13,698)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
