SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
(Amendment No. 1)
September 21, 2001
(Date of Report)
(Date of earliest event reported)
JOHN WILEY & SONS, INC.
(Exact name of registrant as specified in its charter)
New York
(State or jurisdiction of incorporation)
0-11507 13-5593032
- --------------------------- -------------------------------------
Commission File Number IRS Employer Identification Number
605 Third Avenue, New York, NY 10158-0012
- ----------------------------- -------------------------------------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (212) 850-6000
--------------------------
This is the first page of a thirty one page document.
The following information is herewith filed as an amendment to the Form 8-K
dated September 21, 2001 filed by the Company in connection with its acquisition
of all the outstanding shares of Hungry Minds, Inc.
Item 7(a).
Financial Statements of Businesses Acquired Page No.
Independent Auditor's Report 3
Consolidated Balance Sheets of Hungry Minds, Inc. as of September 30, 4
2000 and 1999
Consolidated Statements of Income of Hungry Minds, Inc. for the years 5
ended September 30, 2000 and 1999
Consolidated Statements of Stockholders' Equity of Hungry Minds, Inc. 6
for the years ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows of Hungry Minds, Inc. for the 7
years ended September 30, 2000 and 1999
Notes to Hungry Minds, Inc. Consolidated Financial Statements 8-18
Condensed Consolidated Balance Sheets - Unaudited as of June 30, 19
2001and June 30, 2000
Condensed Consolidated Statements of Operations - Unaudited
for the Nine-Months Ended June 30, 2001 and 2000 20
Condensed Consolidated Statements of Cash Flows - Unaudited 21
for the Nine-Months Ended June 30, 2001 and 2000
Notes to Unaudited Condensed Consolidated Financial Statements 22-25
Item 7(b).
Pro Forma Financial Information
Introduction 26-27
Unaudited Pro Forma Condensed Combined Statement of Financial Position 28
of John Wiley & Sons, Inc. and Hungry Minds, Inc. as of July 31, 2001
Unaudited Pro Forma Condensed Combined Statement of Income of John 29
Wiley & Sons, Inc. and Hungry Minds, Inc. for the year ended April 30,
2001
Unaudited Pro Forma Condensed Combined Statement of Income of John 30
Wiley & Sons, Inc. and Hungry Minds, Inc. for the three months ended
July 31, 2001
Notes to Unaudited Pro Forma Condensed Combined Financial Information 31
of John Wiley & Sons, Inc. and Hungry Minds, Inc.
"Safe Harbor" Statement under the Private Securities Litigation 32
Reform Act of 1995
Signature 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hungry Minds, Inc.:
We have audited the accompanying consolidated balance sheets of Hungry Minds,
Inc. (formerly IDG Books Worldwide, Inc.) and subsidiaries as of September 30,
2000 and 1999 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two fiscal years in the period ended
September 30, 2000. 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 of America. 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 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 Hungry Minds, Inc. (formerly IDG
Books Worldwide, Inc.) and subsidiaries as of September 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the two fiscal
years in the period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
December 15, 2000
HUNGRY MINDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
ASSETS
September 30,
-------------------------------------
2000 1999
------------------ ----------------
Current Assets:
Cash and cash equivalents $ 929 $ 2,084
Accounts receivable - net 70,696 45,974
Inventory - net 29,719 31,344
Other current assets 2,465 4,092
Deferred tax assets 22,102 21,334
------------------ ----------------
Total Current Assets 125,911 104,828
Royalty advances - net 16,229 12,110
Property and equipment - net 15,969 6,032
Intangible assets - net 76,901 90,221
Other assets 5,418 3,280
------------------ ----------------
Total Assets $ 240,428 $ 216,471
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 6,000 $ --
Accounts payable 19,420 9,666
Accrued liabilities 51,110 57,815
------------------ ----------------
Total Current Liabilities 76,530 67,481
Long-term debt 81,500 82,000
Deferred tax liability 4,747 4,950
------------------ ----------------
Total liabilities 162,777 154,431
Minority interest 127 95
Commitments and contingencies (see note 14)
Stockholders' Equity:
Preferred stock, $.001 par value; authorized:
5,000,000 shares; issued and outstanding: 0 shares -- --
Common stock, $.001 par value; authorized: 25,000,000
Class A shares and 400,000 Class B shares; issued
and outstanding: 14,752,656 and 14,278,825 Class A,
and 0 and 200,000 Class B shares in 2000 and 1999,
respectively 15 14
Additional paid-in-capital 50,182 46,637
Retained earnings 27,337 15,284
Accumulated other comprehensive income (10) 10
------------------ ----------------
Total Stockholders' Equity 77,524 61,945
------------------ ----------------
------------------ ----------------
Total Liabilities and Stockholders' Equity $ 240,428 $ 216,471
================== ================
See notes to consolidated financial statements.
HUNGRY MINDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years Ended September 30,
--------------------------------------
2000 1999
----------------- -----------------
Revenue:
Net sales $ 230,974 $ 172,181
Licensing and other revenues 12,349 7,595
----------------- -----------------
Net revenue 243,323 179,776
Operating costs and expenses:
Cost of sales 138,768 92,589
Selling, general and administrative 68,999 58,919
Depreciation and amortization 7,334 5,209
----------------- -----------------
Total operating costs and expenses 215,101 156,717
Operating income 28,222 23,059
Interest expense, net 6,855 1,050
----------------- -----------------
Income before provision for income taxes 21,367 22,009
Provision for income taxes 9,314 9,272
----------------- -----------------
Net income $ 12,053 $ 12,737
Net income per share:
Basic $ 0.82 $ 0.88
================= =================
Diluted $ 0.82 $ 0.86
================= =================
Shares used in per share computation
Basic net income 14,663 14,395
================= =================
Diluted net income 14,688 14,823
================= =================
See notes to consolidated financial statements.
HUNGRY MINDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
other
Additional Comprehen-
Common Stock Paid-in Retained sive
--------------------------
Shares Dollars Capital Earnings Income Total
------------ ------------ ------------ ------------- ------------- ----------------
Balance, September 30, 1998 14,280 $ 14 $ 44,029 2,547 -- $ 46,590
Net income 12,737 12,737
Translation adjustment 10 10
----------------
Comprehensive income 12,747
Issuance of stock
under ESOP 98 1,513 1,513
Proceeds from ESPP
purchases 71 743 743
Proceeds from option
exercises 30 352 352
------------ ------------ ------------ ------------- ------------- ----------------
Balance, September 30, 1999 14,479 14 46,637 15,284 10 61,945
Net income 12,053 12,053
Translation adjustment (20) (20)
----------------
Comprehensive income 12,033
Issuance of stock
under ESOP 41 566 566
Proceeds from ESPP
purchases 60 579 579
Proceeds from option
exercises 173 1 2,040 2,041
Issuance of warrants 360 360
------------ ------------ ------------ ------------- ------------- ----------------
Balance, September 30, 2000 14,753 $ 15 $ 50,182 $ 27,337 $ (10) $ 77,524
============ ============ ============ ============= ============= ================
See notes to consolidated financial statements.
HUNGRY MINDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
September 30, Years Ended
------------------------------------
2000 1999
---------------- ----------------
Cash Flows from Operating Activities:
Net income $ 12,053 $ 12,737
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,334 5,209
Deferred income taxes (971) (1,346)
Changes in operating assets and liabilities:
Accounts receivable (24,663) (18,597)
Receivable from parent -- 1,514
Inventory 660 (4,700)
Royalty advances (6,307) (2,774)
Other current assets 1,840 (1,779)
Accounts payable 9,754 3,369
Accrued liabilities (6,715) 16,703
---------------- ----------------
Net cash provided by (used for) operating activities (7,015) 10,336
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (13,812) (3,754)
Sale of assets, net 17,388 --
Other investments (617) (1,856)
Acquisitions, net of cash acquired (4,640) (100,118)
---------------- ----------------
Net cash used for investing activities (1,681) (105,728)
---------------- ----------------
Cash Flows from Financing Activities:
Payment of Cliffs Notes, Inc. line of credit -- (342)
Proceeds from exercises of stock options 2,041 352
Paydowns on credit facility (45,500) (5,000)
P roceeds from credit facility 51,000 87,000
---------------- ----------------
Net cash provided by financing activities 7,541 82,010
---------------- ----------------
Decrease in cash and equivalents (1,155) (13,382)
Cash and equivalents, beginning of year 2,084 15,466
---------------- ----------------
Cash and equivalents, end of year $ 929 $ 2,084
================ ================
Supplemental cash flow information:
Cash paid for taxes $ 9,638 $ 9,969
================ ================
Cash paid for interest $ 5,270 $ 367
================ ================
Non-cash investing and financing activities:
Acquisitions (Note 3):
Tangible assets $ 1,668 $ 23,747
Intangible assets 4,471 82,899
Less cash paid (4,640) (100,118)
Less warrants issued (360) --
---------------- ----------------
Liabilities assumed $ 1,139 $ 6,528
================ ================
================ ================
Common stock issued to ESOP $ 566 $ 1,513
================ ================
Payroll withheld to fund ESPP purchase $ 579 $ 743
================ ================
See notes to consolidated financial statements.
HUNGRY MINDS, INC. AND SUBSIDIARIES (Formerly IDG Books Worldwide, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Organization and Description of Business Hungry Minds, Inc., a
Massachusetts company, ("the Company") (formerly IDG Books Worldwide, Inc.) was
founded in 1990 as a wholly-owned subsidiary (through intermediate companies) of
International Data Group, Inc. ("Parent"). On March 24, 1998, the Company was
reincorporated in Delaware. On July 31, 1998, the Company consummated its
initial public offering (the "Offering") of 3,180,000 shares of Class A common
stock at an offering price of $15.50 per share.
The Company is a leading global knowledge company featuring a diverse
portfolio of technology, consumer, and general how-to book brands,
computer-based learning tools, Internet sites and Internet e-services. The
Company publishes and markets under well-known brand names, including For
Dummies(R), Visual(TM), Bible, CliffsNotes(TM), Frommer's(R), Betty
Crocker's(R), Weight Watchers(R) and Webster's New World(TM).
Principles of Consolidation
The consolidated financial statements include the accounts of Hungry Minds,
Inc. and its majority controlled subsidiaries (collectively referred to as the
Company). All significant intercompany accounts and transactions have been
eliminated.
Reclassifications
Certain amounts in prior years' financial statements and related notes have
been reclassified to conform to the fiscal year 2000 presentation. The
accompanying balance sheet as of September 30, 2000 reports a deferred tax
liability of $4.7 million with a corresponding addition to goodwill to reflect
the book/tax difference related to the carrying value of Cliffs Notes'
intangible assets. The accompanying consolidated balance sheet as of September
30, 1999 has been reclassified to reflect these reclassifications.
2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the last Saturday of each September.
Fiscal years 2000 and 1999 ended on September 30, 2000 and September 25, 1999,
respectively. As a result, fiscal year 2000 consisted of 53 weeks, while fiscal
year 1999 consisted of 52 weeks. For convenience, fiscal year-ends are denoted
in the accompanying financial statements as September 30.
Revenue Recognition
Sales are recorded upon shipment of products, net of provisions for
estimated returns and allowances, which are estimated based on historical
experience by type of book. For each of the years ended September 30, 2000 and
1999, the provision for returns and allowances represented approximately 22% of
gross sales, which approximates historical averages. Revenue from the licensing
of titles, editorial content, and design are recognized as earned.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of accounts receivable. The
Company's customers consist principally of retail chain booksellers, wholesale
distributors, office superstores, membership clubs, and computer/electronic
superstores located primarily in the United States and Canada. Certain customers
account for over 10% of sales (Note 12). The Company performs ongoing credit
evaluations of its customers and maintains allowances for estimated probable
credit losses.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 amount of revenues and
expenses during the reporting period. The primary estimates underlying the
Company's financial statements include allowances for sales returns, doubtful
accounts, inventory obsolescence, reserves for royalty advances, and
recoverability of deferred tax assets. Actual results could differ from those
estimates. During the fourth quarter of fiscal 2000, the Company revised certain
assumptions in its estimate of the sales returns reserve, which had the effect
of increasing pre-tax income by $5.0 million ($3.0 million after tax, or $.20
per diluted share).
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Royalty Advances
Royalty advances are recorded as cash is advanced to authors and are
expensed as earned by authors or reserved when future recovery appears doubtful.
Royalty advances are reported net of reserves of $14.4 million and $13.7 million
at September 30, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets ranging
from three to five years. Leasehold improvements are amortized over the shorter
of the lease term or the remaining useful life of the related assets. The
Company capitalizes internal-use software in accordance with AICPA Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and EITF 00-2, Accounting for Web Site Development
Costs. Such costs are amortized over a useful life of five years.
Intangible Assets
Intangible assets represent trademarked brand names, goodwill, publishing
rights and other intangible assets. Amortization is provided on a straight-line
method over the estimated useful lives of these assets ranging from five to
forty years.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the Company evaluates the carrying value of its long-lived assets on an ongoing
basis and recognizes an impairment when the estimated future undiscounted cash
flows from operations are less than the carrying value of the related assets.
Income Taxes
The Company accounts for deferred income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, which requires that deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement carrying
amount and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts, more
likely than not, to be realized.
Net Income Per Share
Basic net income per share excludes dilution and is computed using the
weighted average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock (stock options) were exercised or
converted into common stock. For the years ended September 30, 2000 and 1999,
respectively, approximately 25,025 and 428,000 shares, reflecting the dilutive
effects of outstanding stock options, were included in computing diluted net
income per share. See Note 11 for discussion of stock options.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of the estimated fair value of financial instruments. The
carrying values of cash, accounts receivable, accounts payable, and long-term
debt approximates their estimated fair values.
Foreign Currencies
The Company's foreign subsidiaries use their local currency as their
functional currency. The assets and liabilities of the subsidiaries are
translated at exchange rates in effect at the balance sheet date and income and
expense accounts are translated at average exchange rates during the year.
Translation adjustments are reported as a separate component of stockholders'
equity.
Beginning in fiscal year 1999, the Company entered into forward foreign
exchange contracts to reduce exposure to foreign currency exchange risk related
to accounts receivable and intercompany transactions, which are denominated in
foreign currencies. The net gains and losses from the foreign forward exchange
contracts are included in net income. As of September 30, 2000, the Company had
forward foreign contracts to sell 1.4 million Canadian dollars and 5.2 million
Singapore dollars. As of September 30, 1999, the Company had forward foreign
contracts to sell 3.3 million of Canadian dollars and 1.2 million of Singapore
dollars. Forward foreign contracts generally have maturities of one to three
months.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method in accordance with the provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, as allowed by SFAS No. 123, Accounting for
Stock-Based Compensation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities on the Balance Sheet and measure these instruments at fair value.
SFAS 133, as amended, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Accordingly, the Company adopted SFAS 133 on
October 1, 2000. The impact of the Company's adoption of SFAS 133 on its
financial position or results of operation was insignificant.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101, as amended, provides additional guidance on revenue recognition
as well as criteria for when revenue is generally realized and earned. The
Company is required to adopt SAB 101 in the first quarter of fiscal 2001 and
does not expect the adoption of SAB 101 to have a material impact on future
operating results.
3. Acquisitions and Divestitures
Hungry Minds
On August 10, 2000, the Company acquired substantially all of the net
assets of Hungry Minds, Inc. ("Old HMI"), a privately-held e-learning company
with proprietary online learning technology and online learning solutions for
corporations, individuals and students. The acquisition price of approximately
$5.0 million consisted of $3.3 million cash paid into escrow (to be released
over a twenty-four month period assuming certain conditions, as stated in the
Asset Purchase Agreement, are fulfilled, including valid assignment of rights to
intangible property), a $0.9 million cash payment to an Old HMI creditor, a $0.4
million advance to Old HMI prior to closing, and a warrant valued at
approximately $0.4 million. The warrant provides for the purchase of 62,992
shares of the Company's stock at $7.9375 per share, which expires in 2005, and
becomes exercisable only if the Company's stock price reaches $24.9375. The
acquisition was accounted for as a purchase business combination and,
accordingly, the acquisition cost has been allocated to the fair value of the
assets acquired and liabilities assumed. Of the acquisition price, $4.5 million
was allocated to goodwill, which is being amortized over six years. The Company
funded the acquisition with $4.4 million in borrowings on the Credit Facility
(see note 9). The purchase price allocation is preliminary and subject to
revision upon receipt of final information.
Reference Brands
In August 1999, the Company acquired a portfolio of book and online brands
from the Macmillan General Reference Group (the Reference Brands) of Pearson
Education, Inc. for $83.0 million, plus $0.5 million in transaction costs. The
acquisition was accounted for as a purchase business combination and,
accordingly, the acquisition cost has been allocated to the fair value of the
assets acquired and liabilities assumed. Of the acquisition cost, $67.3 million
was allocated to intangible assets, including branded trademarks ($55.6
million), goodwill ($9.2 million), publishing rights ($2.2 million) and
workforce ($0.3 million). Branded trademarks and goodwill are amortized on a
straight-line basis over 40 years. Assumed liabilities included $2.0 million for
the costs of a restructuring plan involving various settlements and contract
terminations ($1.2 million) and estimated severance and relocation of personnel
($0.8 million). As of September 30, 2000, such amounts have been paid.
During fiscal year 2000, the Company sold the Arco, J.K. Lasser and
Chek-Chart businesses, which were purchased as part of the Reference Brands
acquisition. The combined $18.0 million sale price was recorded as an adjustment
to the purchase price of Reference Brands, with no gain or loss resulting from
the sale.
Cliffs Notes
In December 1998, the Company purchased Cliffs Notes, Inc., a privately
held publisher of popular study guides. The acquisition price included
approximately $17.1 million in payments to Cliffs' shareholders, retirement of
shareholder notes and bank debt, plus $0.5 million in transaction costs. The
acquisition was accounted for as a purchase business combination and,
accordingly, the acquisition cost has been allocated to the fair value of the
assets acquired and liabilities assumed. Assumed liabilities included $1.4
million for the cost of a restructuring plan to relocate certain employees of
Cliffs Notes, Inc. and terminate certain facility leases and other business
contracts. As of September 30, 2000, such amounts have been paid. Of the
acquisition cost, $15.4 million was allocated to branded trademarks and $5.0
million was allocated to goodwill with a forty year estimated useful life. In
addition, a $5.0 million deferred tax liability was recorded for the income tax
effect of temporary differences between the book basis and tax basis of branded
trademarks.
The operating results of Old HMI, the Reference Brands and Cliffs Notes,
Inc. have been included in the accompanying consolidated financial statements
from the respective dates of acquisition. The unaudited pro forma results below
assume the acquisitions and divestitures occurred at the beginning of fiscal
1999. The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable. This unaudited pro forma
information is not necessarily indicative of the results that the Company would
have achieved if the Old HMI, Reference Brands and Cliffs Notes, Inc.
acquisitions had taken place on October 1, 1998.
Years Ended September 30,
2000 1999
---------------- ---------------
(in thousands, except per share amounts)
Net revenue $ 239,379 $ 222,056
Net income 2,937 4,982
Diluted net income per share $ 0.20 $ 0.34
Also in December 1998, the Company made a $1.8 million investment to
acquire a 49% interest in a Canadian publisher, CDG Books Canada, Inc., a newly
formed company with Macmillan Canada (a division of Canada Publishing Company).
The Company's investment is accounted for using the equity method. The Company's
equity in the operating losses of CDG Books Canada, Inc. for the fiscal years
2000 and 1999 was $0.4 million and $0.3 million, respectively.
4. Accounts Receivable
Accounts receivable consisted of the following (in thousands):
September 30,
2000 1999
---------- --------
Accounts receivable............................ $105,324 $83,300
Allowance for doubtful accounts................ (5,396) (5,330)
Allowance for sales returns.................... (29,232) (31,996)
---------- --------
Accounts receivable - net............. $70,696 $45,974
======= =======
5.Inventories
Inventories consisted of the following (in thousands):
September 30,
2000 1999
---------- --------
Books (finished goods)....................... $38,374 $40,167
Paper........................................ 4,380 5,364
---------- --------
Total Inventory..................... 42,754 45,531
Reserve for obsolescence..................... (13,035) (14,187)
---------- --------
Inventory - net..................... $ 29,719 $ 31,344
========== ========
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
September 30,
2000 1999
--------- --------
Computers and equipment.............................. $ 16,222 $ 8,854
Furniture and fixtures............................... 3,889 1,272
Leasehold improvements............................... 5,989 2,572
Internal use software................................ 4,457 3,858
-------- --------
Total....................................... 30,557 16,556
Less accumulated depreciation and amortization....... (14,588) (10,524)
-------- --------
Property and equipment - net................ $15,969 $6,032
======= ======
7. Intangible Assets
Intangible assets consisted of the following (in thousands):
September 30,
2000 1999
--------- --------
Branded trademarks.................................... $ 37,837 $55,581
Goodwill.............................................. 35,147 28,048
Publishing rights..................................... 7,220 7,220
Other intangibles..................................... 1,000 1,000
--------- --------
Total........................................ 81,204 91,849
Less accumulated amortization......................... (4,303) (1,628)
---------- --------
Intangible assets - net...................... $ 76,901 $90,221
========= =======
8. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
September 30,
2000 1999
---------- --------
Accrued royalties................................... $16,707 $16,276
Accrued promotions.................................. 10,088 14,068
Accrued compensation and benefits................... 5,350 8,689
Accrued inventory and fulfillment................... 9,989 8,086
Accrued income taxes................................ 1,668 1,158
Other accrued liabilities........................... 7,308 7,101
Accrued acquisition restructuring costs............. -- 2,437
---------- --------
Accrued liabilities........................ $51,110 $57,815
========= ========
9. Long-Term Debt
The majority of the Company's debt was funded under a $110.0 million
syndicated revolving credit facility dated July 1999 (the "Credit Facility").
The Credit Facility included a $70.0 million term loan commitment and a $40.0
million revolving commitment. The term loan facility required quarterly
principal payments beginning December 2000 and continuing through July 2005 (the
"Credit Facility Maturity Date"). The revolving commitment did not require
payment until the Credit Facility Maturity Date. The Company's syndicated
borrowings under the Credit Facility at September 30, 2000 and 1999 totaled
$87.5 million and $82.0 million, respectively. The borrowings included $70.0
million of the term loan commitment in each year and $17.5 million and $12.0
million of the revolving commitment as of September 30, 2000 and 1999,
respectively.
Interest on the Company's borrowings was payable at a margin of between
0.875% and 1.625% over US dollar London Interbank Offered Rate ("LIBOR") and 0%
to 0.375% over US Prime Rate, depending on the nature of the borrowing and the
financial condition of the Company. The weighted average rate in effect at
September 30, 2000 was 7.92%.
Borrowings were secured by all material tangible and intangible domestic
assets now owned or hereafter acquired, and were governed by certain financial
covenants based on the results and financial position of the Company. As of
September 30, 2000, the Company was in compliance with all such covenants.
Scheduled maturities of the credit facility as of September 30, 2000 were
as follows: fiscal 2001: $6 million; fiscal 2002: $11 million; fiscal 2003:
$13.5 million; fiscal 2004: $15.5 million; and, fiscal 2005: $41.5 million.
10. Income Taxes
The provision for federal, state, and foreign taxes consisted of the
following for the years ended September 30 (in thousands):
2000 1999
-------- --------
Current:
Federal................................ $ 8,175 $8,537
State.................................. 1,874 1,873
Foreign................................ 236 208
-------- --------
Total current.......................... 10,285 10,618
-------- --------
Deferred:
Federal................................ (664) (915)
State.................................. (146) (281)
Foreign................................ (161) (150)
--------- --------
Total deferred......................... (971) (1,346)
--------- ---------
Total............................. $ 9,314 $ 9,272
======== ========
Deferred tax assets consisted of the following at September 30 (in
thousands):
2000 1999
--------- ---------
Reserve for returns $10,885$ 11,177
Reserve for obsolescence 3,637 4,116
Loss accruals 5,609 3,294
Uniform capitalization 1,351 1,223
Other 343 1,374
Foreign 277 150
-------- ---------
Deferred tax assets $22,102$ 21,334
Amortization of intangible assets (4,747) (4,950)
-------- ---------
Net deferred tax assets $17,355 $16,384
======= =======
The differences between the effective income tax rate and the statutory
federal tax rate were as follows for the years ended September 30:
2000 1999
------ ------
Statutory federal tax rate....................... 35.0% 35.0%
State taxes, net of federal tax benefit.......... 5.2 4.4
Other............................................ 3.3 2.7
------ ------
Effective tax rate............................... 43.5% 42.1%
====== ======
11. Stockholders' Equity
Common Stock
The Company was authorized to issue 25,000,000 shares of $.001 par value
Class A common stock, 400,000 shares of $.001 par value Class B common stock and
5,000,000 shares of $.001 par value preferred stock. During fiscal 2000, all
200,000 outstanding shares of Class B common stock were converted by the Parent
into an equal number of Class A common shares.
Each outstanding share of Class A common stock was entitled to one vote.
Holders of Class A common stock were entitled to receive dividends in such
amounts as the Board of Directors may from time to time determine. Class A
common stock was not convertible. The Parent had approximately 75.6% of the
voting power of common stock as of September 30, 2000.
Common Stock Warrant
As part of the consideration paid for the acquisition of Old HMI, the
Company issued a warrant to purchase 62,992 shares of common stock of the
Company at $7.9375 per share. The warrant was fully vested, expires in 2005 and
becomes exercisable only if the Company's common stock price reaches $24.9375.
Stock Option Plan
In 1998, the Company's Board of Directors approved the 1998 Stock Option
Plan (the "Plan") under which 2,850,000 shares of common stock were reserved for
issuance to employees, consultants, and directors. Under the plan, both
incentive and nonstatutory stock options may have been granted to purchase
common stock at not less than the fair market value of the common stock at the
date of grant. Options generally vested over four years and expired ten years
after date of grant. During fiscal 1999, the Company granted options to purchase
714,800 shares of Class A common stock at exercise prices between $9.13 and
$22.000 per share. During fiscal 2000, the Company granted options to purchase
1,202,600 shares of Class A common stock at exercise prices between $8.94 and
$16.00 per share. As of September 30, 2000, options to purchase 460,359 shares
were available for future grants.
Information relating to options granted, exercised and cancelled through
September 30, 2000 is as follows:
Shares Weighted
Under Average
Option Exercise Price
- -------------------------------------------------------------------------------
Balance, September 30, 1998 1,477,800 $12.00
============= ===========
Granted (weighted average fair value of $11.80) 714,800 14.79
Exercised (29,594) 11.88
Cancelled (223,331) 12.40
------------- -----------
Balance, September 30, 1999 1,939,675 $12.98
============= ===========
Granted (weighted average fair value of $11.20) 1,202,600 13.98
Exercised (172,755) 11.81
Cancelled (782,228) 14.23
------------- -----------
Balance, September 30, 2000 2,187,292 $13.18
============= ============
Additional information regarding options as of September 30, 2000 is as
follows:
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Excercisable Exercise Price
$8.938 - $12.00 1,252,498 8.0 $11.44 476,407 $11.84
$12.01 - $15.00 248,250 7.1 13.90 119,718 $13.88
$15.01 - $18.875 686,544 8.3 $16.09 105,408 $16.20
------- --- ------ ------- ------
2,187,292 8.0 $13.18 701,533 $12.84
============ === ====== ======= ======
At September 30, 1999, 447,780 options were exercisable at a weighted
average exercise price of $12.15.
Employee Stock Ownership Plan
On February 1, 1999, the Company adopted the Hungry Minds, Inc. 401(k),
Profit Sharing, and Employee Stock Ownership Plan (the "KSOP"). The KSOP allows
eligible employees to contribute up to 8% of their compensation into the 401(k),
subject to annual limits. The Company matches a portion of the employee's 401(k)
contributions and may, at its discretion, make additional profit sharing or
employee stock ownership contributions based upon earnings. In December 1999 and
1998, the Company contributed 40,668 and 98,552 shares of Class A Common Stock
to the Hungry Minds ESOP, respectively. Company contributions to the 401(k) and
Profit Sharing Plan were approximately $1.1 and $1.8 million for fiscal years
2000 and 1999, respectively.
Employee Stock Purchase Plan
The Company had an Employee Stock Purchase Plan ("ESPP") for all eligible
employees to purchase shares of common stock at 85% of the lower of the fair
market value on the first day of the overlapping 24-month offering period or the
last day of the six-month purchase period. Employees had the option to authorize
the Company to withhold up to 10% of their compensation during any six-month
purchase period, subject to certain limitations. The ESPP was authorized to
issue up to 400,000 shares. During fiscal year 2000 and 1999, 60,408 and 70,679
shares were issued under the plan, respectively.
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards Board No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), and as discussed in
Note 2, the Company used the intrinsic value method specified by APB Opinion No.
25 to calculate compensation expense associated with issuing stock options.
Accordingly, the Company has not recognized any compensation expense with
respect to such awards, since the exercise price of the stock options awarded
has been equal to the fair market value of the underlying security at the date
of grant.
SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share had the Company adopted the fair value method as prescribed by SFAS
123. Under SFAS No. 123, the fair value of the stock-based awards to employees
is calculated through the use of the minimum value method for all periods prior
to the initial public offering, and subsequently through the use of options
pricing models. The Company's stock option calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2000 1999
------ -----
Dividend yield..................................... 0% 0%
Volatility......................................... 76% 85%
Risk-free interest rate............................ 5.93% 5.94%
Expected life (in years from date of grant)........ 5 7
The Company's calculations were based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the stock-based awards had been amortized to expense over the vesting
period of the awards, net income would have been approximately $10.1 million
($0.69 per diluted share) and $11.0 million ($0.74 per diluted share) for the
years ended September 30, 2000 and 1999, respectively. However, because options
vest over several years, the pro forma adjustments for the years ended September
30, 2000 and 1999 are not indicative of future period pro forma adjustments,
assuming grants are made in those years, when the calculation will apply to all
applicable stock options.
12. Segment, Geographic, and Major Customer Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments and related disclosures about geographic information and major
customers.
The Company has two general publishing groups: Consumer and Technology. The
two segments share the same infrastructure and personnel, and are not managed as
separate operating divisions. Management evaluates the performance of these
segments at the revenue and gross profit level; the Company's reporting systems
do not track or allocate expenses or fixed assets by segment.
The Consumer Group includes brands targeted at the general consumer,
including For Dummies and CliffsNotes and the recently acquired Reference Brands
(Note 3). The Technology Group consists of brands targeted for computer users,
from beginning through advanced level users, including information technology
professionals and software developers. Net revenues and gross profit by segment
were as follows (in thousands):
Net sales to customers by geographic region (based on the shipping
location) were as follows for the years ended September 30 (in thousands):
2000 1999
------ --------
United States............................ $ 200,512 $ 142,886
Canada................................... 8,416 9,376
Singapore................................ 7,574 4,048
United Kingdom........................... 4,618 7,838
Australia................................ 4,235 2,148
Other.................................... 5,619 5,885
-------- --------
Total................................. $ 230,974 $ 172,181
========= =========
The majority of the Company's long-lived assets are located in the United
States; however, at September 30, 2000 and 1999, approximately $260,000 and
$200,000, respectively, of property and equipment long-lived assets, net of
accumulated depreciation, were located outside of the United States.
Net sales to individual customers representing greater than 10% of the
Company's net sales were as follows for the years ended September 30 (in
thousands):
2000 1999
------ --------
Barnes & Noble, Inc................................$40,751 $24,704
Borders, Inc....................................... 33,262 21,269
13. Related Party Transactions
The Company paid a fee to the Parent for certain administrative services.
These fees totaled $0.4 million in fiscal 2000 and $0.5 million in fiscal 1999.
For the years ended September 30, 2000 and 1999, the Company accrued $0.4
million and $1.8 million, respectively, for contributions to be made to the
Hungry Minds ESOP. In December 1999 and 1998, the Company contributed 40,668 and
98,552 shares of Class A Common Stock to the plan, respectively.
Net revenue from affiliated customers amounted to approximately $1.2
million, and $1.6 million, in fiscal years 2000 and 1999, respectively.
14. Commitments and Contingencies
Leases
The Company leases equipment and facilities under operating leases which
expire at various dates through May 2010. Total rental expense for operating
leases amounted to approximately $7.3 million and $3.8 million in 2000 and 1999,
respectively. At September 30, 2000, the aggregate minimum rental commitments
under noncancelable operating leases in excess of one year were as follows (in
thousands):
Years ending September 30,
2001 $ 5,941
2002 5,853
2003 5,231
2004 4,765
2005 4,630
Thereafter 21,760
--------
Total $ 48,180
========
In addition, the Company has a contract, which expires in 2009, to
outsource its distribution and fulfillment functions to retail and wholesale
customers through one vendor in a single source facility in Virginia. The
Company also has a contract with the same vendor for a portion of its printing,
which expires in 2008. Billings on this contract are expected to account for
less than one-fourth of the Company's printing costs.
The Company is subject to various legal actions and claims which have
arisen in the ordinary course of business. In the opinion of management and
counsel, the ultimate resolution of such legal proceedings and claims will not
have a material effect on the financial position or results of operations of the
Company.
In September 2001, the Company bought out their lease in Foster City,
California. This reduces the above minimum rental commitments to $4,886 and
$5,069 in fiscal 2002 and 2003, respectively.
15. Quarterly Information (Unaudited)
The summarized quarterly financial data presented below for the Company's
fiscal years ended September 30, 2000 and 1999 reflect all adjustments which, in
the opinion of management, are of a normal and recurring nature necessary to
present fairly the results of operations for the periods presented (in
thousands, except per share amounts).
Fourth Third Second First
Quarter (2) Quarter Quarter Quarter
------------- ----------- ----------- -----------
2000
Net revenue $ 65,799 $ 55,183 $ 64,532 $ 57,809
Net income 1,544 2,554 4,572 3,383
Net income per share:
Basic (1) 0.10 0.17 0.31 0.23
Diluted (1) 0.10 0.17 0.31 0.23
1999
Net revenue $ 56,303 $ 41,482 $ 44,686 $ 37,305
Net income 2,375 2,631 4,551 3,180
Net income per share:
Basic (1) 0.16 0.18 0.32 0.22
Diluted (1) 0.16 0.17 0.31 0.22
(1) Due to variances in earnings from quarter to quarter and the issuance
of additional shares of common stock during the periods, the sum of
quarterly earnings per share can vary from annual earnings per share.
(2) During the fourth quarter of fiscal 2000, the Company revised certain
assumptions in its estimate of the sales returns reserve, which had the
effect of increasing pre-tax income by $5.0 million ($3.0 million after
tax, or $.20 per diluted share).
16. Subsequent Events
In September 2001, all of the outstanding shares of the Company were
acquired by John Wiley & Sons, Inc. for cash at a purchase price of $6.09
net per share, and all amounts outstanding under the Credit Facility were
repaid.
Hungry Minds, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except per share amounts)
June 30,
------------------------------------------
2001 2000
--------------------- --------------------
ASSETS
Current Assets:
Cash and equivalents........................................................$ 10,864 $ 384
Accounts receivable - net.................................................... 45,420 56,889
Inventory - net.............................................................. 20,269 28,708
Other current assets......................................................... 9,445 4,961
Deferred tax assets.......................................................... 22,047 24,049
--------------------- ---------------------
Total Current Assets.................................................. 108,045 114,991
Royalty advances - net.......................................................... 15,116 12,955
Property and equipment - net.................................................... 11,737 15,403
Intangible assets - net ........................................................ 70,097 73,714
Other assets ................................................................... 4,864 3,714
--------------------- ---------------------
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt...........................................$ 94,500 $ --
Accounts payable............................................................. 15,361 11,121
Accrued liabilities.......................................................... 27,900 47,306
--------------------- ---------------------
Total Current Liabilities............................................. 137,761 58,427
Long-term debt.................................................................. -- 82,000
Deferred tax liability ......................................................... 4,747 4,919
--------------------- ---------------------
Total liabilities.................................................. 142,508 145,346
Minority interests.............................................................. 88 75
Stockholders' Equity:
Preferred stock, $.001 par value; authorized:
5,000,000 shares; issued and outstanding: 0
shares..................................................................... -- --
Common stock, $.001 par value; authorized:
25,000,000 Class A shares and 400,000
Class B shares; issued and outstanding:
14,780,548 and 14,645,944 Class A shares at
June 30, 2001 and 2000, respectively
and 0 and 75,000 Class B shares at June 30, 2001 and 2000, respectively 15 15
Additional paid-in-capital................................................... 50,365 49,552
Retained earnings............................................................ 16,918 25,793
Accumulated other comprehensive loss ........................................ (35) (4)
--------------------- ---------------------
Total stockholders' equity......................................... 67,263 75,356
--------------------- ---------------------
Total Liabilities and Stockholders' Equity........................$ 209,859 $220,777
===================== =====================
See notes to unaudited condensed consolidated financial statements.
Hungry Minds, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations- Unaudited
(in thousands, except per share amounts)
Nine Months Ended
June 30,
-----------------------------------
2001 2000
-----------------------------------
Revenue:
Net sales ............................................................... $128,799 $ 167,388
Licensing and other revenues ............................................ 7,582 10,136
---------------- ---------------
Net revenue .......................................................... 136,381 177,524
---------------- ---------------
Operating costs and expenses:
Cost of sales ............................................................ 92,946 98,167
Selling, general and administrative ...................................... 40,479 51,859
Restructuring and impairment charges ...................................... 5,054 --
Depreciation and amortization ............................................ 7,382 4,513
---------------- ---------------
Total operating costs and expenses .................................... 145,861. 154,539
---------------- ---------------
Operating income (loss) ..................................................... (9,480) 22,985
Interest expense, net .................................................... 7,584 4,865
---------------- ---------------
Income (loss) before provision (benefit) for income taxes ................... (17,064) 18,120
Provision (benefit) for income taxes ..................................... (6,645) 7,611
---------------- ---------------
Net income (loss) .......................................................... $(10,419) $ 10,509
================ ===============
Net income (loss) per share:
Basic ................................................................... $ (0.71) $ 0.72
================ ===============
Diluted ................................................................. $ (0.71) $ 0.71
================ ===============
Shares used in per share calculations:
Basic ................................................................... 14,767 14,636
================ ===============
Diluted .......................................................... 14,767 14,767
================ ===============
See notes to unaudited condensed consolidated financial statements.
Hungry Minds, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Unaudited
(in thousands)
Nine Months Ended
June 30,
------------------------------------
2001 2000
------------------------------------
Cash Flows from Operating Activities:
Net income (loss) ................................................ $ (10,419) $ 10,509
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ................................... 7,382 4,513
Deferred income taxes............................................ 55 (2,715)
Noncash portion of restructuring and impairment charges.......... 3,259 --
Changes in operating assets and liabilities
(net of effects of dispositions in 2000):
Accounts receivable ........................................... 25,276 (10,578)
Inventory ...................................................... 9,450 1,350
Other current assets .......................................... (6,980) (732)
Royalty advances ............................................... 1,113 (3,033)
Accounts payable .............................................. (4,059) 1,572
Accrued liabilities ........................................... (22,368) (9,379)
Accrued restructuring .......................................... 1,053 --
---------------- ----------------
Net cash provided by (used for) operating activities....... 3,762 (8,493)
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures ............................................. (1,851) (12,024)
Divestitures ..................................................... -- 17,388
Other investments ................................................ 1,024 (611)
---------------- ----------------
Net cash provided by (used for) investing activities....... (827) 4,753
---------------- ----------------
Cash Flows from Financing Activities:
Advances on the credit facility ................................. 13,000 31,500
Payments on the credit facility ................................. (6,000) (31,500)
Proceeds from exercises of stock options ........................ -- 2,040
---------------- ----------------
Net cash provided by financing activities ................. 7,000 2,040
---------------- ----------------
---------------- ----------------
Net change in cash and equivalents ............................... 9,935 (1,700)
Cash and equivalents, beginning of period ......................... 929 2,084
---------------- ----------------
Cash and equivalents, end of period ............................... $ 10,864 $ 384
================ ================
Supplemental Cash Flow Information:
Cash paid for income taxes ....................................... $ 2,636 $ 4,915
================ ================
Cash paid for interest ........................................... $ 8,060 $ 3,176
================ ================
Noncash Financing Activity:
Issuance of Class A common stock under the ESOP plan ............. $ -- $ 566
================ ================
Payroll withheld to fund ESPP purchase ........................... $ 121 $ 309
================ ================
See notes to unaudited condensed consolidated financial statements.
HUNGRY MINDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Basis of Presentation
The accompanying interim consolidated financial statements are
unaudited, but have been prepared in accordance with generally accepted
accounting ("GAAP") for interim consolidated financial statements. Certain
information or footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with GAAP have
been condensed or omitted in accordance with guidance for interim financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
full year. These consolidated financial statements should be read in
conjunction with the most recent audited consolidated financial statements
included in the Company's Form 10-K for the year ended September 30, 2000.
Organization and Description of Business--Hungry Minds, Inc., a Delaware
company, (the "Company") (formerly IDG Books Worldwide, Inc.) was founded
in 1990 as an indirect wholly-owned subsidiary of International Data Group,
Inc. ("IDG").
The Company is a leading global knowledge company featuring a diverse
portfolio of technology, consumer, and general how-to book brands,
computer-based learning tools, internet sites and internet e-services. The
Company publishes and markets under well-known brand names, including For
Dummies(R), Visual(TM), Frommer's(R), Bible, CliffsNotes(TM), Betty
Crocker's(R), Howell Book House(TM), Webster's New World(TM) and Weight
Watchers(R).
Principles of Consolidation-- The consolidated financial statements include
the accounts of Hungry Minds, Inc. and its majority controlled subsidiaries
(collectively referred to as the Company). All significant intercompany
accounts and transactions have been eliminated.
Reclassifications-- Certain amounts in prior periods' financial statements
and related notes have been reclassified to conform to the fiscal year 2001
presentation.
2. Significant Accounting Policies
Fiscal Year--The Company's fiscal year ends on the last Saturday of each
September. Similarly, the Company's fiscal quarters generally consist of
thirteen weeks. For convenience, the thirty-nine week periods ended June
30, 2001 and June 24, 2000 are referred to throughout this document as the
nine months ended June 30, 2001 and 2000, respectively.
Net Income (Loss) Per Share-- Basic net income (loss) per share excludes
dilution and is computed using the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock (stock options) were exercised or converted into common
stock. For the nine months ended June 30, 2001 the Company recorded net
losses and therefore there was no dilution. For the nine months ended June
30, 2000, 131,000 shares, reflecting the dilutive effects of stock options,
were included in computing diluted net income per share.
Comprehensive Income (Loss) -- Comprehensive income (loss) for the nine
months ended June 30, 2001 and 2000 was ($10,444) and $10,495,
respectively.
New Accounting Pronouncements-- On October 1, 2000, the Company adopted
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133, as amended, requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet and
measure these instruments at fair value. In accordance with SFAS 133,
during 2001, the Company recognized a $622 liability and related pretax
expense on a hedge instrument related to the Credit Facility (See note 7).
The instrument caps LIBOR on $25,000 at 6.29% through October of 2001. In
October 2001, the bank had the ability to change the 6.29% cap into a
two-year swap, which, as of June 30, 2001, would result in a liability to
the Company of approximately $622 (see Note 10).
On October 1, 2000, the Company adopted Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as
amended, provides additional guidance on revenue recognition as well as
criteria for when revenue is generally realized and earned. The impact of
the Company's adoption of SAB 101 on its financial position or results of
operations was insignificant.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations ("SFAS 141") and SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 prohibits the use of the
pooling of interest method of accounting for business combinations for
transactions initiated after June 30, 2001. SFAS 142 prohibits the
amortization of goodwill and other intangible assets that have indefinite
lives and instead requires an annual valuation and impairment test be
performed on goodwill and all other intangible assets. The Company will be
required to adopt SFAS 142 on October 1, 2002, but is permitted to adopt it
early, on October 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001, will be subject immediately to the provisions of SFAS 142.
The adoption of SFAS 141 will not impact the Company's financial position
or results of operations. The impact of SFAS 142 on the Company's financial
results is currently being evaluated.
3. Accounts Receivable
Accounts receivable consisted of the following:
June 30,
-----------------------------------------------
2001 2000
----------------------- ---------------------
Accounts receivable ........................ $ 77,129 $ 95,428
Allowance for doubtful accounts ............ (5,817) (5,250)
Allowance for sales returns ................ (25,892) (33,289)
----------------------- ---------------------
Net accounts receivable ................ $ 45,420 $ 56,889
======================= =====================
4. Inventories
Inventories consisted of the following:
June 30,
-----------------------------------------------
2001 2000
----------------------- ---------------------
Books (finished goods) ................... $ 33,243 $ 35,842
Paper .................................... 2,853 4,456
----------------------- ---------------------
Total inventory...................... 36,096 40,298
Reserve for obsolescence ................ (15,827) (11,590)
----------------------- ---------------------
Net inventory ........................ $ 20,269 $ 28,708
======================= =====================
5. Intangible Assets
Intangible assets consisted of the following:
June 30,
-----------------------------------------------
2001 2000
----------------------- ---------------------
Branded trademarks........................ $ 37,837 $ 53,012
Goodwill ................................. 30,699 18,530
Publishing rights ......................... 7,220 5,000
Other intangible assets ................... 1,000 700
------------------------ ---------------------
Total intangible assets .............. 76,756 77,242
Less: accumulated amortization ........... (6,659) (3,528)
----------------------- ---------------------
Net intangible assets ................ $ 70,097 $ 73,714
======================= =====================
6. Accrued Liabilities
Accrued liabilities consisted of the following:
June 30,
-----------------------------------------------
2001 2000
Accrued royalties ........................... $ 12,564 $ 14,845
Accrued promotions .......................... 2,421 11,696
Accrued compensation and benefits ........... 4,005 6,911
Accrued inventory and fulfillment ........... 3,842 5,585
Accrued income taxes ........................ -- 1,886
Other accrued liabilities ................... 5,068 6,383
----------------------- ---------------------
Total accrued liabilities ............. $ 27,900 $ 47,306
======================= =====================
7. Indebtedness
The Company's debt was funded under a $110,000 syndicated credit facility
dated July 1999 (the "Credit Facility"). The Company's borrowings under the
Credit Facility at June 30, 2001 and 2000 totaled $94,500 and $82,000,
respectively.
During the first and second fiscal quarters of 2001, the Company did not
meet certain financial ratio covenants contained in the Credit Facility. As a
result, on May 7, 2001, the Company and its lenders under the Credit Facility
agreed on the terms of a Forbearance and Amendment Agreement (the "Amendment").
Pursuant to the Amendment, the lenders agreed to forbear, subject to the terms
and conditions set forth therein, from exercising their right to call amounts
outstanding under the Credit Facility. The Amendment also effected the following
changes, among others, to the terms of the Credit Facility: (i) the Company is
no longer permitted to borrow additional amounts under the Credit Facility; (ii)
the Credit Facility maturity date was changed to November 2, 2001; (iii) the
interest rate margins charged on indebtedness were fixed at 2.25% for base rate
loans and 3.5% for LIBOR loans, each representing increases of approximately 200
basis points; and (iv) certain financial ratio covenants were modified. As of
June 30, 2001, the Company was in compliance with such modified covenants.
The Amendment also contained certain required milestones including the
continuance of the Company's efforts to complete a sale of the Company by the
maturity date of the loan, November 2, 2001, and to take all steps necessary to
enter into a binding purchase and sale agreement covering the sale of the
Company by July 31, 2001. The Company and its lenders under the Credit Facility
later agreed to extend the deadline to enter into a binding purchase and sale
agreement to August 15, 2001. An agreement covering the sale of the Company was
reached on August 12, 2001 (see Note 10).
As a condition to the effectiveness of the Amendment, the Company was
required to enter into a $9,500 subordinated debt facility (the "Subordinated
Debt Facility") with IDG, its parent corporation, and IDG was required to enter
into an agreement (the "IDG Commitment Agreement") with the lenders under the
Credit Facility in which IDG committed to lend such amount to the Company
pursuant to the Subordinated Debt Facility, and also agreed that it would pay to
the lenders, on behalf of the Company, any scheduled installment of principal,
interest and fees coming due under the Credit Facility on or before November 2,
2001, if not timely paid by the Company. The Subordinated Debt Facility required
the Company to pay interest on amounts borrowed at rates, which exceed (by 150
basis points) the interest rates paid pursuant to the Credit Facility. The
Subordinated Debt Facility also required the Company to pay a fee upon maturity
which is equal to the greater of (i) $285 or (ii) 50% of the aggregate principal
amount borrowed by the Company or paid on its behalf under the Subordinated Debt
Facility or the IDG Commitment Agreement. If the Company did not draw on this
facility, no fee was payable.
8. Segment Information
The Company has two general publishing groups: Consumer and Technology. The
two segments share the same infrastructure and personnel, and are not managed as
separate operating divisions. Management evaluates the performance of these
segments at the revenue and gross profit level; the Company's reporting systems
do not track or allocate expenses or fixed assets by segment.
The Consumer Group includes brands targeted at the general consumer,
including For Dummies, Frommer's, CliffsNotes, Betty Crocker's, Howell Book
House, Webster's New World, Weight Watchers and many others. The Technology
Group consists of brands targeted for computer users, from beginning through
advanced level users, including information technology professionals and
software developers. Such brands also include For Dummies and CliffsNotes as
well as Visual, Bible, Secrets(R)and many others. Unaudited net revenues and
gross profit estimates by segment are as follows:
9. Restructuring and Impairment Costs
During the second fiscal quarter of 2001, the Company recorded
restructuring and impairment charges of $5,054 as a result of its restructuring
plan, which included the closing of three of its offices and a reduction in
workforce of approximately 130 employees from a total workforce of approximately
700 employees. The restructuring is primarily the result of a continued
reduction in sales and the decision to significantly scale back the Company's
internet operations to concentrate on its most heavily trafficked and leading
revenue-generating internet brands, such as Frommers.com. Costs associated with
the restructuring and impairment include an impairment of $2,380 to its
estimated net realizable value of goodwill associated with the Company's August
2000 acquisition of the e-learning company Hungry Minds, Inc. (the "Hungry Minds
Acquisition"), severance pay, relocation costs, rent or lease termination costs
on unused office space and the write-off of certain equipment and leasehold
improvements at closed facilities. The majority of such costs have already been
incurred with approximately $1,050 remaining, which consists primarily of lease
termination costs. As part of the restructuring, the majority of the operations
from the Hungry Minds Acquisition have been shut down.
10. Subsequent Events
In September 2001, all of the outstanding shares of the Company were
acquired by John Wiley & Sons, Inc. for cash at a purchase price of $6.09 net
per share, and all amounts outstanding under the Credit Facility and the hedge
instrument were repaid.
Item 7(b). Pro Forma Financial information
Introduction
The following unaudited pro forma financial information
gives effect to the acquisition in September 2001 by John
Wiley & Sons, Inc. ("Wiley") of all the outstanding shares
of Hungry Minds, Inc. (HM) for a total purchase price of
approximately $184.7 million, consisting of approximately
$90.2 million in cash for the common stock of HM, $92.5
million in cash to enable Hungry Minds to repay its
outstanding funded debt and fees and expenses of
approximately $2 million.
The unaudited pro forma statements have been prepared by
Wiley based on purchase accounting and upon assumptions
deemed proper by Wiley. The pro forma calculations presented
are shown for comparative purposes only, and it should be
noted that Wiley's financial statements will reflect the
effects of the acquisition of HM only since date of
acquisition in September 2001.
For purposes of calculating the pro forma financial
information, a portion of the cost in excess of historical
book values has been allocated to the various assets
acquired and liabilities assumed on the basis of preliminary
estimated fair values. The pro forma adjustments are based
on preliminary estimates and assumptions, and actual
adjustments may differ as a result of changes due to
appraisals and evaluations of HM's assets and liabilities,
including expected useful lives or amortization periods of
the tangible and intangible assets, and tax regulations. At
this time, it is anticipated that any changes will not have
a material effect in the aggregate on the information
presented.
For the unaudited pro forma condensed combined financial
information, certain HM amounts have been reclassified to
conform to the Wiley presentation. It is possible that a
more detailed evaluation may result in different
reclassifications of HM accounts or in changes in its
accounting principles to conform with Wiley.
The unaudited pro forma condensed combined statement of
financial position which follows, combines the unaudited
consolidated statement of financial position of Wiley and
the unaudited statement of financial position of HM as of
July 31, 2001, as if the acquisition had been consummated on
July 31, 2001. The information presented does not purport to
reflect the financial position of Wiley as of July 31, 2001
had Wiley acquired HM on that date, or the financial
position of Wiley at any future date.
The unaudited pro forma condensed combined statement of
income for the year ended April 30, 2001 which follows,
presents the combined results of operations of Wiley and HM
based on the audited results of operations for Wiley and the
unaudited results of operations for HM for such year, as if
the acquisition had been consummated as of May 1, 2000. The
results shown are not necessarily indicative of the actual
results that would have been obtained had the acquisition
been consummated as of May 1, 2000, or of future results of
operations of the combined companies. The results of
operations for HM for the year ended April 30, 2001 included
restructuring and impairment charges of $5.1 million
representing costs associated with a work force reduction,
facility closings and a write-down of certain goodwill to
its estimated realizable value. Offsetting this charge was a
$5.0 million increase in operating income resulting from
certain revised assumptions related to HM's estimate of its
sales returns reserve.
The unaudited pro forma condensed combined statement of
income for the three months ended July 31, 2001 which
follows, presents the unaudited combined results of
operations for Wiley and HM for such period, as if the
acquisition had been consummated as of May 1, 2000. The
results shown are not necessarily indicative of the actual
results that would have been obtained had the acquisition
been consummated as of May 1, 2000, or of future results of
operations of the combined companies.
The statements that follow should be read in conjunction
with the above and the Notes to the Unaudited Pro Forma
Condensed Combined Financial Information, and the historical
financial statements and notes thereto of Wiley and HM.
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
July 31, 2001
UNAUDITED
(Dollars in Thousands)
Pro Forma Pro Forma
Assets Wiley HM Adjustments Combined
--------- -------- ------------- ----------
Current Assets
Cash and cash equivalents $ 6,131 6,065 13,326 (B) 25,522
Accounts receivable 96,056 40,718 (7,307) (A) 129,467
Income tax receivable - 9,329 115 (A) 9,444
Inventories 50,611 20,392 (1,537) (A) 69,466
Deferred income tax benefits 14,170 22,047 (5,245) (A) 30,972
Prepaid expenses 9,217 1,603 (43) (A) 10,777
---------- --------- -------- --------
Total Current Assets 176,185 100,154 (691) 275,648
Product Development Assets 42,848 16,199 1,166 (A) 60,213
Property and Equipment 53,738 11,424 (6,959) (A) 58,203
Intangible Assets 281,171 69,878 56,971 (A) 408,020
Deferred Income Tax Benefits 2,956 1,217 (1,217) (A) 2,956
Other Assets 17,681 70 - 17,751
---------- --------- --------- ---------
Total Assets $ 574,579 198,942 49,270 822,791
========== ========= ========= =========
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt$ 30,000 94,500 (94,500) (B) 30,000
Accounts and royalties payable 61,807 23,619 500 (A) 85,926
Deferred subscription revenues 76,054 - - 76,054
Accrued income taxes 11,426 - - 11,426
Other accrued liabilities 34,095 14,155 12,694 (A) 60,944
--------- --------- --------- --------
Total Current Liabilities 213,382 132,274 (81,306) 264,350
Long-Term Debt 65,000 - 200,000 (B) 265,000
Other Long-Term Liabilities 35,286 - 9,125 (A) 44,411
Deferred Income Taxes 21,154 4,747 (16,628) (A) 9,273
Minority Interests - 60 (60) (A) -
Shareholders' Equity 239,757 61,861 (61,861) (C) 239,757
--------- --------- -------- --------
Total Liabilities & Shareholders' Equity $ 574,579 198,942 49,270 822,791
========= ========= ======== ========
The accompanying Introduction and Notes are an integral part of this condensed
combined statement.
JOHN WILEY & SONS, INC AND HUNGRY MINDS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME - UNAUDITED
FOR THE YEAR ENDED APRIL 30, 2001
(In thousands except per share data)
Pro Forma Pro Forma
Wiley HM Adjustment Combined
-------- --------- ----------- ---------
Revenues $ 613,790 220,574 - 834,364
Costs and Expenses
Cost of sales 199,400 94,490 - 293,890
Operating and administrative expenses 301,470 124,141 (941) (D) 424,670
Amortization of intangibles 17,496 2,473 (2,343) (E) 17,626
--------- --------- -------- --------
Total Costs and Expenses 518,366 221,104 (3,284) 736,186
-------- --------- -------- ---------
Operating Income (Loss) 95,424 (530) 3,284 98,178
Interest Income and Other 2,828 130 - 2,958
Interest Expense (8,025) (9,002) (2,741) (F) (19,768)
------- ------- ------- ---------
Interest Income (Expense) - Net (5,197) (8,872) (2,741) (16,810)
------- ------- ------- ---------
Income(Loss) Before Taxes 90,227 (9,402) 543 81,368
Provision (Benefit) For Income Taxes 31,309 (3,655) (451) (G) 27,203
-------- ------- ------- ---------
Net Income (Loss) $ 58,918 (5,747) 994 54,165
========= ======= ======= =========
Income Per Share
Diluted $ 0.93 0.86
Basic $ 0.97 0.90
Average Shares Used in Computation
Diluted 63,300 63,300
Basic 60,492 60,492
The accompanying Introduction and Notes are an integral part of this condensed
combined statement.
JOHN WILEY & SONS, INC AND HUNGRY MINDS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME - UNAUDITED
FOR THE THREE MONTHS ENDED JULY 31, 2001
(In thousands except per share data)
Pro Forma Pro Forma
Wiley HM Adjustments Combined
-------- -------- ----------- ----------
Revenues $ 161,044 43,144 - 204,188
Costs and Expenses
Cost of sales 49,928 20,360 - 70,288
Operating and administrative expenses 76,233 23,690 (223) (D) 99,700
Amortization of intangibles 4,346 1,146 (1,113) (E) 4,379
------- -------- ------- ---------
Total Costs and Expenses 130,507 45,196 (1,336) 174,367
======= ======== ======= =========
Operating Income (Loss) 30,537 (2,052) 1,336 29,821
Interest Income and Other 439 28 - 467
Interest Expense (1,143) (2,706) (364) (F) (4,213)
-------- -------- ------- --------
Interest Income (Expense) - Net (704) (2,678) (364) (3,746)
-------- -------- -------- ---------
Income(Loss) Before Taxes 29,833 (4,730) 972 26,075
Provision (Benefit) For Income Taxes 10,292 (1,979) 268 (G) 8,581
-------- -------- -------- --------
Net Income (Loss) $ 19,541 (2,751) 704 17,494
======== ======== ======== =========
Income Per Share
Diluted $ 0.31 0.28
Basic $ 0.32 0.29
Average Shares Used in Computation
Diluted 63,075 63,075
Basic 60,589 60,589
The accompanying Introduction and Notes are an integral part of this condensed
combined statement.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
1. Pro Forma Adjustments
The following notes describe the pro forma adjustments to the unaudited pro
forma condensed combined balance sheet reflecting the acquisition of HM as
though it was consummated as of July 31, 2001:
(A) To allocate the purchase price paid, including estimated expenses, of
approximately $184.7 million and to adjust HM's assets and liabilities
based on preliminary estimates of fair values including:
- estimated reserves for returns and uncollectible accounts receivable.
- estimated reserves for inventory obsolescence and estimates of the net
realizable value of other assets.
- estimated accrued liabilities for severance and HM's costs related to
the acquisition.
- estimated accrued liabilities for losses related to excess leased
space.
- recognition of appropriate deferred tax benefits.
(B) To reflect borrowings of $200 million to finance the acquisition,
refinance the existing debt of HM, and to finance the working capital
needs of HM. The transaction was financed by a new five-year term loan
bank facility.
(C) To eliminate the equity accounts of HM.
The following notes describe the pro forma adjustments to the unaudited pro
forma condensed combined statements of income reflecting the acquisition of HM
as though it was consummated as of May 1, 2000.
(D) To reflect revised estimates for depreciation and amortization of fixed
assets.
(E) To reflect the non-amortization of certain intangible assets arising
from the allocation of the purchase price and adjustments to HM's
assets and liabilities based on preliminary estimates of fair values.
The values assigned to branded trademarks, acquired publication rights
and goodwill are being accounted for in accordance with the recently
issued Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
Accordingly, goodwill, and those branded trademarks that are estimated
to have an indefinite useful life, are not being amortized. Acquired
publication rights are being amortized over an estimated useful lives
ranging from 10 to 15 years.
(F) To reflect additional interest expense assumed to have been incurred on
the borrowings to finance the acquisition and to refinance HM debt. For
purposes of the pro forma results of operations, an average effective
interest rate of 5.81% was used, based on the assumption that Wiley
will enter into an interest rate swap agreement to fix the interest
rate on the existing floating rate bank loan.
(G) To record the estimated income tax effects of the pro forma adjustments.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This report contains certain forward-looking statements concerning the
company's operations, performance, and financial condition. Reliance should not
be placed on forward-looking statements, as actual results may differ materially
from those in any forward-looking statements. Any such forward-looking
statements are based upon a number of assumptions and estimates that are
inherently subject to uncertainties and contingencies, many of which are beyond
the control of the company, and are subject to change based on many important
factors. Such factors include, but are not limited to (i) the level of
investment in new technologies and products; (ii) subscriber renewal rates for
the company's journals; (iii) the financial stability and liquidity of journal
subscription agents; (iv) the consolidation of book wholesalers and retail
accounts; (v) the market position and financial stability of key online
retailers; (vi) the seasonal nature of the company's educational business and
the impact of the used book market; (vii) worldwide economic and political
conditions; and (viii) other factors detailed from time to time in the company's
filings with the Securities and Exchange Commission. The company undertakes no
obligation to update or revise any such forward-looking statements to reflect
subsequent events or circumstances.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
John Wiley & Sons, Inc.
/S/ Ellis. E. Cousens
------------------
Ellis E. Cousens
Executive Vice President and
Chief Financial Officer
Date: December 5, 2001