SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT 1934
For the quarterly period ended October 31, 2001 Commission File No. 1-11507
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from to
JOHN WILEY & SONS, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-5593032
- -------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
- ----------------------------------
NOT APPLICABLE
-----------------------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report
Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of each of the Registrant's classes of common
stock as of October 31, 2001 were:
Class A, par value $1.00 - 49,513,015
Class B, par value $1.00 - 11,651,264
This is the first page of a 22 page document
JOHN WILEY & SONS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position - Unaudited
as of October 31, 2001 and 2000, and April 30, 2001........... 3
Condensed Consolidated Statements of Income - Unaudited
for the Three and Six Months ended October 31, 2001 and 2000.. 4
Condensed Consolidated Statements of Cash Flows - Unaudited
for the Six Months ended October 31, 2001 and 2000............ 5
Notes to Unaudited Condensed Consolidated Financial Statements.. 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk......18-19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
"Safe Harbor" Statement under the
Private Securities Litigation Reform Act of 1995....................... 21
SIGNATURES 22
EXHIBITS
None
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
(UNAUDITED)
October 31, April 30,
--------------------------------------
Assets 2001 2000 2001
------------------ ------------------ ------------------
Current Assets
Cash and cash equivalents $ 21,719 10,565 $ 52,947
Accounts receivable 124,432 94,953 62,514
Income tax receivable 12,282 - -
Inventories 73,027 49,952 50,763
Deferred income tax benefits 34,641 13,427 13,331
Prepaid expenses 11,631 7,293 9,980
---------------- ------------------ ------------------
Total Current Assets 277,732 176,190 189,535
Product Development Assets 60,627 40,866 41,191
Property and Equipment 60,563 37,564 52,255
Intangible Assets 404,908 291,692 283,761
Deferred Income Tax Benefits 2,786 2,415 3,380
Other Assets 20,777 20,096 17,880
------------------ ------------------ ------------------
Total Assets $ 827,393 568,823 $ 588,002
================== ================== ====================
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt $ 80,000 78,445 $ 30,000
Accounts and royalties payable 91,186 78,606 42,520
Deferred subscription revenues 35,658 38,535 117,103
Accrued income taxes 13,971 8,568 9,586
Other accrued liabilities 62,265 51,116 47,552
---------------- ------------------ ------------------
Total Current Liabilities 283,080 255,270 246,761
Long-Term Debt 235,000 65,000 65,000
Other Long-Term Liabilities 44,929 33,091 34,901
Deferred Income Taxes 9,457 14,478 21,317
Shareholders' Equity 254,927 200,984 220,023
----------------- ------------------ ------------------
Total Liabilities & Shareholders' Equity $ 827,393 568,823 $ 588,002
================= ================== ====================
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands except per share information)
Three Months Six Months
Ended October 31, Ended October 31,
--------------------------------------- -------------------------------------
2001 2000 2001 2000
-------------------- ---------------- ------------------- ---------------
Revenues $ 176,201 160,559 $ 337,245 314,487
Costs and Expenses
Cost of sales 56,957 50,102 106,885 99,269
Operating and administrative expenses 86,011 77,866 162,244 150,540
Amortization of intangibles 4,320 4,286 8,666 8,430
-------------------- ---------------- ------------------- ---------------
Total Costs and Expenses 147,288 132,254 277,795 258,239
-------------------- ---------------- ------------------- ---------------
Operating Income 28,913 28,305 59,450 56,248
Interest Income and Other (181) 356 258 882
Interest Expense (1,816) (2,391) (2,959) (4,502)
-------------------- ---------------- ------------------- ---------------
Interest Expense - Net (1,997) (2,035) (2,701) (3,620)
-------------------- ---------------- ------------------- ---------------
Income Before Taxes 26,916 26,270 56,749 52,628
Provision For Income Taxes 9,002 9,325 19,294 19,209
-------------------- ---------------- ------------------- ---------------
Net Income $ 17,914 16,945 $ 37,455 33,419
==================== ================ =================== ===============
Income Per Share
Diluted $ 0.28 0.27 $ 0.59 0.53
Basic $ 0.29 0.28 $ 0.62 0.55
Cash Dividends Per Share
Class A Common $ 0.05 0.04 $ 0.09 0.08
Class B Common $ 0.05 0.04 $ 0.09 0.08
Average Shares
Diluted 63,175 63,534 62,977 63,438
Basic 60,862 60,607 60,578 60,481
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
For The Six Months
Ended October 31,
------------------------------------------
2001 2000
-------------------- -------------------
Operating Activities
Net income $ 37,455 33,419
Non cash items
Amortization of intangibles 8,667 8,430
Amortization of composition costs 12,093 11,374
Depreciation of property and equipment 8,337 7,095
Other non-cash items 13,148 11,298
Net change in operating assets and liabilities (97,952) (81,199)
Payment of acquisition related liabilities (11,363) -
-------------------- -------------------
Cash Used for Operating Activities (29,615) (9,583)
-------------------- -------------------
Investing Activities
Additions to product development assets (20,579) (16,376)
Additions to property and equipment (13,014) (11,546)
Proceeds from sale of publishing assets - 2,500
Acquisitions, net of cash acquired (184,742) (7,052)
-------------------- -------------------
Cash Used for Investing Activities (218,335) (32,474)
-------------------- -------------------
Financing Activities
Net borrowings of short-term debt 50,000 48,731
Borrowings of long-term debt 200,000 -
Repayment of long-term debt (30,000) (30,000)
Cash dividends (5,490) (4,858)
Purchase of treasury shares (2,204) (1,664)
Proceeds from issuance of stock on option exercises and other 3,053 1,193
-------------------- -------------------
Cash Provided by Financing Activities 215,359 13,402
-------------------- -------------------
Effect of Exchange Rate Changes on Cash 1,363 (3,079)
-------------------- -------------------
Cash and Cash Equivalents
Decrease for Period (31,228) (31,734)
Balance at Beginning of Period 52,947 42,299
-------------------- -------------------
Balance at End of Period $ 21,719 10,565
==================== ===================
Supplemental Information
Businesses Acquired:
Fair value of assets acquired $ 247,611 $ 7,188
Liabilities assumed (62,869) (136)
-------------------- -------------------
Cash paid for businesses acquired $ 184,742 $ 7,052
-------------------- -------------------
Cash Paid During the Period for:
Interest $ 3,405 $ 5,381
Income taxes $ 9,029 $ 14,468
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the Company's
consolidated financial position as of October 31, 2001 and 2000, and April
30, 2001, and results of operations and cash flows for the periods ended
October 31, 2001 and 2000. The results for the three and six months ended
October 31, 2001 are not necessarily indicative of the results to be
expected for the full year. These statements should be read in conjunction
with the most recent audited financial statements contained in the
Company's Form 10-K for the fiscal year ended April 30, 2001.
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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. Certain prior year amounts have been restated to conform to the current
year's presentation including the adoption in the fourth quarter of the
prior fiscal year of the consensus of the Emerging Issues Task Force Issue
00-10, "Accounting for Shipping and Handling Fees and Costs" which resulted
in the reclassification of shipping and handling fee income from cost of
sales and operating and administrative expenses, where it was previously
recorded, to revenues. This reclassification had the effect of increasing
revenues and the prior year's costs and expenses in the second quarter and
six months ended October 31, 2000 by $3.4 million and $6.5 million,
respectively, with no effect on operating income or net income. Shipping
and handling costs included in operating and administrative expenses
amounted to $3.6 and $3.9 million, in the first six months of fiscal year
2002 and 2001, respectively.
3. At the beginning of the current fiscal year, the Company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and No. 138, which specifies the accounting and
disclosure requirements for such instruments. Under the new standard, all
derivatives are recognized as assets or liabilities and measured at fair
value. Derivatives that are not determined to be effective hedges are
adjusted to fair value with a corresponding effect on earnings. Changes in
the fair value of derivatives that are designated and determined to be
effective as part of a hedge transaction will have no immediate effect on
earnings and depending on the type of hedge, are recorded either as part of
other comprehensive income and will be included in earnings in the periods
in which earnings are affected by the hedged item, or are included in
earnings as an offset to the earnings impact of the hedged item. Any
ineffective portions of hedges are reported in earnings as they occur. The
adoption of these new standards as of May 1, 2001 resulted in a transition
adjustment loss of $.5 million which is included as part of other
comprehensive income.
For a derivative to qualify as a hedge at inception and throughout the
hedged period, the Company formally documents the nature and relationships
between the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. For hedges of
forecasted transactions, the significant characteristics and expected terms
of a forecasted transaction are specifically identified, and it must be
probable that each forecasted transaction will occur. If it is deemed
probable that the forecasted transaction will not occur, the gain or loss
is recognized in earnings currently.
During the period ending October 31, 2001, there was no material
ineffectiveness related to the cash flow hedges, and the estimated amount
of gains or losses that are expected to be reclassified into earnings over
the next year are not material. The Company does not use derivative
financial instruments for trading or speculative purposes. At October 31,
2001, the Company had open foreign exchange forward contracts expiring
through January 2003 as follows:
Currency Purchased U.S. $ Value Average Contract Rate
------------------ ------------ ---------------------
UK(pound) $ 11,844 $ 1.4992
Euro $ 1,331 $ .9181
The U.K. (pound) contract has been designated a cash flow hedge of foreign
currency exposures related to the payment of facility construction
commitments.
4. Comprehensive income was as follows:
Three Months Six Months
Ended October 31, Ended October 31,
--------------------------------- --------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
(thousands)
Net Income $17,914 16,945 $37,455 33,419
Other Comprehensive Income (Loss) -
Transition adjustment for cash flow
hedges as of May 1, 2001 - - (454) -
Current period change in fair value of cash 47 - (97) -
flow hedges
Foreign currency translation adjustments (824) (309) (267) (886)
-------------- ------------- ------------- --------------
Comprehensive Income $17,137 16,636 $36,637 32,533
-------------- ------------- ------------- --------------
A reconciliation of accumulated other comprehensive loss follows:
Three Months Ended October 31, 2001 Six Months Ended October 31, 2001
----------------------------------- ---------------------------------
Foreign Foreign
Currency Cash Currency
Translation Flow Translation Cash Flow
Adjustments Hedges Total Adjustments Hedges Total
----------- ------ ----- ----------- ------ -----
Beginning Balance $ (2,560) (598) (3,158) $ (3,117) - (3,117)
Transition - - - - (454) (454)
adjustment
Change for period (824) 47 (777) (267) (97) (364)
Reclassification to - - - - - -
earnings
-------------- -------------- ------------ --------------- --------------- ------------
Ending Balance $ (3,384) (551) (3,935) $ (3,384) (551) (3,935)
-------------- -------------- ------------ --------------- --------------- ------------
5. In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for by
a single method - the purchase method. In addition, the statement requires
the purchase price to be allocated to identifiable intangible assets in
addition to goodwill if certain criteria are met. The statement also
requires additional disclosures related to the reasons for the business
combination, the allocation of the purchase price, and if significant by
reportable segment, to the assets acquired and liabilities assumed.
SFAS No. 142 eliminates the requirement to amortize goodwill and those
intangible assets that have indefinite useful lives, but requires an annual
test for impairment at the reporting unit level. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives. SFAS No. 142 will be effective for the Company's next fiscal year
beginning May 1, 2002 for goodwill and other intangible assets acquired
prior to July 1, 2001, and is effective immediately for acquisitions
occurring after June 30, 2001. The Company is in the process of evaluating
and reassessing its goodwill and other intangible assets to determine the
impact of any impairment and the related useful lives and the corresponding
amortization expense to be recorded. The Company anticipates that
substantially all amortization of goodwill as a charge to earnings will be
eliminated.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". This standard addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. The standard is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's financial results.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The standard is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 144 is not expected
to have a material impact on the Company's financial results.
6. A reconciliation of the shares used in the computation of income per
share follows:
Three Months Six Months
Ended October 31, Ended October 31,
---------------------------------- -- ---------------------------------
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
(thousands)
Weighted average shares outstanding
61,135 60,956 60,844 60,817
Less: Unearned deferred compensation
shares (273) (349) (266) (336)
--------------- --------------- -------------- ---------------
Shares used for basic income per share
60,862 60,607 60,578 60,481
Dilutive effect of stock options and
other stock awards 2,313 2,927 2,399 2,957
--------------- --------------- -------------- ---------------
Shares used for diluted income per share
63,175 63,534 62,977 63,438
--------------- --------------- -------------- ---------------
7. Inventories were as follows:
October 31,
-------------------------------- April 30,
2001 2000 2001
-------------- -------------- -------------
(thousands)
Finished goods $67,797 46,318 $46,353
Work-in-process 4,479 2,183 4,481
Paper, cloth and other 4,042 4,990 3,020
-------------- -------------- -------------
76,318 53,491 53,854
LIFO reserve (3,291) (3,539) (3,091)
-------------- -------------- -------------
Total inventories $73,027 49,952 $50,763
-------------- -------------- -------------
8. The Company is a global publisher providing must-have content and services
to customers worldwide. Core businesses include scientific, technical, and
medical journals, encyclopedias, books and online products and services;
professional and consumer books and subscription services; and textbooks
and educational materials for undergraduate and graduate students and
lifelong learners. The Company has publishing, marketing, and distribution
centers in the United States, Canada, Europe, Asia, and Australia. The
Company's reportable segments are based on the management reporting
structure used to evaluate performance. Segment information is as follows:
Three Months Ended October 31,
----------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Customers Sales Total Customers Sales Total
----------- -------- -------- --------- -------- -------
Revenues
Domestic Segments:
Scientific, Technical, and Medical $40,215 $1,565 $41,780 $37,823 $1,777 $39,600
Professional/Trade 53,782 3,844 57,626 39,254 4,516 43,770
Higher Education 27,835 7,103 34,938 30,910 6,911 37,821
European Segment 38,521 2,695 41,216 37,146 2,568 39,714
Other Segments 15,848 186 16,034 15,426 336 15,762
Eliminations - (15,393) (15,393) - (16,108) (16,108)
-------------- ----------- ------------ -------------- ----------- ------------
Total Revenues $176,201 - $176,201 $160,559 - $160,559
-------------- ----------- ------------ -------------- ----------- ------------
Direct Contribution to Profit
Domestic Segments:
Scientific, Technical, and Medical $18,696 $18,339
Professional/Trade 15,018 10,907
Higher Education 10,997 11,755
European Segment 13,146 13,093
Other Segments 2,952 3,152
------------ ------------
Total Direct Contribution to Profit 60,809 57,246
Shared Services and Administrative Costs (31,896) (28,941)
------------ ------------
Operating Income 28,913 28,305
Interest Expense - Net (1,997) (2,035)
------------ ------------
Income Before Taxes $26,916 $26,270
------------ ------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation, including the restatement of revenues to include shipping
and handling fee income in accordance with the new accounting standard as
outlined in note 2. Previously, such amounts were classified as offsets to cost
of sales and operating and administrative expenses.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended October 31,
-----------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Revenues Customers Sales Total Customers Sales Total
------------- ------------ ------------ ------------- ------------ ------------
Domestic Segments:
Scientific, Technical, and Medical $78,769 3,127 81,896 $73,595 3,464 77,059
Professional/Trade 89,551 7,431 96,982 72,735 7,923 80,658
Higher Education 64,229 13,043 77,272 65,854 12,734 78,588
European Segment 72,910 6,061 78,971 70,939 5,208 76,147
Other Segments 31,786 405 32,191 31,364 655 32,019
Eliminations -- (30,067) (30,067) -- (29,984) (29,984)
------------- ------------ ------------ ------------- ------------ ------------
Total Revenues $337,245 -- 337,245 $314,487 -- $314,487
------------- ------------ ------------ ------------- ------------ ------------
Direct Contribution to Profit
Domestic Segments:
Scientific, Technical, and Medical $36,635 $34,645
Professional/Trade 22,282 17,267
Higher Education 28,114 28,363
European Segment 26,496 25,251
Other Segments 6,372 6,959
------------ ------------
Total Direct Contribution to Profit 119,899 112,485
Shared Services and Administrative Costs (60,449) (56,237)
------------ ------------
Operating Income 59,450 56,248
Interest Expense - Net (2,701) (3,620)
------------ ------------
Income Before Taxes $56,749 $52,628
------------ ------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation, including the restatement of revenues to include shipping
and handling fee income in accordance with the new accounting standard as
outlined in note 2. Previously, such amounts were classified as offsets to cost
of sales and operating and administrative expenses.
9. In September 2001, the Company acquired 100% of the outstanding shares of
Hungry Minds, Inc. (Hungry Minds) for a total purchase price of
approximately $184.7 million, consisting of approximately $90.2 million in
cash for the common stock of Hungry Minds, $92.5 million in cash to enable
Hungry Minds to repay its outstanding debt, and fees and expenses of
approximately $2 million.
Hungry Minds is a leading global knowledge company with an outstanding
collection of respected brands in such areas as technology, business,
consumer and how-to brands, computer-based learning tools, Web-based
products and Internet e-services. Best-selling brands include the For
Dummies series, the Unofficial Guide, the technological Bible and Visual
series, Frommer's travel guides, CliffsNotes, Webster's New World
Dictionary, Betty Crocker, Weight Watchers, and other market-leading
brands. Hungry Minds has 2,500 active titles in 39 languages, including 600
frontlist titles and revisions per year. The acquisition of Hungry Minds'
world-renowned brands is an excellent opportunity to accelerate revenue and
earnings growth by enhancing the Company's already strong presence in the
professional/trade market and exploiting its strong global position. The
Company will obtain synergies by leveraging its sales forces and worldwide
distribution channels, and eliminating redundant infrastructure costs.
The cost of the acquisition has been allocated on the basis of preliminary
estimates of the fair values of the assets acquired and the liabilities
assumed. Final asset and liability fair values may differ based on
finalization of appraisals, tax bases, and other considerations; however,
it is anticipated that any changes will not have a material effect, in the
aggregate, on the consolidated financial position of the Company. The
excess of cost over the preliminary estimate of the fair value of the net
tangible assets acquired relates primarily to goodwill and branded
trademarks with indefinite lives that are not being amortized, and to
acquired publication rights that are being amortized over lives ranging
from ten to fifteen years. The accompanying condensed financial statements
include the results of operations of Hungry Minds since the date of
acquisition. The following unaudited pro forma financial information
presents the results of operations of the Company as if the acquisition had
been consummated as of May 1, 2000. The unaudited pro forma financial
information is not necessarily indicative of the actual results that would
have been achieved had the acquisition actually been consummated as of May
1, 2000, nor is it necessarily indicative of future results of operations.
Three Months Six Months
Ended October 31, Ended October 31,
---------------------------------- -- ---------------------------------
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
(thousands except per share data)
Revenues $203,635 233,198 $407,823 435,419
Net Income $14,343 23,938 $31,852 34,910
Income Per Share $.23 .38 $.51 .55
The pro forma financial information for the three and six month periods
ended October 31, 2000 included a non-recurring gain related to Hungry
Minds revision of certain assumptions in the calculation of its sales
returns reserve resulting in increased revenues, net income and income
per share of approximately $5 million, $3 million, and $.05 per share,
respectively.
10. To finance the Hungry Minds acquisition, as well as to provide funds for
general working capital and other needs, the Company obtained an additional
$300 million bank credit facility with 13 banks, consisting of a $200
million five-year term loan facility to be repaid in September 2006, and a
$100 million five-year revolving credit facility expiring in September
2006. The Company has the option of borrowing at the following floating
interest rates: (i) at a rate based on the London Interbank Offered Rate
(LIBOR) plus an applicable margin ranging from .625% to 1.375% depending on
the coverage ratio of debt to EBITDA; or (ii) at the higher of (a) the
Federal Funds Rate plus .5% or (b) UBS's prime rate, plus an applicable
margin ranging from 0% to .375% depending on the coverage ratio of debt to
EBITDA. In addition, the Company pays a commitment fee ranging from .125%
to .225% on the unused portion of the facility depending on the coverage
ratio of debt to EBITDA. In the event of a change of control, as defined,
the banks have the option to terminate the agreement and require repayment
of any amounts outstanding. The credit facility contains certain
restrictive covenants similar to the Company's existing credit agreements
related to minimum net worth, funded debt levels, and interest coverage
ratio, and restricted payments, including a cumulative limitation for
dividends paid and share repurchases.
11. Subsequent to the end of the second quarter, in November 2001, the Company
acquired 47 higher education titles from International Thomson for
approximately $16 million in cash. The titles are in such publishing areas
as business, earth and biological sciences, foreign languages, mathematics,
nutrition and psychology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
During this seasonal period of cash usage, operating activities used
$29.6 million of cash, or $20 million more than the prior year's
comparable period. The increase was primarily due the payment of
Hungry Minds' acquisition related liabilities and lower levels of
accounts payable and accrued liabilities. The use of cash during this
period is consistent with the seasonality of the journal subscription
business and the higher education segment's receipts cycle that
occurs, for the most part, in the second half of the fiscal year.
Investing activities used $218.3 million during the current
year-to-date, or $185.9 million more than the comparable prior year
period. Investing activities included the acquisition of Hungry Minds
and certain other publishing assets amounting to $184.7 million.
Current year financing activities primarily reflect the purchase of
treasury shares, dividend payments, the $30 million scheduled
repayment of existing long-term debt, short-term borrowings of $50
million and new long-term borrowings of $200 million to finance the
acquisition of Hungry Minds.
Although the statement of financial condition indicates a negative
working capital of $5.3 million, current liabilities include $35.7
million of deferred income related to journal subscriptions for which
the cash has been received and which will be recognized in income as
the journals are delivered to customers. In addition, the Company
believes its cash balances together with existing credit facilities
are sufficient to meet its obligations.
RESULTS OF OPERATIONS
SECOND QUARTER ENDED OCTOBER 31, 2001
Revenues for the second quarter advanced 10% to $176.2 million
compared with $160.6 million in the prior year period. Operating
income for the current quarter increased 2% to $28.9 million compared
with $28.3 million in the prior year. Net income advanced 6% to $17.9
million, and income per diluted share increased 4% to $.28 compared
with $.27 in the prior year.
The second quarter revenue and operating income increase was primarily
attributable to the inclusion of Hungry Minds results, which was
acquired on September 21, 2001. Excluding Hungry Minds, revenues for
the quarter were essentially on par with the prior year and operating
income was approximately $1 million below the prior year period.
Operating margins decreased to 16.4% from 17.6% in the prior year,
also as a result of Hungry Minds. Although the Company's businesses
are somewhat resistant to changing economic conditions, the tragic
events of September 11th have affected results. Customer traffic at
brick and mortar bookstores, in the United States and abroad, was down
significantly in the weeks following the terrorist attacks. Although
the Company will not fully recoup the lost sales following the
tragedy, it is believed the aftermath effects of September 11th on the
Company's business will be relatively short-term in duration. The
current market for computer books has been soft, however there is
strong customer interest in the recent release of Windows XP for
Dummies. In addition, the Company's tax publishing program is
capitalizing on changes in the tax laws. Wiley InterScience, the
Company's online service continues to evolve as a profitable global
enterprise.
The integration of Hungry Minds has been proceeding ahead of schedule.
The Company is already benefiting from the best practices approach
which is being followed throughout the acquisition process. The
Company is forecasting revenues for Hungry Minds in the range of
$75-80 million through the end of the fiscal year. The Company expects
the acquisition to be neutral to earnings this fiscal year and
accretive thereafter.
Cost of sales as a percentage of revenues increased to 32.3% compared
with 31.2% in the prior year, primarily due to the inclusion of Hungry
Minds which has lower gross margins than Wiley's other businesses.
Operating expenses as a percentage of revenues were 48.8% in the
current quarter, compared with 48.5% in the prior year's second
quarter. The increase was primarily due to higher technology-related
costs. Operating expenses increased 10.5% over the prior year,
primarily due to the inclusion of Hungry Minds. Excluding Hungry Minds
and foreign currency translation effects, operating expenses increased
approximately 1% over the prior year period. The operating margin was
16.4% in the current quarter, compared with 17.6% in the prior year's
second quarter.
The effective tax rate was 33.4% in the current quarter, compared with
35.5% in the prior year. The decrease was due to lower state income
taxes resulting from settlement of open tax issues at the end of the
prior fiscal year, as well as lower foreign taxes on settlement of
open tax issues during the current year.
SEGMENT RESULTS
Scientific, Technical And Medical (STM)
- ---------------------------------------
Domestic STM revenues of $41.8 million increased 6% over the prior year, led by
increases in the journal programs, which had stronger renewal rates compared
with the prior year, as well as the addition of three society journals. The
direct contribution to profit increased 2% to $18.7 million. The direct
contribution margin declined to 44.7% in the current quarter compared with 46.3%
in the prior year, as a result of higher royalties related to the new society
journals, as well as lower gross margins on the IEEE book publishing program.
During the quarter, Wiley InterScience launched OnlineBooks, a fully searchable
and browseable database that integrates content from the Company's STM books
with that of its online journals and reference works. This initiative represents
the next step in the evolution of digital information resources provided by the
Company globally.
The Company announced an agreement with Celera Genomics to develop links between
cited article references, abstracts, and full-text articles available on the
Wiley InterScience online service and the Celera Discovery System (CDS). This
agreement will provide subscribers of both services with more direct access to a
broad range of bioinformatics data, full-text articles and abstracts. CDS is a
web-based platform that integrates Celera's exclusive genomic and biological
databases (e.g., the Human Genome Database and the Human Gene index), essential
public and third party sources, and analysis and visualization tools into one
system to advance the discovery process for researchers worldwide. The Company
also signed an agreement to link EBSCO Online to Wiley InterScience. These
agreements are examples of the Company's strategy to open new pathways for
researchers to explore and access the Company's must-have content.
Professional/Trade
- ------------------
Domestic Professional/Trade segment revenues of $57.6 million for the second
quarter advanced 32% over the comparable prior year period, and the direct
contribution to profit advanced 38% to $15 million. The increase was
attributable to the inclusion of Hungry Minds. Excluding Hungry Minds, revenues
and direct contribution to profit declined by 2% and 5%, respectively. The
direct contribution margin increased from 24.9% in the prior year to 26.1%.
The Professional/Trade business was adversely impacted by the slowdown in retail
and corporate sales in the aftermath of the September 11th terrorist attacks.
Business and travel books have been most affected. The culinary, architecture,
psychology and general interest areas continue to perform well. The most
significant event of the second quarter was the completion of the Company's
acquisition of Hungry Minds on September 21st. Together, the Company and Hungry
Minds have a strong position in targeted markets, with a formidable collection
of respected brands and a far-reaching global presence.
The Company entered into an agreement with eBrary to provide online access to
100 of its Professional/Trade titles through multiple online channels, including
libraries and other organizations. The license is based on an innovative sales
model in which online access is provided free of charge, but a per-page fee is
incurred for printing. During the quarter, the Company also selected Innodata as
its new e-Book conversion partner, at a lower cost and with faster turnaround
than previous vendors.
Higher Education
- ----------------
Domestic Higher Education segment revenues of $34.9 million decreased 8% for the
quarter from the prior year and the direct contribution to profit decreased 6%
to $11 million. Two factors contributed to these results. First, college
bookstores are promoting used textbooks more aggressively. This is reflected in
Higher Education's performance, as frontlist sales are tracking to expectations,
while backlist titles have experienced greater than anticipated attrition. The
Company is hopeful that new, value-added materials and services that complement
the educational packages will appeal to students and help to combat the growth
in used book sales. Second, although overall demographic trends in higher
education are favorable, enrollments in engineering, a key Wiley area, are
currently down. It is noteworthy that the Company's programs in psychology and
geography, two of its "soft side" disciplines, are performing well. The Company
should benefit from the overall increase in enrollments as students move through
their junior and senior years when they will take advanced courses in their
major fields of study. The direct contribution margin improved to 31.5% compared
with 31.1% in the prior year, as a result of expense contingency plans.
In October, Wiley announced a partnership with Columbia Earthscape, a nonprofit,
academic web-based service provided by Columbia University Press, to create the
most comprehensive multimedia resources available for Earth Science education at
the college and university level. As a result of this collaboration, Wiley and
Columbia Earthscape will enhance their product costs with each other's content
and resources and will coordinate editorial, production, marketing and sales
efforts. Wiley is a leading publisher of reports and data from organizations
such as ABC NewsOne, the American Museum of Natural History, the Lamont-Doherty
Earth Observatory, MIT, UNESCO and a wealth of other online resources.
Early in the third quarter, the Company acquired 47 higher education titles in
business, earth and biological sciences, foreign languages, mathematics,
nutrition and psychology from International Thomson. The acquisition will
strengthen the Company's position in key markets.
Europe
- ------
European revenues of $41.2 million advanced 4% over the prior year's second
quarter. Growth was driven by STM journals program. The direct contribution to
profit of $13.0 million was essentially on par with the prior year. The direct
contribution margin was 31.9% in the current period compared with 33% in the
prior year, as a result of flat book sales for the quarter.
During the quarter, Wiley Europe was selected as publisher of the British
Journal of Surgery, one of the world's most prestigious and widely read general
surgery publications. Factors that resulted in the Company's successful bid
included the functionality of Wiley InterScience, the strength of its online
communities and web portals, and Wiley's global market reach.
InPharm, Wiley Europe's online information service for the pharmaceutical
industry, signed a sales representation agreement during the quarter with
drugdev123.com, a specialist website serving the clinical research market.
Wiley-VCH also launched pro-physics.de, a community-of-interest site. In
November, Wiley Europe introduced Express Exec, an extensive print and digital
service that provides users with the latest business thinking and best practices
in areas such as marketing, strategy, innovation, leadership and human
resources.
Other Segments
- --------------
The other segment revenues advanced 2% for the quarter primarily as a result of
a strong performance in Australia and the inclusion of Hungry Minds'
international sales, offset to a large degree by market softness throughout
Asia.
Wiley Australia has once again won the coveted Tertiary Publisher of the Year
award for outstanding service to the higher education market. This is the fourth
time Wiley Australia has achieved this honor, which is awarded by booksellers.
RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 31, 2001
Revenues for the first six months of $337.2 million advanced 7% compared with
$314.5 million in the prior year period. Operating income increased 6% to $59.5
million, compared with $56.2 million in the prior year. Net income advanced 12%
to $37.5 million, and income per diluted share increased 11% to $.59 compared
with $.53 in the prior year. Excluding the results of Hungry Minds and foreign
currency translation effects, revenues and operating income advanced 3%, and 2%,
respectively, for the first six months of the fiscal year.
Cost of sales as a percentage of revenues was 31.7% compared with 31.6% in the
prior year. Operating expenses as a percentage of revenues were 48.1%, compared
with 47.9% in the prior year's first six months. Operating expenses increased 8%
over the prior year. Excluding Hungry Minds and foreign currency translation
effects, operating expenses increased 4% from the prior year period. The
operating margin was 17.6% compared with 17.9% in the prior year period.
Interest expense net of interest income declined by $.9 million as a result of
lower interest rates and lower average debt outstanding.
The effective tax rate was 34% in the current period compared with 36.5% in the
prior year. The decrease was due to lower state income taxes resulting from
settlement of open tax issues at the end of the prior fiscal year, as well as
lower foreign taxes on settlement of open tax issues during the current year.
SEGMENT RESULTS
Scientific, Technical and Medical (STM)
- ---------------------------------------
Domestic STM revenues of $81.9 million increased 6% over the prior year led by
stronger renewal rates in the journal programs and the addition of three new
society journals. The direct contribution to profit increased 6% to $36.6
million. The direct contribution margin was 44.7% compared with 45% in the prior
year.
Professional/Trade
- ------------------
Domestic Professional/Trade revenues of $97 million for the first six months
advanced 20% over the comparable prior year period and the direct contribution
to profit advanced 29% to $22.3 million. Excluding the results of the Hungry
Minds acquisition, revenues and direct contribution to profit advanced 2% for
the first six months, as sales were adversely impacted by the slowdown in retail
and corporate sales in the aftermath of the September 11th terrorist attacks.
The direct contribution margin increased from 21.4% in the prior year to 23%.
Higher Education
- ----------------
Domestic Higher Education revenues of $77.3 million declined 2% from the prior
year. The direct contribution to profit decreased 1% to $28.1 million. Higher
Education results were adversely affected by higher used textbook sales and
lower enrollments in engineering. The direct contribution margin improved to
36.4% compared with 36.1% in the prior year, due to expense contingency
measures.
Europe
- ------
European revenues of $79 million for the first six months advanced 4% and the
direct contribution to profit of $26.5 million increased 5% over the prior year.
The direct contribution margin was 33.6% compared with 33.2% in the prior year.
The improvement was primarily attributable to higher journal revenues.
Other Segments
- --------------
The other segment revenues advanced 1% for the first six months as higher
Australian and Canadian revenues and the inclusion of Hungry Minds'
international operations were offset to a large extent by recessionary
environments in some key Asian markets.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for by a single
method - the purchase method. In addition, the statement requires the purchase
price to be allocated to identifiable intangible assets in addition to the
goodwill if certain criteria are met. The statement also requires additional
disclosures related to the reasons for the business combination, the allocation
of the purchase price, and if significant by reportable segment, to the assets
acquired and liabilities assumed.
SFAS No. 142 eliminates the requirement to amortize goodwill and those
intangible assets that have indefinite useful lives, but requires an annual test
for impairment at the reporting unit level. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives. SFAS No. 142
will be effective for the Company's next fiscal year beginning May 1, 2002 for
goodwill and other intangible assets acquired prior to July 1, 2001, and is
effective immediately for acquisitions occurring after June 30, 2001. The
Company is in the process of evaluating and reassessing its goodwill and other
intangible assets to determine the impact of any impairment and the related
useful lives and the corresponding amortization expense to be recorded. The
Company anticipates that substantially all amortization of goodwill as a charge
to earnings will be eliminated.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". This standard addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard is effective for fiscal years beginning after June 15, 2002.
The adoption of SFAS No. 143 is not expected to have a material impact on the
Company's financial results.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The standard is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 144 is not expected to have a material
impact on the Company's financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to market risk primarily related to interest rates,
foreign exchange and credit risk. It is the Company's policy to monitor these
exposures and to use derivative financial instruments and/or insurance contracts
from time to time to reduce fluctuations in earning and cash flows when it is
deemed appropriate to do so. The Company does not use derivative financial
investments for trading or speculative purposes.
Interest Rates
The Company had $315 million of variable rate loans outstanding at October 31,
2001, which approximated fair value. The Company did not use any derivative
financial investments to manage this exposure. The weighted average interest
rate as of October 31, 2001 was approximately 3.2%. A hypothetical 10% change in
interest rates for the variable rate debt would affect annual net income and
cash flow by approximately $.5 million.
Foreign Exchange Rates
The Company is exposed to foreign currency exchange movements primarily in
European, Asian, Canadian and Australian currencies. Consequently, the Company
and its subsidiaries, from time to time, enter into foreign exchange forward
contracts as a hedge against foreign currency asset, liability, commitment, and
anticipated transaction exposures, including intercompany purchases. The Company
does not use derivative financial instruments for trading or speculative
purposes. For a more detailed description, reference is made to note 3 of the
condensed financial statements.
Credit Risk
The Company's business is not dependent upon a single customer, however, the
book publishing business has witnessed a significant concentration in national,
regional and online bookstore chains in recent years. Although no one of such
customers accounted for more than 6% of total annual consolidated revenues in
fiscal year 2001, to mitigate its credit risk exposure the Company obtains
credit insurance where available. In the journal publishing business,
subscriptions are primarily sourced through independent subscription agents who
facilitate the journal-ordering process by consolidating the subscription
orders/billings of each subscriber with various publishers. Monies are collected
in advance from subscribers by the subscription agents and are remitted to the
journal publishers, including the Company, generally prior to the commencement
of the subscriptions. Future calendar-year subscription receipts from these
agents are highly dependent on their financial position and liquidity.
Subscription agents accounted for approximately 24% of total annual consolidated
revenues and no one agent accounted for more than 8% of total annual
consolidated revenues in fiscal year 2001. Insurance for these accounts is not
commercially feasible and/or available.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of shareholders of
the Company on September 20, 2001.
Election of Directors
- ---------------------
Ten directors as indicated in the Proxy Statement were elected to the Board,
three of whom were elected by the holders of Class A Common Stock, and seven by
the holders of Class B Common Stock.
Proposal to Amend and Restate the 1990 Director Stock Plan
- ----------------------------------------------------------
The proposal was adopted as follows:
Votes For 13,346,678
Votes Against 1,897,292
Abstentions 30,078
Ratification of Appointment of Arthur Andersen LLP, as Independent
- ------------------------------------------------------------------
Public Accountants for the Year
- ---------------------------------
Ending April 30, 2002
- ---------------------
The appointment was ratified as follows:
Votes For 15,230,181
Votes Against 11,243
Abstentions 2,625
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated August 12, 2001 under Item 5.
Other Events relating to the acquisition of Hungry Minds, Inc.
The Company filed a Form 8-K dated September 21, 2001 under Item 2.
Acquisition or Disposition of Assets relating to the acquisition of
Hungry Minds, Inc.
"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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHN WILEY & SONS, INC.
Registrant
By /s/William J. Pesce
--------------
William J. Pesce
President and
Chief Executive Officer
By /s/Ellis E. Cousens
--------------
Ellis E. Cousens
Executive Vice President and
Chief Financial Officer
Dated: December 13, 2001