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, 2004 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) 111 RIVER STREET, HOBOKEN, NJ 07030 - ------------------------------- ------------------------------------ (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (201) 748-6000 ------------------ 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, 2004 were: Class A, par value $1.00 - 49,905,493 Class B, par value $1.00 - 11,213,164 This is the first page of a 27-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, 2004 and 2003, and April 30, 2004........................................3 Condensed Consolidated Statements of Income - Unaudited for the Three and Six Months ended October 31, 2004 and 2003...............................4 Condensed Consolidated Statements of Cash Flows - Unaudited for the Six Months ended October 31, 2004 and 2003.........................................5 Notes to Unaudited Condensed Consolidated Financial Statements.............................6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................13-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................20 Item 4. Controls and Procedures......................................................................21 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................................................22 SIGNATURES AND CERTIFICATIONS........................................................................23-27 EXHIBITS 99.1 - 18 U.S.C. Section 1350 Certificate by the President and Chief Executive Officer 99.2 - 18 U.S.C. Section 1350 Certificate by the Chief Financial and Operations Officer JOHN WILEY & SONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands) (UNAUDITED) October 31, April 30, ------------------------------------ ---------------- 2004 2003 2004 ---------------- --------------- ---------------- Assets Current Assets Cash and cash equivalents $ 18,359 10,756 $ 82,027 Accounts receivable 142,066 147,124 127,224 Inventories 77,672 84,049 83,789 Deferred income tax benefits 18,041 27,482 18,113 Prepaid and other 11,638 9,047 12,853 ---------------- --------------- ---------------- Total Current Assets 267,776 278,458 324,006 Product Development Assets 59,231 61,353 60,755 Property, Equipment and Technology 114,758 116,815 117,305 Intangible Assets 280,736 279,697 276,440 Goodwill 195,354 194,114 194,893 Deferred Income Tax Benefits 17,503 28,046 18,976 Other Assets 21,917 22,310 22,207 ---------------- --------------- ---------------- Total Assets $ 957,275 980,793 $ 1,014,582 ================ =============== ================ Liabilities & Shareholders' Equity Current Liabilities Current portion of long-term debt and notes payable $ - 60,000 $ - Accounts and royalties payable 71,056 91,080 68,338 Deferred subscription revenue 50,103 42,665 127,224 Accrued income taxes 30,352 28,962 19,338 Accrued pension liability 5,348 6,733 4,559 Deferred income taxes 5,784 - 5,721 Other accrued liabilities 63,994 54,381 81,185 ---------------- --------------- ---------------- Total Current Liabilities 226,637 283,821 306,365 Long-Term Debt 200,000 200,000 200,000 Accrued Pension Liability 52,171 56,378 48,505 Other Long-Term Liabilities 31,250 28,997 31,757 Deferred Income Taxes 12,543 12,185 12,891 Shareholders' Equity Class A & Class B common stock 83,190 83,190 83,190 Additional paid-in-capital 52,399 41,652 45,887 Retained earnings 478,773 408,332 441,533 Accumulated other comprehensive income 7,661 1,015 2,197 Unearned deferred compensation (3,199) (1,997) (2,134) Treasury stock (184,150) (132,780) (155,609) ---------------- --------------- ---------------- Total Shareholders' Equity 434,674 399,412 415,064 ---------------- --------------- ---------------- Total Liabilities & Shareholders' Equity $ 957,275 980,793 $ 1,014,582 ================ =============== ================ 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, ------------------------------------ --------------------------------- 2004 2003 2004 2003 ---------------- ---------------- ---------------- -------------- Revenue $ 247,050 228,880 $ 473,989 448,540 Costs and Expenses Cost of sales 85,247 78,182 160,476 150,291 Operating and administrative expenses 119,168 111,296 237,602 223,339 Amortization of intangibles 2,511 2,535 5,010 4,865 ---------------- ---------------- ---------------- -------------- Total Costs and Expenses 206,926 192,013 403,088 378,495 ---------------- ---------------- ---------------- -------------- Operating Income 40,124 36,867 70,901 70,045 Interest Income and Other (net) (56) 720 101 815 Interest Expense (1,504) (1,332) (2,848) (2,687) ---------------- ---------------- ----------------- -------------- Net Interest Expense and Other (1,560) (612) (2,747) (1,872) ---------------- ---------------- ----------------- -------------- Income Before Taxes 38,564 36,255 68,154 68,173 Provision For Income Taxes 12,105 10,607 21,811 20,725 ---------------- ---------------- ----------------- -------------- Net Income $ 26,459 25,648 $ 46,343 47,448 ================ ================ ================= ============== Income Per Share Diluted $ 0.42 0.41 $ 0.74 0.75 Basic $ 0.43 0.41 $ 0.76 0.77 Cash Dividends Per Share Class A Common $ 0.08 0.07 $ 0.15 0.13 Class B Common $ 0.08 0.07 $ 0.15 0.13 Average Shares Diluted 62,548 63,176 62,731 63,091 Basic 61,054 61,891 61,240 61,788 The accompanying Notes are an integral part of the condensed consolidated financial statements. JOHN WILEY & SONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW - UNAUDITED (In thousands) For The Six Months Ended October 31, ----------------------------------- 2004 2003 ------------------ ---------------- Operating Activities - -------------------- Net income $ 46,343 47,448 Adjustments to reconcile net income to cash provided by (used for) operating activities Amortization of intangibles 5,010 4,865 Amortization of composition costs 16,569 15,254 Depreciation of property and equipment 15,123 13,720 Non-cash charges & other 28,850 25,030 Change in deferred subscription revenue (77,965) (77,444) Net change in operating assets and liabilities (14,151) (29,404) ------------------ ---------------- Cash Provided by (Used for) Operating Activities 19,779 (531) ------------------ ---------------- Investing Activities - -------------------- Additions to product development assets (28,255) (26,305) Additions to property and equipment (10,984) (13,140) Acquisition of publishing assets (7,662) (1,904) ------------------ ---------------- Cash Used for Investing Activities (46,901) (41,349) ------------------ ---------------- Financing Activities - -------------------- Borrowings of short-term debt - 60,000 Repayment of long-term debt - (35,000) Purchase of treasury stock (30,657) (2,486) Cash dividends (9,103) (8,079) Proceeds from exercise of stock options 2,853 3,287 ------------------ ---------------- Cash (Used for) Provided By Financing Activities (36,907) 17,722 ------------------ ---------------- Effects of Exchange Rate Changes on Cash 361 1,673 ------------------ ---------------- Cash and Cash Equivalents Decrease for Period (63,668) (22,485) Balance at Beginning of Period 82,027 33,241 ------------------ ---------------- Balance at End of Period $ 18,359 10,756 ================== ================ Supplemental Information Businesses/Rights Acquired: Fair value of assets acquired $ 7,662 1,904 Liabilities assumed - - ------------------ ---------------- Cash Paid for Businesses Acquired $ 7,662 1,904 ================== ================ Cash Paid During the Period for: Interest $ 2,367 2,462 Income taxes - Net $ 6,351 3,485 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 consolidated financial position of John Wiley & Sons, Inc., and Subsidiaries (the "Company") as of October 31, 2004 and 2003, the results of operations for the three month and six month periods ended October 31, 2004 and 2003, and cash flows for the six month periods ended October 31, 2004 and 2003. The results for the three months and six months ended October 31, 2004 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, 2004. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current year's presentation. Stock-Based Compensation: Stock options and restricted stock grants are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure." Accordingly, the Company recognizes no compensation expense for fixed stock option grants since the exercise price is equal to the fair value of the shares at date of grant. For restricted stock grants, compensation cost is generally recognized ratably over the vesting period based on the fair value of shares. Pro forma information under SFAS No. 123 and SFAS No. 148 --------------------------------------------------------- The per share value of options granted in connection with the Company's stock option plans during the following periods are estimated using the Black Scholes option pricing model with the following weighted average assumptions: For the Three and Six Months Ending October 31, ------------------------------- 2004 2003 ------------- ------------- Expected life of options (years) 8.1 8.1 Risk-free interest rate 4.5% 2.9% Volatility 23.8% 30.7% Dividend yield 0.9% 1.0% Fair value $11.00 $8.97 For purposes of the following pro forma disclosure, the fair value of the awards was estimated at the date of grant using the Black Scholes option-pricing model and amortized to expense over the options vesting periods. For the Three Months For the Six Months Ending October 31, Ending October 31, ----------------------------- ----------------------------- (in thousands except per share amount) 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income as reported $26,459 $25,648 $46,343 $47,448 Stock-based compensation, net of tax, included in the determination of net income as reported - Restricted stock plans 775 429 1,519 950 Director stock plan 15 (13) 29 15 Stock-based compensation costs, net of tax, that would have been included in the determination of net income had the fair value-based method been applied (2,143) (1,537) (4,255) (3,218) ------------ ------------ ------------ ------------- Pro forma net income $25,106 $24,527 $43,636 $45,195 ============ ============ ============ ============= Reported earnings per share Diluted $0.42 $0.41 $0.74 $0.75 Basic $0.43 $0.41 $0.76 $0.77 Pro forma earnings per share Diluted $0.40 $0.39 $0.70 $0.72 Basic $0.41 $0.40 $0.71 $0.73 2. Comprehensive Income -------------------- Comprehensive income was as follows (in thousands): For the Three Months For the Six Months Ending October 31, Ending October 31, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income $26,459 $25,648 $46,343 $47,448 Change in other comprehensive income (loss), net of taxes: Derivative cash flow hedges - (248) - (277) Foreign currency translation adjustment 2,050 6,608 5,464 8,463 ------------ ------------ ------------ ------------ Comprehensive income $28,509 $32,008 $51,807 $55,634 ============ ============ ============ ============ A reconciliation of accumulated other comprehensive gain (loss) follows (in thousands): Three Months Ended October 31, 2004 --------------------------------------------------- Beginning Change for Ending Balance Period Balance ------------- ------------- ------------- Foreign currency translation adjustment $21,537 2,050 23,587 Minimum pension liability, net of tax (15,926) - (15,926) ------------- ------------- ------------- Total $5,611 2,050 7,661 ============= ============= ============= Six Months Ended October 31, 2004 --------------------------------------------------- Beginning Change for Ending Balance Period Balance ------------- ------------- ------------- Foreign currency translation adjustment $18,123 5,464 23,587 Minimum pension liability, net of tax (15,926) - (15,926) ------------- ------------- ------------- Total $2,197 5,464 7,661 ============= ============= ============= 3. Weighted Average Shares for Earning Per Share --------------------------------------------- A reconciliation of the shares used in the computation of income per share follows (in thousands): For the Three Months For the Six Months Ending October 31, Ending October 31, ------------------------------ ------------------------------ 2004 2003 2004 2003 ------------- ------------ ------------- ------------ Weighted average shares outstanding 61,359 62,176 61,518 62,033 Less: Unearned deferred compensation shares (305) (285) (278) (245) ------------- ------------ ------------- ------------ Shares used for basic income per share 61,054 61,891 61,240 61,788 Dilutive effect of stock options and other stock awards 1,494 1,285 1,491 1,303 ------------- ------------ ------------- ------------ Shares used for diluted income per share 62,548 63,176 62,731 63,091 ============= ============ ============= ============ 4. Inventories ----------- Inventories were as follows (in thousands): As of As of October 31, April 30, ------------------------------------ --------------- 2004 2003 2004 --------------- --------------- --------------- Finished goods $68,443 $76,138 $74,310 Work-in-process 5,975 5,995 7,582 Paper, cloth and other 5,954 5,671 4,397 --------------- --------------- --------------- 80,372 87,804 86,289 LIFO reserve (2,700) (3,755) (2,500) --------------- --------------- --------------- Total inventories $77,672 $84,049 $83,789 =============== =============== =============== 5. Acquisitions ------------ In the first quarter of fiscal year 2005, the Company acquired the Journal of Microscopy and Analysis, a controlled circulation journal, for approximately $5.4 million, which is recorded as acquired publication rights. In the first quarter of fiscal year 2004, the Company made two additional payments aggregating $1.0 million to complete prior year acquisitions. In the second quarter, the Company purchased higher education titles from Leyh Publishing and extended the publishing rights for two STM journals for a total of $0.9 million. 6. Recent Accounting Standards --------------------------- In July 2000 the Emerging Issues Task Force (EITF) issued EITF No. 00-21, "Accounting for Revenue Relationships with Multiple Deliverables." The EITF was effective for fiscal years beginning after June 15, 2003. The adoption of EITF No. 00-21 in the current fiscal year did not have a material impact on the Company's consolidated financial statements. 7. Segment Information ------------------- The Company is a global publisher of print and electronic products, providing must-have content and services to customers worldwide. Core businesses include professional and consumer books and subscription services; scientific, technical, and medical journals, encyclopedias, books and online products and services; 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, -------------------------------------------------------------------------------- 2004 2003 -------------------------------------- -------------------------------------- (thousands) Inter- Inter- External segment External segment Customers Sales Total Customers Sales Total ------------ ------------ ------------ ------------ ------------ ------------ Revenue ------- U.S. segments: Professional/Trade $79,780 9,309 89,089 $77,238 9,293 86,531 Scientific, Technical, and Medical 44,839 1,857 46,696 40,937 1,757 42,694 Higher Education 31,672 9,003 40,675 29,586 8,088 37,674 European segment 63,772 3,953 67,725 56,310 3,708 60,018 Asia, Australia & Canada 26,987 (55) 26,932 24,809 268 25,077 Eliminations - (24,067) (24,067) - (23,114) (23,114) ------------ ------------ ------------ ------------ ------------ ------------ Total revenue $247,050 - 247,050 $228,880 - 228,880 ------------ ------------ ------------ ------------ ------------ ------------ Direct Contribution to Profit ----------------------------- U.S. segments: Professional/Trade $26,155 $25,382 Scientific, Technical, and Medical 21,397 20,503 Higher Education 12,392 9,935 European segment 21,814 19,230 Asia, Australia & Canada 5,813 5,480 ------------ ------------ Total direct contribution to profit 87,571 80,530 Shared services and administrative costs ---------------------------------------- Distribution (12,019) (11,591) Information technology (12,963) (12,428) Finance (7,901) (7,189) Other administration (14,564) (12,455) ------------ ------------ Total shared services and administration costs (47,447) (43,663) ------------ ------------ Operating income 40,124 36,867 Interest expense and other - net (1,560) (612) ------------ ------------ Income before taxes $38,564 $36,255 ============ ============ Six Months Ended October 31, ---------------------------------------------------------------------------------- 2004 2003 -------------------------------------- ---------------------------------------- (thousands) Inter- Inter- External segment External segment Customers Sales Total Customers Sales Total ------------ ------------ ------------ ------------ ------------ ------------ Revenue ------- U.S. segments: Professional/Trade $148,111 16,886 164,997 $146,688 15,987 162,675 Scientific, Technical, and Medical 89,305 3,597 92,902 81,051 3,350 84,401 Higher Education 69,140 17,010 86,150 69,719 15,723 85,442 European segment 117,903 9,345 127,248 103,174 7,427 110,601 Asia, Australia & Canada 49,530 868 50,398 47,908 565 48,473 Eliminations - (47,706) (47,706) - (43,052) (43,052) ------------ ------------ ------------ ------------ ------------ ------------ Total revenue $473,989 - 473,989 $448,540 - 448,540 ------------ ------------ ------------ ------------ ------------ ------------ Direct Contribution to Profit ----------------------------- U.S. segments: Professional/Trade $41,706 $43,570 Scientific, Technical, and Medical 43,666 41,219 Higher Education 28,443 28,619 European segment 40,508 34,652 Asia, Australia & Canada 9,004 9,623 ------------ ------------ Total direct contribution to profit 163,327 157,683 Shared services and administrative costs ---------------------------------------- Distribution (23,758) (22,852) Information technology (25,232) (24,229) Finance (15,240) (14,240) Other administration (28,196) (26,317) ------------ ------------ Total shared services and administration costs (92,426) (87,638) Unusual item - relocation expenses - - ------------ ------------ Operating income 70,901 70,045 Interest expense and other - net (2,747) (1,872) ------------ ------------ Income before taxes $68,154 $68,173 ============ ============ 8. Intangible Assets ----------------- Intangible Assets consist of the following (in thousands): As of As of October 31, April 30, --------------------------------- -------------- 2004 2003 2004 -------------- -------------- -------------- Intangible assets not subject to amortization Branded trade marks $57,900 57,900 $57,900 Acquired publication rights 119,579 116,450 116,584 -------------- -------------- --------------- Total intangible assets not subject to amortization 177,479 174,350 174,484 -------------- -------------- --------------- Net, intangible assets subject to amortization, 103,257 105,347 101,956 principally acquired publication rights -------------- -------------- --------------- Total $280,736 279,697 $276,440 ============== ============== =============== 9. Derivative Financial Instruments -------------------------------- Under certain circumstances, the Company may enter into derivative financial instruments to hedge against foreign currency fluctuation on specific transactions or interest rate volatility. The Company does not use derivative financial instruments for trading or speculative purposes. The Company did not hold any derivative financial instruments during the first half of fiscal year 2005. 10. Retirement Plans ---------------- The components of net pension expense for the defined benefit plans were as follows: For the Three Months Ending For the Six Months Ending October 31, October 31, ----------------------------- ----------------------------- (Dollars in thousands) 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Service Cost $1,843 1,970 $3,990 3,491 Interest Cost 2,720 2,271 5,373 4,445 Expected Return of Plan Assets (2,266) (1,595) (4,534) (3,114) Net Amortization of Prior Service Cost 138 152 292 305 Net Amortization of Unrecognized Transition Asset (7) (8) (13) (16) Recognized Net Actuarial Loss 481 476 938 903 ------------ ------------ ------------ ------------ Net Pension Expense $2,909 3,266 $6,046 6,014 ============ ============ ============ ============ As of October 31, 2004, no contributions have been made to the domestic defined benefit plans for fiscal year 2005. The Company does not anticipate making any contributions to its domestic defined benefit pension plan in fiscal year 2005 as, currently, none is statutorily required. However, from time to time, the Company may elect to voluntarily contribute to the plan to improve its funded status. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - SECOND QUARTER ENDED OCTOBER 31, 2004 Revenue for the second quarter increased 8% to $247.1 million from $228.9 million in the prior year driven primarily by continued strength in Scientific, Technical and Medical business, improved return rates in Higher Education and Professional/Trade in the U.S. and foreign exchange translation benefits. Excluding foreign currency gains, revenue for the quarter increased 6%. Earnings per diluted share increased to $0.42 from $0.41 in the prior year's second quarter as higher operating earnings were partially offset by higher income taxes. Gross profit as a percentage of revenue was 65.5% during the quarter as compared to 65.8% in the prior year's quarter. The majority of the decline was a result of additional expenses associated with new society STM journals and was partially offset by a favorable shift in overall product mix. Operating and administrative expenses for the second quarter increased 7%, or 5% excluding foreign currency effects, primarily due to shared services and administrative costs. The change in interest and other (net) was due to a gain on the sale of a former office facility in Germany in the prior year. Second quarter operating income of $40.1 million increased 9% from $36.9 million in the same period of the prior year, or 7% excluding foreign currency effects. The Company's effective tax rate for the second quarter of fiscal year 2005 and 2004 was 31.4% and 29.3%, respectively. The higher tax rate reflects a reduction of certain foreign and U.S. tax deductions. SEGMENT RESULTS Professional/Trade (P/T) - ------------------------ Wiley's U.S. P/T revenue for the second quarter advanced 3% from the prior year due to improved sales return experience. In addition, improvements in business, architecture, professional culinary, psychology and education programs were partly offset by lower revenue from consumer titles. Journals and revenue generated through brand licensing and website advertising also improved in the quarter. The second quarter direct contribution margin of 29.4% was essentially on par with the prior year's quarter as product mix was offset by higher inventory provisions. Several P/T titles received considerable attention from the media and customers, including Tisch/The Power of We: Succeeding Through Partnerships; Winget/Shut Up, Stop Whining and Get a Life; Obeidi and Pitzer/The Bomb in My Garden; and Wirthlin/The Greatest Communicator. Five Wiley titles were featured on major bestseller lists, The Power of We; Shut Up, Stop Whining, and Get a Life; Five Dysfunctions of a Team; Mentored by a Millionaire; and Investing For Dummies. Second quarter highlights also included the publication of MaGee/Ford Tough: Bill Ford and the Battle to Rebuild America's Automaker; Hagstrom/The Warren Buffett Way; Taguchi, Chowdhury and Wu/Taguchi's Quality Engineering; Palmer/The Hidden Wholeness; and The American Medical Association Family Medical Guide. The second editions of three best-selling Windows XP For Dummies titles were published during the quarter, tied to Microsoft's launch of the Windows XP Service Pack 2. During the quarter, Wiley signed a licensing deal with Acadient for the creation of a CPA exam review online course that is expected to go live in January 2005. The Company also reached an agreement to be Agora Publishing's financial book publisher. Agora is a premier financial newsletter publisher, whose publications reach more than one million readers around the world. Wiley entered into a brand licensing agreement with American Media Inc. (AMI) to publish For Dummies-branded micro magazines that will be sold at cash register display racks at key mass merchandisers, drug and grocery chain outlets in North America. The first four titles of the series, which were published during the quarter, are: Organizing For Dummies, Home Decorating For Dummies, Kitchen Remodeling For Dummies and Bathroom Remodeling For Dummies. Scientific, Technical And Medical (STM) - --------------------------------------- Wiley's U.S. STM business continued to exhibit strength with revenue up over prior year by 9% for the quarter. Journal performance was strong, with new society publications contributing significantly to the growth. Direct contribution margin for the second quarter of fiscal year 2005 declined 2.2% points to 45.8% principally due to additional expenses associated with new society publications and product mix. Globally, STM revenue increased approximately 11% for the second quarter reflecting robust journal and book sales. In addition to strong renewals, new Wiley InterScience licenses were signed by the Chinese Academy of Sciences, University of Western Australia, Fraunhofer Gesellschaft, Saxony Consortium and The Scripps Research Institute. Customers continue to take advantage of Wiley InterScience's wide range of access options, as reflected in the continuing growth in usage. Full-text accesses of Wiley InterScience journal content was up 25% year-on-year for the six months, driven by our ongoing program to enhance the discoverability of our content, including our participation in CrossRef Search, in collaboration with Google. During the quarter, STM launched in Wiley InterScience the NeuroScience Backfile Collection and SpecInfo, a spectral database previously available only on CD-ROM. Several major reference works were also made available to customers through Wiley's online service. Wiley and the Movement Disorders Society signed a long-term contract extension for the publication of its journal, Movement Disorders. During the quarter, the Company also reached an agreement with the Society for Hospital Medicine to publish its newsletter as a controlled-circulation, advertising-supported publication and to launch its new flagship journal, which is targeted to the large and growing market of hospital-based medical practitioners. Higher Education - ---------------- Revenue of Wiley's U.S. Higher Education business increased 8% during the second quarter. The revenue increase reflects the combined effect of improved sales return experience and growth in the Social Science and Science programs. Market conditions continue to be difficult due to student concerns regarding the price/value of textbooks and related materials. The direct contribution to profit improved approximately $2.5 million mainly due to improved sales returns and operating cost savings. Wiley's innovative online product, eGrade Plus, was launched successfully this summer. Currently available with 32 major frontlist textbooks through several pricing options, eGrade Plus provides the student with a print and/or online textbook, as well as online study guides and self-testing products, which provide immediate feedback to help the student succeed in the course. Professors who adopt eGrade-Plus can customize the course content to fit their specific curriculum. With 50,000 units sold and as many as 15,000 students accessing eGrade Plus at any given time, Wiley has delivered uninterrupted service this fall. In addition, more than half of the instructors using eGrade Plus attended peer-to-peer training sessions led by Wiley's Faculty Resource Network. Students and faculty have access to Wiley's extensive technical support resources for the product. Feedback has been positive in the States and abroad. Europe - ------ Second quarter revenue for Wiley's European operations was up 13% over prior year to $67.7 million, or 6% excluding foreign currency effects. Direct contribution margin for the second quarter was 32.6% as compared to 32.0% in the second quarter of the prior year, excluding foreign exchange effects. Continuing the positive trends of the first quarter, journal and book revenues were up. Indigenous products from both the U.K. and Germany were robust, as were imported U.S. P/T titles. Sales of The Cochrane Collection, which is now available through Wiley InterScience, were strong throughout Europe. Several agreements were created or extended during the quarter. The Cochrane Collaboration selected Wiley as the publisher of a series of books in evidence-based medicine. The Society of Chemical Industry extended its agreement with Wiley to publish its four primary journals. Wiley-VCH formed an alliance with the Shanghai Institute of Organic Chemistry, a part of the Chinese Academy of Sciences, to publish the Chinese Journal of Chemistry, the Institute's flagship journal. The journal, which was founded in 1983, is published in English 12 times a year and covers all fields of chemistry, including physical, organic, inorganic and analytical, primarily through original research papers. Wiley Europe's general interest and consumer publishing program continued to generate interest, publicity and sales. Five months after publication, Barrow/Starting a Business For Dummies, became the best-selling small business title in the U.K. A psychology title, Iwaniec/Failure to Thrive, was awarded a commendation at the British Medical Association book awards. A noteworthy development during the quarter was the U.K. government's response to the House of Commons Science and Technology Committee report, which was clearly influenced by publishers' concerns regarding open access to journals and author-pay business models. The government dismissed most of the Committee's recommendations, reinforcing the view of publishers' that science is best served by a competitive market-driven approach. Asia, Australia & Canada - ------------------------ Wiley's revenue in Asia, Australia and Canada was up 7% during the second quarter, or 3% excluding foreign currency effects. Asia contributed to the majority of the improvement reflecting growth in all of Wiley businesses with strong results in India, the Philippines, Thailand, Indonesia and Japan. Second quarter results were slightly lower than expected in Australia, primarily because of delayed ordering for the school market. Wiley Canada's performance during the second quarter was mixed with Higher Education falling short of prior year, while P/T delivered solid results. eGrade Plus was rolled out internationally, driving sales in Australia and Canada by helping to win new adoptions, as well as maintaining existing business. eGrade Plus is now being used at Tongji University in China. The Australian Campus Booksellers Association and the Australian Publishers Association have named Wiley Australia as "Tertiary Publisher of the Year" and "Secondary Publisher of the Year," respectively. Wiley has won these awards consistently over the last five years. Shared Services and Administrative Costs - ---------------------------------------- Shared services and administrative costs increased 9% to $47.4 million or 7% excluding the impact of foreign exchange mainly due to higher employment related costs, as planned, and costs associated with Sarbanes Oxley legislation compliance. SIX MONTHS ENDED OCTOBER 31, 2004 Revenue for the first half of fiscal year 2005 increased 6%, or 4% excluding foreign currency translation gains. The improvement was driven by worldwide growth in STM journals and books and P/T results in both the U.K. and U.S. Net income for the six-month period of fiscal year 2005 and 2004 were $46.3 million and $47.4 million, respectively. Earnings per diluted share declined slightly from $0.75 to $0.74 mainly due to a higher effective tax rate. Gross profit as a percentage of revenue for the six-month period was 66.1% as compared to 66.5% in the prior year's period reflecting the higher cost of new society STM journals and overall product mix. Operating and administrative expenses increased 6% over last year's period, or 5% excluding foreign currency effects. The increase was primarily due to employment related costs, as planned, higher depreciation on technology investment associated with the transition of certain aspects of the business from print to electronic delivery and costs associated with Sarbanes Oxley legislation compliance. Operating income for the six-month period of $70.9 million was up slightly from prior year. The change in interest and other (net) was due to a gain on the sale of a former office facility in Germany in the prior year. The Company's effective income tax rate increased by 1.6% points to 32.0% mainly due to a reduction of certain U.S. and foreign tax deductions. SEGMENT RESULTS Professional/Trade (P/T) - ------------------------ U.S. P/T revenue for the first half of fiscal year 2005 was $165.0 million compared to $162.7 million in the prior year. Growth in architecture and education programs, journal revenue, brand licensing and website advertising were partially offset by lower sales of technology and consumer titles. The contribution margin in the first half of fiscal year 2005 was 25.3% compared to 26.8% in the prior year mainly due to higher inventory provisions and higher editorial and production costs, as planned. Scientific, Technical And Medical (STM) - --------------------------------------- U.S. STM revenue for the first half of fiscal year 2005 increased 10% to $92.9 million. Journal performance was strong, up approximately 13% over prior year with new society journals contributing significantly to the growth. STM books also contributed to the growth with year-to-date revenues up approximately 6% over prior year. The contribution margin was 47.0% for the first half of fiscal year 2005 compared to 48.8% in the prior year reflecting additional expenses associated with new society journals. Globally, STM revenue for the first half of fiscal year 2005 increased approximately 11% over the prior year period. Higher Education - ---------------- U.S. Higher Education revenue for the first half of fiscal year 2005 was $86.2 million compared to $85.4 million in the prior year. Improved sales return experience and growth in Social Sciences and Science programs were partially offset by shortfalls in Engineering, Math, Computer Science, Business and Accounting. While revenue improved slightly for the year, market conditions continue to be difficult due to student concerns regarding the price/value of college textbooks and related materials. The contribution margin decreased 0.5% points to 33.0% reflecting higher composition costs partially offset by product mix and cost contingency savings. Europe - ------ European revenue of $127.2 million in the first six-months of fiscal year 2005 increased 15% over the prior year, or 9% excluding foreign exchange effects. STM journal and book sales in Europe accounted for the majority of the improvement, continuing the positive trend of the first quarter. New society journals continue to contribute to journal performance. Sales of indigenous and imported P/T titles in the UK also contributed to the favorable results. For the first six-months of fiscal year 2005, the contribution margin excluding foreign exchange improved 0.8% points to 32.2% reflecting higher journal revenues and cost savings. Asia, Australia & Canada - ------------------------ Asia, Australia and Canada revenue increased 4% to $50.4 million for the six-months of fiscal year 2005, but was flat excluding foreign currency effects. Direct contribution to profit, excluding foreign exchange effects, declined 3.1% points to 16.8% principally due to product mix in Asia and Australia. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities for the first half of fiscal year 2005 improved $20.3 million versus the same period last year due to improved U.S. receivable collections and effective inventory management, partly offset by the higher author royalty payments and the timing of vendor payments. In addition, higher annual incentive compensation payments related to fiscal year 2004 performance were offset by lower pension contributions. Investing activities used $46.9 million for the first half of fiscal year 2005 as compared to $41.3 million in the prior year period. Investing activities in the current six-month period include $28.3 million for product development and $11.0 million for property, equipment and technology expenditures, the majority of which was for investments in technology. Estimated spending on product development and property, equipment and technology for the full fiscal year 2005 is projected to be approximately $65 million and $30 million, respectively. During the first half of fiscal year 2005, the Company acquired publishing rights to a controlled circulation journal, The Journal of Microscopy and Analysis. Current year financing activities include the continuation of the Company's stock repurchase program. During the second quarter and six-month periods ending October 31, 2004, the Company purchased 646,800 and 959,200 common shares of its capital stock at an average price of $32.27 and $31.96 per share, respectively. Under the current stock repurchase program, the Company has remaining authorization to purchase up to 2.8 million shares of its Class A common stock. The Company paid dividends to shareholders consistent with the prior year of $0.15 per share. The Company was able to execute the stock repurchases, dividend payments and the capital investments without any additional drawings on the revolving credit facility. During the same period last year the Company had net borrowings $25 million. The Company believes its cash balances together with existing credit facilities are sufficient to meet its obligations. At October 31, 2004 the Company had $200 million of variable rate loans outstanding, which approximated fair value and $132 million available under its revolving credit facilities and other short-term lines of credit. The final payment on the variable rate term loan is due September 2006. The Company intends to utilize cash in excess of operating requirements, in conjunction with a possible refinancing of all or a portion of the existing term loan and revolving credit facility, to repay outstanding principal upon their maturity. "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. 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 customer 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 earnings and cash flows when it is deemed appropriate to do so. The Company does not use derivative financial investments for trading or speculative purposes. The Company did not hold any derivative financial instruments during the first half of fiscal year 2005. Interest Rates The Company did not use any derivative financial investments to manage this exposure. The weighted average interest rate as of October 31, 2004 was approximately 2.56%. A hypothetical 1% change in interest rates for the variable rate debt would affect annual net income and cash flow by approximately $1.2 million. Foreign Exchange Rates Under certain circumstances, the Company enters into derivative financial instruments in the form of forward contracts as a hedge against foreign currency fluctuation of specific transactions, including inter-company purchases. Customer Credit Risk The Company's business is not dependent upon a single customer; however, the industry has experienced a significant concentration in national, regional, and online bookstore chains in recent years. Although no one book customer accounted for more than 6% of total fiscal year 2004 consolidated revenue, the top ten book customers accounted for approximately 25% of total fiscal year 2004 consolidated revenue and approximately 50% of total gross trade accounts receivable at April 30, 2004. In the journal publishing business, subscriptions are primarily sourced through independent subscription agents who, acting as agents for library customers, facilitate ordering by consolidating the subscription orders/billings of each subscriber with various publishers. Cash is generally collected in advance from subscribers by the subscription agents and are remitted to the journal publisher, including the Company, generally prior to the commencement of the subscriptions. Although at fiscal year-end the Company had minimal credit risk exposure to these agents, future calendar-year subscription receipts from these agents are highly dependent on their financial condition and liquidity. Subscription agents accounted for approximately 22% of total fiscal year 2004 consolidated revenue and no one agent accounted for more than 7% of total fiscal year 2004 consolidated revenue. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and regulations. The Company's Chief Executive Officer and Chief Financial Officer, together with the Chief Accounting Officer and other members of the Company's management, have conducted an evaluation of these disclosure controls and procedures as of a date within 90 days prior to the date of filing this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect such internal controls subsequent to this evaluation. Accordingly, no corrective actions were required or undertaken with respect to the internal controls. PART II - OTHER INFORMATION ITEM 5. 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 15, 2004. All significant contracts were filed with the Securities and Exchange Commission as exhibits to the Company's Shareholder Proxy Statement on August 5, 2004. 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 Ratify the Appointment of KPMG LLP as Independent Public Accountants for the Year Ending April 30, 2005. - ------------------------------------------------------------------ The proposal was ratified as follows: Votes For 13,733,842 Votes Against 40,044 Abstentions 7,477 Proposal to Approve the 2004 Key Employee Stock Plan. - ----------------------------------------------------- The proposal was adopted as follows: Votes For 11,406,008 Votes Against 774,068 Abstentions 9,960 Non-Votes 1,591,327 Proposal to Approve the 2004 Executive Annual Incentive Plan. - ------------------------------------------------------------- The proposal was adopted as follows: Votes For 12,499,172 Votes Against 107,893 Abstentions 14,322 Non-Votes 1,159,975 Proposal to Approve the Directors Stock Plan. - --------------------------------------------- The proposal was adopted as follows: Votes For 12,030,955 Votes Against 148,553 Abstentions 10,527 Non-Votes 1,591,328 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 - 18 U.S.C. Section 1350 Certificate by the President and Chief Executive Officer 99.2 - 18 U.S.C. Section 1350 Certificate by the Chief Financial and Operations Officer (b) The following reports on Form 8-K were furnished to the Securities and Exchange Commission since the filing of the Company's 10-K on June 17, 2004. i. Earnings release on the first quarter fiscal 2005 results issued on form 8-K dated September 1, 2004, which include the condensed financial statements of the Company. ii. Earnings release on the second quarter fiscal 2005 results issued on form 8-K dated December 1, 2004, which include the condensed financial statements of the Company. The following reports on Form 8-K were filed with the Securities and Exchange Commission since the filing of the Company's 10-K on June 17, 2004. None 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 & Operations Officer By /s/ Edward J. Melando ----------------------- Edward J. Melando Vice President, Controller and Chief Accounting Officer Dated: December 09, 2004 CERTIFICATIONS I, William J. Pesce, certify that: - - I have reviewed this quarterly report on Form 10-Q of John Wiley & Sons, Inc.; - - Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and - - Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. - - The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting and - - The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. By /s/ William J. Pesce ----------------------- William J. Pesce President and Chief Executive Officer Dated: December 09, 2004 I, Ellis E. Cousens, certify that - - I have reviewed this quarterly report on Form 10-Q of John Wiley & Sons, Inc.; - - Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and - - Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. - - The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting and - - The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. By /s/ Ellis E. Cousens ----------------------- Ellis E. Cousens Executive Vice President and Chief Financial & Operations Officer Dated: December 09, 2004 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of John Wiley & Sons, Inc. (the "Company") on Form 10-Q for the period ending October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Pesce, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (as amended), as applicable; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/William J. Pesce - ----------------------- William J. Pesce President and Chief Executive Officer Dated: December 09, 2004 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 .S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of John Wiley & Sons, Inc. (the "Company") on Form 10-Q for the period ending October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ellis E. Cousens, Executive Vice President and Chief Financial & Operations Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (as amended), as applicable; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Ellis E. Cousens - --------------------- Ellis E. Cousens Executive Vice President and Chief Financial & Operations Officer Dated: December 09, 2004