1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM .................... TO ....................
Commission file number: 0-22187
ADVANTAGE LEARNING SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
Wisconsin 39-1559474
(State or other (IRS Employer
jurisdiction of incorporation) Identification No.)
PO Box 8036
2911 Peach Street
Wisconsin Rapids, Wisconsin
(Address of principal executive offices)
54495-8036
(Zip Code)
(715) 424-3636
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class August 10, 1998
----- ---------------
Common Stock, $0.01 par value 16,902,383
2
ADVANTAGE LEARNING SYSTEMS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS ------
Consolidated Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997 ............................................. 1
Unaudited Consolidated Statements of Income for
the Three Months and Six Months Ended
June 30, 1998 and 1997 ........................................................ 2
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997............................................ 3
Notes to Unaudited Consolidated Financial Statements.................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................................... 10
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 12
- Index -
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 DECEMBER 31,
(Unaudited) 1997
----------------- --------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 6,270 $22,320
Short term investments 25,670 6,865
Accounts receivable, less allowance of
$689 in 1998 and $638 in 1997 4,790 3,317
Inventories 389 345
Prepaid expenses 319 746
Deferred tax asset 2,212 1,831
------- -------
Total current assets 39,650 35,424
------- -------
Property, plant and equipment, net 13,044 11,315
Building held for sale 716 727
Deferred tax asset 1,627 1,661
Intangibles, net 1,819 1,599
Capitalized software, net 42 157
------- -------
Total assets $56,898 $50,883
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 691 $ 982
Deferred revenue 3,339 2,854
Payroll and employee benefits 1,284 657
Retainage & amounts due under construction contract -- 17
Other current liabilities 3,372 1,684
Distribution payable to shareholders -- 555
------- -------
Total current liabilities 8,686 6,749
------- -------
Deferred revenue 1,128 1,299
------- -------
Total liabilities 9,814 8,048
Minority interest 66 --
Shareholders' equity:
Common stock, $.01 par;
Shares authorized: 50,000,000;
Issued and outstanding: 16,902,383 169 169
Additional paid in capital 40,767 40,757
Retained earnings 6,082 1,909
------- -------
Total shareholders' equity 47,018 42,835
------- -------
Total liabilities and shareholders' equity $56,898 $50,883
======= =======
See accompanying notes to consolidated financial statements.
- 1 -
4
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
--------- -------- ---------- --------
(In thousands, except per share amounts)
Net sales:
Products $ 9,680 $ 7,299 $ 18,316 $ 13,744
Services 2,041 1,433 4,028 2,801
-------- -------- -------- --------
Total net sales 11,721 8,732 22,344 16,545
-------- -------- -------- --------
Cost of sales:
Products 1,056 895 1,957 1,675
Services 748 587 1,612 1,305
-------- -------- -------- --------
Total cost of sales 1,804 1,482 3,569 2,980
-------- -------- -------- --------
Gross profit 9,917 7,250 18,775 13,565
Operating expenses:
Product development 1,283 696 2,311 1,375
Selling and marketing 3,068 2,291 6,419 4,452
General and administrative 1,742 1,457 3,479 2,621
Purchased research and development 475 -- 475 --
-------- -------- -------- --------
Total operating expenses 6,568 4,444 12,684 8,448
-------- -------- -------- --------
Operating income 3,349 2,806 6,091 5,117
Other income (expense):
Interest income 422 23 856 49
Interest expense (7) (194) (7) (369)
Other, net 62 (26) 132 (44)
-------- -------- -------- --------
Income before taxes 3,826 2,609 7,072 4,753
Income taxes 1,552 -- 2,899 1,602
-------- -------- -------- --------
Net income $ 2,274 $ 2,609 $ 4,173 $ 3,151
======== ======== ======== ========
Basic and diluted earnings per share $ 0.13 $ 0.19 $ 0.25 $ 0.23
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- 2 -
5
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
--------- --------
(In thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income $ 4,173 $ 3,151
Noncash (income) expenses included in net income -
Depreciation and amortization 824 682
Purchased research and development 475 --
Deferred income taxes (347) 1,602
Change in assets and liabilities -
Accounts receivable (1,439) (870)
Inventory (8) 93
Prepaid expenses 428 --
Intangibles (26) (539)
Accounts payable and other current liabilities 1,113 1,227
Retainage and amounts due under construction contract (17) (953)
Deferred revenue 314 493
-------- --------
Net cash provided by operating activities 5,490 4,886
-------- --------
Cash flows used in investing activities:
Purchase of property, plant and equipment (2,257) (620)
Short-term investments (18,805) --
Capitalized software development costs -- (4)
-------- --------
Net cash used in investing activities (21,062) (624)
-------- --------
Cash flows used in financing activities:
Equity contribution from minority partner 66 --
Distribution to shareholders (544) (4,554)
Proceeds from long-term debt and notes payable to shareholders -- 1,100
-------- --------
Net cash used in financing activities (478) (3,454)
-------- --------
Net (decrease) increase in cash (16,050) 808
Cash and cash equivalents, beginning of period 22,320 1,756
======== ========
Cash and cash equivalents, end of period $ 6,270 $ 2,564
======== ========
See accompanying notes to consolidated financial statements.
- 3 -
6
ADVANTAGE LEARNING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATION
The consolidated financial statements include the financial results of Advantage
Learning Systems, Inc. ("ALS") and its consolidated subsidiaries, (collectively
the "Company"). All significant intercompany transactions have been eliminated
in the consolidated financial statements.
2. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods, and are
presented on an unaudited basis. These financial statements should be read in
conjunction with the Company's financial information contained in the Company's
Annual Report on Form 10-K which is on file with the U.S. Securities and
Exchange Commission.
The results of operations for the three and six month periods ended June 30,
1998 and 1997 are not necessarily indicative of the results to be expected for
the full year.
3. ACQUISITION
Effective June 30, 1998, the Company acquired 100% of the stock of Logicus
Incorporated ("Logicus"), an Ontario, Canada-based firm specializing in writing
enhancement software. The transaction was accounted for using the purchase
method of accounting. The estimated fair value of the assets and liabilities of
Logicus are included in the consolidated balance sheet of the Company as of June
30, 1998. A preliminary allocation of the purchase price includes valuation of
certain acquired in-process research and development costs which resulted in a
pre-tax charge of $475,000 for the three and six months ended June 30, 1998.
4. EARNINGS PER COMMON SHARE
Basic earnings per common share has been computed based on the weighted average
number of common shares outstanding. Diluted earnings per common share has been
computed based on the weighted average number of common shares outstanding,
increased by the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
The weighted average shares outstanding during the three and six months ended
June 30, 1998 and 1997 are as follows:
Three Months and
Three Months Ended Six Months Ended Six Months Ended
June 30, 1998 June 30, 1998 June 30, 1997
----------------- ---------------- ----------------
Basic Weighted Average Shares 16,902,383 16,902,383 13,651,133
Impact of Stock Options 69,551 63,036 -
Diluted Weighted Average Shares 16,971,934 16,965,419 13,651,133
- 4 -
7
5. EMPLOYEE STOCK PURCHASE PLAN
Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan
which allows employees to purchase shares of common stock through payroll
deductions, up to 10% of eligible compensation. The purchase price is equal to
85% of the fair market value of the common stock on either the first or last day
of the subscription period, whichever is lower. A total of 250,000 shares are
available for purchase under the plan. The Company has adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation". As allowed under the provisions of SFAS 123, the Company has
elected to apply Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", in accounting for its stock-based
plans. Accordingly, the Company will not recognize compensation expense for
employee stock purchases.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position No. 97-2 ("SOP
97-2") "Software revenue recognition". This SOP was issued to provide guidance
on applying generally accepted accounting principles to software transactions
and to narrow the range of revenue recognition practices that were in use before
its issuance. SOP 97-2 is generally effective for transactions entered into in
fiscal years beginning after December 15, 1997. The adoption of SOP 97-2 had no
material impact on the Company's results of operations for the six months ended
June 30, 1998.
- 5 -
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- -----
Net Sales:
Products 82.6% 83.6% 82.0% 83.1%
Services 17.4 16.4 18.0 16.9
===== ===== ===== =====
Total net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of sales:
Products 10.9% 12.3% 10.7% 12.2%
Services 36.6 41.0 40.0 46.6
Total cost of sales 15.4 17.0 16.0 18.0
Gross profit:
Products 89.1 87.7 89.3 87.8
Services 63.4 59.0 60.0 53.4
Total gross profit 84.6 83.0 84.0 82.0
Operating expenses:
Product development 10.9 8.0 10.3 8.3
Selling and marketing 26.2 26.2 28.7 26.9
General and administrative 14.8 16.7 15.6 15.9
Purchased research and development 4.1 0.0 2.1 0.0
----- ----- ----- -----
Total operating expenses 56.0 50.9 56.7 51.1
----- ----- ----- -----
Operating income 28.6 32.1 27.3 30.9
Other income (expense):
Interest income 3.6 0.3 3.8 0.3
Interest expense -0.1 -2.2 0.0 -2.2
Other, net 0.5 -0.3 0.6 -0.3
----- ----- ----- -----
Total other income (expense) 4.0 -2.2 4.4 -2.2
----- ----- ----- -----
Income before taxes 32.6 29.9 31.7 28.7
Income taxes 13.2 0.0 13.0 9.7
===== ===== ===== =====
Net income 19.4% 29.9% 18.7% 19.0%
===== ===== ===== =====
- 6 -
9
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net Sales. The Company's net sales increased by $3.0 million, or 34.2%,
to $11.7 million in the second quarter of 1998 from $8.7 million in the second
quarter of 1997. Product sales increased by $2.4 million, or 32.6%, to $9.7
million in the second quarter of 1998 from $7.3 million in the second quarter of
1997. The increase in product sales is primarily attributable to (i) increased
sales of Accelerated Reader title disks to a larger base of Accelerated Reader
schools, including the introduction of approximately 1,600 new book titles since
March 31, 1998, (ii) the continuation of very strong STAR Reading sales which
started shipping in September 1996, and (iii) the addition of over 2,100 new
Accelerated Reader and STAR Reading schools in the second quarter of 1998. Sales
of Accelerated Reader software and supplemental Accelerated Reader title disks
remained relatively constant at approximately 50% and 51% of net sales in the
second quarter of 1998 and 1997, respectively.
In April, 1998, the Company announced the introduction of two new
products: Accelerated Math, a new computerized algorithm-based math management
system to help teachers ensure student achievement of all math objectives; and
STAR Math, a computerized norm-referenced math test and database. Shipment of
STAR Math is scheduled for September and Accelerated Math should begin shipping
in late November.
Service revenue, which consists of revenue from sales of: (i) training
seminars and programs and (ii) software support agreements, increased by
$608,000, or 42.4%, to $2.0 million in the second quarter of 1998 from $1.4
million in the second quarter of 1997. This increase is primarily attributable
to an increased number of Reading Renaissance training sessions, and, to a
lesser extent, additional revenue from software support agreements principally
associated with increased new product sales.
Cost of Sales. The cost of sales of products increased by $161,000, or
18.0%, to $1.1 million in the second quarter of 1998 from $895,000 in the second
quarter of 1997. As a percentage of product sales, the cost of sales of products
decreased to 10.9% in the second quarter of 1998 compared to 12.3% in the second
quarter of 1997, primarily due to operating leverage associated with increased
product sales. The cost of sales of services increased by $161,000, or 27.4%, to
$748,000 in the second quarter of 1998 from $587,000 in the second quarter of
1997. As a percentage of sales of services, the cost of sales of services
declined to 36.6% in the second quarter of 1998 compared to 41.0% in the second
quarter of 1997 primarily as a result of decreased costs of delivering training
sessions. During the summer months, the Company delivers more on-site training
sessions than the more costly to deliver off-site sessions which are more common
during the school year. As a result, the Company anticipates that gross profit
margins on services will continue to improve in the third quarter of 1998 over
early 1998 levels. The Company's overall gross profit margin improved 1.4% to
84.6% in the second quarter of 1998 from 83.0% in the second quarter of 1997,
due to improved gross profit margins on both products and services. Management
expects that the overall gross profit margin will remain relatively constant in
1998.
Product Development. Product development expenses increased by
$587,000, or 84.4%, to $1.3 million in the second quarter of 1998 from $696,000
in the second quarter of 1997. These expenses increased primarily due to
increased development staff and consulting costs associated with new products.
As a percentage of net sales, product development costs increased to 10.9% in
the second quarter of 1998 from 8.0% in the second quarter of 1997. The Company
anticipates that the total dollar amount of product development costs will
continue to increase as the Company extends its product offerings into other
areas of the K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by
$777,000, or 33.9%, to $3.1 million in the second quarter of 1998 from $2.3
million in the second quarter of 1997. These expenses increased due to (i)
salary and recruiting costs associated with the hiring of additional personnel,
(ii) mailings to an increased customer and prospect base and increased
advertising in publications and (iii) participation in more trade shows. As a
percentage of net sales, selling and marketing expenses remained constant at
26.2% in the second quarter of 1998 and 1997. Management anticipates incurring
increased selling and marketing expenses during the second half of 1998 due
primarily to the introduction of Accelerated Math, writing products acquired in
the purchase of Logicus, and, to a lesser extent, the expansion of international
selling and marketing activities.
- 7 -
10
General and Administrative. General and administrative expenses
increased by $285,000, or 19.6%, to $1.7 million in the second quarter of 1998
from $1.5 million in the second quarter of 1997. The higher expenses for the
second quarter of 1998 are largely due to increased costs associated with: (i)
the conversion to a publicly held company in late 1997 and (ii) increased costs
associated with the hiring of additional personnel, including wages and related
benefits. As a percentage of net sales, general and administrative costs
decreased to 14.8% in the second quarter of 1998 compared to 16.7% in the second
quarter of 1997.
Purchased Research and Development. Purchased research and development
was $475,000 in the second quarter of 1998 compared to no such expense in second
quarter 1997. In connection with the acquisition of Logicus Incorporated,
$475,000 of the purchase price was allocated to purchased research and
development which was expensed in June 1998.
Operating Income. Operating income increased by $543,000, or 19.3%, to
$3.3 million in the second quarter of 1998 from $2.8 million in the second
quarter of 1997. As a percentage of net sales, operating income decreased to
28.6% in the second quarter of 1998 compared to 32.1% in the second quarter of
1997. Excluding the effect of the purchased research and development expense,
operating income would have increased by $1.0 million, or 36.3%, to $3.8 million
in the second quarter of 1998, or 32.6% of net sales.
Interest Income. Interest income increased $399,000 to $422,000 in the
second quarter of 1998 from $23,000 in the second quarter of 1997. This increase
is due to an increase in interest earning short-term investments which were
purchased with proceeds from the Company's initial public offering in late 1997.
Interest Expense. Interest expense decreased $187,000 in the second
quarter of 1998 compared to the same period in 1997. In late 1997, proceeds from
the Company's initial public offering were used to pay all outstanding
indebtedness.
Income Tax Expense. Income tax expense of $1.6 million was recorded in
the second quarter of 1998 at an effective income tax rate, as a percent of
pre-tax income, of 40.6%. Prior to September 29, 1997, the shareholders of
Advantage Learning Systems, Inc. ("ALS") and the Institute for Academic
Excellence, Inc. (the "Institute") had elected to have these companies treated
as "S corporations" under the Internal Revenue Code. Accordingly, the financial
statements do not include any provision or liability for current or deferred
federal or state income taxes related to ALS or the Institute for any periods
prior to September 29, 1997.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net Sales. The Company's net sales increased by $5.8 million, or 35.1%,
to $22.3 million in the first half of 1998 from $16.5 million in the first half
of 1997. Product sales increased by $4.6 million, or 33.3%, to $18.3 million in
the first half of 1998 from $13.7 million in the first half of 1997. The
increase in product sales is primarily attributable to (i) increased sales of
Accelerated Reader title disks to a larger base of Accelerated Reader schools,
including the introduction of approximately 2,800 new book titles since December
31, 1997, (ii) the continuation of very strong STAR Reading sales which started
shipping in September 1996, and (iii) the addition of approximately 3,600 new
Accelerated Reader and STAR Reading schools in the first half of 1998. Sales of
Accelerated Reader software and supplemental Accelerated Reader title disks
remained relatively constant at approximately 52% and 53% of net sales in the
first half of 1998 and 1997, respectively.
Service revenue increased by $1.2 million, or 43.8%, to $4.0 million in
the first half of 1998 from $2.8 million in the first half of 1997. This
increase is primarily attributable to an increased number of Reading Renaissance
training sessions, and, to a lesser extent, additional revenue from software
support agreements principally associated with increased new product sales.
Cost of Sales. The cost of sales of products increased by $282,000, or
16.8%, to $2.0 million in the first half of 1998 from $1.7 million in the first
half of 1997. As a percentage of product sales, the cost of sales of products
decreased to 10.7% in the first half of 1998 compared to 12.2% in the first half
of 1997, primarily due to operating leverage associated with increased product
sales. The cost of sales of services increased by $307,000, or 23.6%, to $1.6
million in the first half of 1998 from $1.3 million in the first half of 1997.
As a percentage of sales of services, the cost of sales of services declined to
40.0% in the first half of 1998 compared to 46.6% in the first half of 1997
primarily as a result of
- 8 -
11
decreased costs of delivering training sessions. The Company anticipates that
gross profit margins on services will continue to improve in the third quarter
of 1998 over early 1998 levels due to an increase in less costly to deliver
on-site training sessions during the summer months. The Company's overall gross
profit margin improved 2.0% to 84.0% in the first half of 1998 from 82.0% in the
first half of 1997, due to improved gross profit margins on both products and
services. Management expects that the overall gross profit margin will remain
relatively constant in 1998.
Product Development. Product development expenses increased by
$936,000, or 68.1%, to $2.3 million in the first half of 1998 from $1.4 million
in the first half of 1997. These expenses increased primarily due to increased
development staff and consulting costs associated with new products. As a
percentage of net sales, product development costs increased to 10.3% in the
first half of 1998 from 8.3% in the first half of 1997. The Company anticipates
that the total dollar amount of product development costs will continue to
increase as the Company extends its product offerings into other areas of the
K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by $2.0
million, or 44.2%, to $6.4 million in the first half of 1998 from $4.5 million
in the first half of 1997. These expenses increased primarily due to (i)
increased advertising expenses including costs associated with the publication
of additional catalogs, mailings to an increased customer and prospect base and
increased advertising in publications, (ii) salary and recruiting costs
associated with the hiring of additional personnel and (iii) participation in
more trade shows. As a percentage of net sales, selling and marketing expenses
increased to 28.7% in the first half of 1998 from 26.9% in the first half of
1997. Management anticipates incurring increased selling and marketing expenses
during the second half of 1998 due primarily to the introduction of Accelerated
Math, writing products acquired in the purchase of Logicus, and, to a lesser
extent, the expansion of international selling and marketing activities.
General and Administrative. General and administrative expenses
increased by $858,000, or 32.7%, to $3.5 million in the first half of 1998 from
$2.6 million in the first half of 1997. The higher expenses for the first half
of 1998 are largely due to increased costs associated with: (i) the conversion
to a publicly held company in late 1997 and (ii) increased costs associated with
the hiring of additional personnel, including wages and related benefits. As a
percentage of net sales, general and administrative costs remained relatively
constant at 15.6% in the first half of 1998 compared to 15.9% in the first half
of 1997.
Purchased Research and Development. Purchased research and development
was $475,000 in the first half of 1998 compared to no such expense in first half
1997. In connection with the acquisition of Logicus Incorporated, $475,000 of
the purchase price was allocated to purchased research and development which was
expensed in June 1998.
Operating Income. Operating income increased by $974,000, or 19.0%, to
$6.1 million in the first half of 1998 from $5.1 million in the first half of
1997. As a percentage of net sales, operating income decreased to 27.3% in the
first half of 1998 compared to 30.9% in the first half of 1997. Excluding the
effect of the purchased research and development expense, operating income would
have increased by $1.4 million, or 28.3%, to $6.6 million in the first half of
1998, or 29.4% of net sales.
Interest Income. Interest income increased $807,000 to $856,000 in the
first half of 1998 from $49,000 in the first half of 1997. This increase is due
to an increase in interest earning short-term investments purchased with
proceeds from the Company's initial public offering in late 1997.
Interest Expense. Interest expense decreased $362,000 in the first half
of 1998 compared to the same period in 1997. In late 1997, proceeds from the
Company's initial public offering were used to pay all outstanding indebtedness.
Income Tax Expense. Income tax expense of $2.9 million was recorded in
the first half of 1998 at an effective income tax rate, as a percent of pre-tax
income, of 41.0%. A deferred tax asset and corresponding benefit of $1.6 million
recorded in 1996 in connection with the operations of IPS Publishing, Inc.
("IPS"), which was a C corporation at the time, was reversed in January 1997
when IPS elected S corporation status. Prior to September 29, 1997, the
shareholders of ALS and the Institute had elected to have these companies
treated as S corporations under the Internal Revenue Code. Accordingly, the
financial statements do not include any provision or liability for current or
deferred federal or state income taxes related to ALS or the Institute for any
periods prior to September 29, 1997.
- 9 -
12
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash and cash equivalents decreased to $6.3
million from the December 31, 1997 total of $22.3 million. The decrease of $16.0
million in cash and cash equivalents in the first half of 1998 is primarily due
to the net effect of (i) the purchase of $18.8 million in short-term commercial
paper, (ii) an increase of $5.5 million in net cash provided by operating
activities and (iii) $2.3 million used in the purchase of property, plant and
equipment, of which $1.7 million related to the construction of an office
facility in Madison, Wisconsin.
Effective June 30, 1998, the Company acquired 100% of the stock of Logicus
Incorporated. The cash settlement of this transaction took place on July 1,
1998. The acquisition is not expected to have a material impact on 1998
financial results.
In December 1997, the Company obtained a $7.5 million unsecured revolving line
of credit with a bank which matures on December 31, 1998. The line of credit
bears interest at either a floating rate based on the prime rate established by
the bank less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR
plus 1.25%. The rate is at the option of the Company and is determined at the
time of borrowing. As of June 30, 1998, the line of credit had not been used.
In March 1998, Athena Holdings LLC ("AHL") was formed by the Company and an
unaffiliated party to develop an office facility in the Madison, Wisconsin area.
The Company received a 70% interest in AHL in return for its capital
contribution of $700,000. This facility will be used for the Company's Madison
operations and the other party will also utilize part of the facility. The
estimated total cost of the project is approximately $6.6 million. The Company
is providing permanent financing for the project in the form of a mortgage note
with interest at a market rate.
Within the next 12 months, the Company expects to commence pilot operations in
one or more international markets. It is anticipated that the investment
required during this period will be approximately $1.5 million to $2.0 million.
The Company believes cash flow from operations and its current cash position
will be sufficient to meet its working capital requirements for the foreseeable
future.
YEAR 2000
The Company has investigated the extent to which its operations are subject to
Year 2000 issues and assessed the measures it believes will be necessary to
avoid any material disruption to its operations relating to Year 2000 issues. On
the basis of this investigation and assessment, the Company has taken steps to
ensure that its products and systems will not be adversely impacted by Year 2000
issues. As of the date hereof, substantially all of the Company's products are
Year 2000 compliant. The cost to the Company for such compliance measures has
not been material, and management believes that the cost of additional
modifications will likewise not be material. In addition to assessing its own
readiness for the Year 2000, the Company has begun the process of initiating
formal communications with all of its significant suppliers to determine the
extent to which the Company is vulnerable to those third parties' potential
failure to remediate their own Year 2000 issues. There can be no guarantee that
the systems of other companies, on which the Company's systems rely, will be
timely converted or that a failure to convert by another company or a conversion
that is incompatible with the Company's systems would not have a material
adverse effect on the Company.
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company can obtain a "safe-harbor" for forward-looking statements by identifying
those statements and by accompanying those statements with cautionary statements
which identify factors that could cause actual results to differ materially from
those in the forward-looking statements. Accordingly, the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains certain forward-looking statements relating to growth
plans, projected sales, revenues, earnings and costs, and product development
schedules and plans. The Company's actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include those factors identified in Item 1,
Business, Forward-Looking Statements, contained in the Company's Form 10-K for
the year ended December 31, 1997, which factors are incorporated herein by
reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable until December 31, 1998.
- 10 -
13
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The net proceeds to the Company from its initial public offering, after
deducting underwriting discounts of $3,606,400 and other expenses of
approximately $941,000, were approximately $46,972,000. From September
24, 1997 (the effective date of the Company's Form S-1 Registration
Statement) through June 30, 1998, the Company used the net proceeds
from the offering as follows:
(i) Approximately $1.6 million was used to pay compensation expenses
related to the termination of the Company's phantom stock plan.
(ii) Approximately $7.2 million was used to pay the entire principal
and accrued interest on the mortgage note and an unsecured note, both
related to the construction of the Company's new headquarters facility
in Wisconsin Rapids, Wisconsin.
(iii) Approximately $5.1 million was used to pay the entire principal
and accrued interest on notes from the Company's principal shareholders
related to the 1996 acquisition of IPS Publishing, Inc.
(iv) Approximately $10.5 million was used to pay distributions of S
corporation retained profits to S corporation shareholders.
(v) Approximately $1.7 million was used to invest in Athena Holdings
LLC, a limited liability company formed for the purpose of constructing
a building for the Institute for Academic Excellence, Inc.'s
operations.
The remaining proceeds have been invested in cash-equivalents and short-term
investments. The Company has broad discretion with respect to the use of the
remaining proceeds.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 28, 1998, the Company held its Annual Meeting of Shareholders.
(b) Not applicable.
(c) The Annual Meeting of Shareholders was held to elect seven directors to
serve until the 1999 Annual Meeting of Shareholders and until their
successors are elected and qualified. The results of this proposal,
which was voted upon at the Annual Meeting, are as follows:
For Withheld Abstain/Broker Non-vote
--- -------- -----------------------
(1) Judith A. Paul 16,454,014 1,300 447,069
(2) Terrance D. Paul 16,454,014 1,300 447,069
(3) Michael H. Baum 16,454,014 1,300 447,069
(4) John R. Hickey 16,454,014 1,300 447,069
(5) Timothy P. Welch 16,454,014 1,300 447,069
(6) Perry S. Akins 16,454,014 1,300 447,069
(7) John H. Grunewald 16,454,014 1,300 447,069
(d) Not applicable.
- 11 -
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter covered by
this report.
- 12 -
15
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.
ADVANTAGE LEARNING SYSTEMS, INC.
(Registrant)
August 14, 1998 /s/ Michael H. Baum
--------------------- ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
August 14, 1998 /s/ Timothy Sherlock
--------------------- ------------------------------
Date Timothy Sherlock
Secretary, Vice President, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
Index to Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule