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, 1999.
[ ] 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 JULY 31, 1999
----- --------------
Common Stock, $0.01 par value 34,079,678
2
ADVANTAGE LEARNING SYSTEMS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
PART I - FINANCIAL INFORMATION
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 ....................................................... 1
Unaudited Consolidated Statements of Income for
the Three Months and Six Months Ended
June 30, 1999 and 1998 ...................................................... 2
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998.......................................... 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........................................................................ 11
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................. 13
- Index -
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $25,222 $14,222
Short term investments 11,954 18,869
Accounts receivable, less allowance of
$1,446,000 in 1999 and $1,058,000 in 1998 10,179 8,832
Inventories 848 794
Prepaid expenses 688 656
Deferred tax asset 2,406 2,242
------- -------
Total current assets 51,297 45,615
------- -------
Property, plant and equipment, net 21,414 19,101
Deferred tax asset 1,611 1,647
Intangibles, net 2,438 1,445
Capitalized software, net 312 188
------- -------
Total assets $77,072 $67,996
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,017 $ 1,815
Deferred revenue 3,690 3,443
Payroll and employee benefits 1,881 1,080
Income taxes payable -- 2,157
Other current liabilities 2,111 2,182
------- -------
Total current liabilities 9,699 10,677
------- -------
Deferred revenue 1,344 1,398
------- -------
Total liabilities 11,043 12,075
Minority interest 269 295
Shareholders' equity 65,760 55,626
------- -------
Total liabilities and shareholders' equity $77,072 $67,996
======= =======
See accompanying notes to consolidated financial statements.
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ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
----------- ---------- ---------- ---------
(In thousands, except per share amounts)
Net sales:
Products $ 16,806 $ 9,680 $ 31,866 $ 18,316
Services 3,531 2,041 6,823 4,028
-------- -------- -------- --------
Total net sales 20,337 11,721 38,689 22,344
-------- -------- -------- --------
Cost of sales:
Products 1,884 1,056 3,449 1,957
Services 1,460 748 3,165 1,612
-------- -------- -------- --------
Total cost of sales 3,344 1,804 6,614 3,569
-------- -------- -------- --------
Gross profit 16,993 9,917 32,075 18,775
Operating expenses:
Product development 1,825 1,283 3,219 2,311
Selling and marketing 5,329 3,068 10,051 6,419
General and administrative 2,290 1,742 4,526 3,479
Purchased research and development 180 475 180 475
-------- -------- -------- --------
Total operating expenses 9,624 6,568 17,976 12,684
-------- -------- -------- --------
Operating income 7,369 3,349 14,099 6,091
Other income (expense):
Interest income 399 422 812 856
Interest expense (3) (7) (3) (7)
Other, net 291 62 467 132
-------- -------- -------- --------
Income before taxes 8,056 3,826 15,375 7,072
Income taxes 3,343 1,552 6,344 2,899
-------- -------- -------- --------
Net income $ 4,713 $ 2,274 $ 9,031 $ 4,173
======== ======== ======== ========
Basic earnings per share $ 0.14 $ 0.07 $ 0.27 $ 0.12
======== ======== ======== ========
Diluted earnings per share $ 0.14 $ 0.07 $ 0.26 $ 0.12
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 1998
----------------- ---------------
(In thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income $ 9,031 $ 4,173
Noncash (income) expenses included in net income -
Depreciation and amortization 1,311 824
Purchased research and development 180 475
Deferred income taxes (128) (347)
Change in assets and liabilities -
Accounts receivable (1,181) (1,439)
Inventory (53) (8)
Prepaid expenses (29) 428
Accounts payable and other current liabilities (1,386) 1,113
Deferred revenue 192 314
Other (45) (43)
-------- --------
Net cash provided by operating activities 7,892 5,490
-------- --------
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment (3,310) (2,257)
Proceeds from (purchase of) short-term investments, net 6,915 (18,805)
Capitalized software development costs (183) --
Acquisition (850) --
-------- --------
Net cash provided by (used in) investing activities 2,572 (21,062)
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of stock 222 --
Equity contribution from minority partner -- 66
Distribution to shareholders -- (544)
Proceeds from exercise of stock options 314 --
-------- --------
Net cash provided by (used in) financing activities 536 (478)
-------- --------
Net increase (decrease) in cash 11,000 (16,050)
Cash and cash equivalents, beginning of period 14,222 22,320
-------- --------
Cash and cash equivalents, end of period $ 25,222 $ 6,270
======== ========
See accompanying notes to consolidated financial statements.
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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, 1999 are not necessarily indicative of the results to be expected for
the full year.
3. ACQUISITION
Effective June 9, 1999, the Company acquired the assets of Humanities
Software, Incorporated ("Humanities"), an Oregon-based firm specializing in
writing software. The transaction was accounted for using the purchase method of
accounting. The operating results of Humanities are included in the consolidated
financial statements of the Company since the date of acquisition. The allocated
purchase price includes valuation of certain acquired in-process research and
development costs which resulted in a pre-tax charge of $180,000 in the second
quarter of 1999. The acquisition is not expected to have a significant effect on
earnings in the near term.
On June 10, 1999 the Company announced the signing of a definitive
agreement to acquire Generation21 Learning Systems LLC, a Denver-based developer
of software for enterprise-wide training and knowledge management. The
transaction, which closed on July 1, 1999, will be accounted for as a
pooling-of-interests. In accordance with the pooling-of-interests method of
accounting, the Company will expense transaction costs of approximately $400,000
in the third quarter of 1999. The Company expects to make significant
investments in marketing and related areas with respect to Generation21. Based
on management's current expectations as to the Company's growth, the anticipated
investments in Generation21 are not expected to have a material impact on the
Company's results of operations.
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.
On January 18, 1999, the board of directors of the Company authorized a
2-for-1 split of common stock in the form of a stock dividend payable on
February 26, 1999 to shareholders of record on February 11, 1999. Accordingly,
all share and per share data presented herein have been restated to reflect this
split. The weighted average shares outstanding during the three and six months
ended June 30, 1999 and 1998 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---------------- ---------------- --------------- -------------
Basic Weighted Average Shares 33,892,880 33,804,766 33,880,053 33,804,766
Impact of Stock Options 224,135 139,102 272,937 126,072
Diluted Weighted Average Shares 34,117,015 33,943,868 34,152,990 33,930,838
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4. SEGMENT REPORTING
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: software and training.
The software segment produces learning information systems software for
the K-12 school market in the United States and Canada. The software assists
educators in assessing and monitoring student development by increasing the
quantity, quality and timeliness of student performance data in the areas of
reading, math and writing. Revenue from the software segment includes product
revenue from the sale of software and service revenue from the sale of software
support agreements.
The training segment provides professional development training
seminars. Its programs train educators how to accelerate learning in the
classroom through use of the information that the Company's learning information
systems provide. Revenue from the training segment includes service revenue from
a variety of seminars presented in hotels and schools across the country, and
product revenue from training material.
The Company evaluates the performance of its operating segments based
on operating income before nonrecurring items. Intersegment sales and transfers
and revenue derived outside of the United States are not significant. Summarized
financial information concerning the Company's reportable segments is shown in
the following table:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ------------ ----------
(In thousands)
Revenues:
Software $ 17,882 $ 10,149 $ 34,159 $ 19,219
Training 2,455 1,572 4,530 3,125
-------- -------- -------- --------
Total revenues $ 20,337 $ 11,721 $ 38,689 $ 22,344
======== ======== ======== ========
Operating income:
Software $ 8,301 $ 4,048 $ 15,735 $ 7,184
Training (752) (224) (1,456) (618)
-------- -------- -------- --------
Total operating income (1) $ 7,549 $ 3,824 $ 14,279 $ 6,566
======== ======== ======== ========
(1) Total operating income differs from Operating income in the
Consolidated Statements of Income due to nonrecurring items not
included above: $180,000 and $475,000 purchased research and
development in the second quarter of 1999 and 1998, respectively.
The information about the segments presented above is in compliance
with SFAS 131 reporting requirements. The reported measures are consistent with
those used in measuring amounts in the consolidated financial statements. Such
measurements are generally along legal entity lines as aggregated.
It is management's opinion, however, that because many flows of value
between the segments cannot be precisely quantified, this information provides
an incomplete measure of the training segment profit or loss, and should not be
viewed in isolation. Management evaluates the performance of the training
segment based on many factors not captured by the financial accounting system
and often evaluates the Company's financial performance on a total entity basis.
5. COMPREHENSIVE INCOME
Total comprehensive income was $9,038,000 and $4,173,000 in the first
six months of 1999 and 1998, respectively. The difference between net income and
total comprehensive income comprised solely foreign currency translations.
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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,
1999 1998 1999 1998
---------- -------- -------- --------
Net Sales:
Products 82.6% 82.6% 82.4% 82.0%
Services 17.4 17.4 17.6 18.0
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of sales:
Products 11.2% 10.9% 10.8% 10.7%
Services 41.4 36.6 46.4 40.0
Total cost of sales 16.4 15.4 17.1 16.0
Gross profit:
Products 88.8 89.1 89.2 89.3
Services 58.6 63.4 53.6 60.0
Total gross profit 83.6 84.6 82.9 84.0
Operating expenses:
Product development 9.0 10.9 8.3 10.3
Selling and marketing 26.2 26.2 26.0 28.7
General and administrative 11.3 14.8 11.7 15.6
Purchased research and development 0.9 4.1 0.5 2.1
----- ----- ----- -----
Total operating expenses 47.4 56.0 46.5 56.7
----- ----- ----- -----
Operating income 36.2 28.6 36.4 27.3
Other income (expense):
Interest income 2.0 3.6 2.1 3.8
Interest expense 0.0 (0.1) 0.0 0.0
Other, net 1.4 0.5 1.2 0.6
----- ----- ----- -----
Total other income 3.4 4.0 3.3 4.4
----- ----- ----- -----
Income before taxes 39.6 32.6 39.7 31.7
Income taxes 16.4 13.2 16.4 13.0
----- ----- ----- -----
Net income 23.2% 19.4% 23.3% 18.7%
===== ===== ===== =====
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THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. The Company's net sales increased by $8.6 million, or 73.5%,
to $20.3 million in the second quarter of 1999 from $11.7 million in the second
quarter of 1998. Product sales increased by $7.1 million, or 73.6%, to $16.8
million in the second quarter of 1999 from $9.7 million in the second quarter of
1998. The increase in product sales is primarily attributable to (i) sales of
the Company's new math products which began shipping in late 1998 and (ii)
increased sales of Accelerated Reader title disks, with about 23,000 available
book titles, to a larger base of Accelerated Reader schools.
The Company anticipates that several new initiatives announced in the
second quarter of 1999 will positively impact continued growth over the long
term in the sale of its reading software products. In June 1999, the Company
announced that all of its reading and language arts software products have won
approval in California's state adoption of curriculum materials. Gaining
approval means that schools that want to purchase Accelerated Reader reading
information system, STAR Reading computer-adaptive reading test, and Perfect
Copy writing skills software can pay for them using state curriculum materials
funds. Also during the quarter, the Company announced plans for development of
early-literacy titles, and also began shipment of the Literacy Skills module of
the new version of the Company's Accelerated Reader software, scheduled for
overall completion in the fall. The Company plans to enlarge its title list by
more than 8,000 titles in 1999, part of its "Quiz on Every Book" program.
Service revenue, which consists of revenue from sales of training
seminars and software support agreements, increased by $1.5 million, or 73.0%,
to $3.5 million in the second quarter of 1999 from $2.0 million in the second
quarter of 1998. This increase is primarily attributable to an increased number
of Renaissance training sessions, and to revenue recognized from one-year
software support agreements associated with new product sales along with
renewals of agreements by an expanding base of existing customers.
Cost of Sales. The cost of sales of products increased by $828,000, or
78.4%, to $1.9 million in the second quarter of 1999 from $1.1 million in the
second quarter of 1998. As a percentage of product sales, the cost of sales of
products remained relatively constant at 11.2% and 10.9% in the second quarter
of 1999 and 1998, respectively. The cost of sales of services increased by
$712,000, or 95.3%, to $1.5 million in the second quarter of 1999 from $748,000
in the second quarter of 1998. As a percentage of sales of services, the cost of
sales of services increased to 41.4% in the second quarter of 1999 compared to
36.6% in the second quarter of 1998, primarily due to increased costs of
providing technical support relating to software support agreements. The
Company's overall gross profit margin decreased to 83.6% in the second quarter
of 1999 from 84.6% in the second quarter of 1998, due primarily to decreased
gross profit margins on services. Management expects that the overall gross
profit margin will remain relatively constant in 1999.
Product Development. Product development expenses increased by
$542,000, or 42.2%, to $1.8 million in the second quarter of 1999 from $1.3
million in the second quarter of 1998. These expenses increased primarily due to
increased development staff and consulting costs associated with the new math
and writing products, new Accelerated Reader quizzes, and new seminars
introduced in 1998 and early 1999. As a percentage of net sales, product
development costs decreased to 9.0% in the second quarter of 1999 from 10.9% in
the second quarter of 1998. The Company anticipates that the total dollar amount
of product development costs will continue to increase as the Company enhances
and extends its product offerings into other areas of the K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by $2.3
million, or 73.7%, to $5.3 million in the second quarter of 1999 from $3.1
million in the second quarter of 1998. These expenses increased primarily due to
(i) mailings to an increased customer and prospect base and increased
lead-generation advertising and (ii) salary and recruiting costs associated with
the hiring of additional personnel. As a percentage of net sales, selling and
marketing expenses remained constant at 26.2%. Management anticipates that
selling and marketing expenses will generally continue to rise, while remaining
relatively constant as a percentage of sales, as the Company expands its
customer and prospect base and number of curricular areas its products cover.
General and Administrative. General and administrative expenses
increased by $548,000, or 31.4%, to $2.3 million in the second quarter of 1999
from $1.7 million in the second quarter of 1998. As a percentage of net sales,
general and administrative costs decreased to 11.3% in the second quarter of
1999 compared to 14.8% in the second quarter of 1998. Management anticipates
that general and administrative expenses will continue to rise, while remaining
relatively constant as a percentage of net sales.
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Purchased Research and Development. In connection with the acquisitions
in June 1999 and June 1998, a portion of the purchase price of each acquisition
was allocated to acquired in-process research and development costs. This
resulted in a charge of $180,000 in the second quarter of 1999 and a charge of
$475,000 in the second quarter of 1998.
Operating Income. Operating income increased by $4.0 million to $7.4
million in the second quarter of 1999 from $3.3 million in the second quarter of
1998. As a percentage of net sales, operating income increased to 36.2% in the
second quarter of 1999 compared to 28.6% in the second quarter of 1998.
Income Tax Expense. Income tax expense of $3.3 million was recorded in
the second quarter of 1999 at an effective income tax rate, as a percent of
pre-tax income, of 41.5%, compared to $1.6 million, or 40.6% of pre-tax income
in second quarter 1998. Management expects that the effective tax rate will
remain relatively constant in 1999.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. The Company's net sales increased by $16.3 million, or
73.1%, to $38.7 million for the six months ended June 30, 1999 from $22.3
million in the first six months of 1998. Product sales increased by $13.5
million, or 74.0%, to $31.9 million in the first six months of 1999 from $18.3
million in the same period in 1998. The increase in product sales is primarily
attributable to (i) sales of the Company's new math products, with over 4,000
schools purchasing math since the release in late 1998 and (ii) increased sales
of Accelerated Reader title disks, with about 23,000 available book titles, to a
larger base of Accelerated Reader schools.
Service revenue increased by $2.8 million, or 69.4%, to $6.8 million
for the first six months of 1999 as compared to $4.0 million in the same period
in 1998. This increase is primarily attributable to an increased number of
Renaissance training sessions, and to revenue recognized from one-year software
support agreements associated with new product sales along with renewals of
agreements by an expanding base of existing customers.
Cost of Sales. The cost of sales of products increased by $1.5 million,
or 76.2%, to $3.4 million in the first six months of 1999 from $2.0 million in
1998. As a percentage of product sales, the cost of sales of products remained
relatively constant at 10.8% and 10.7% in the first half of 1999 and 1998,
respectively. The cost of sales of services increased by $1.6 million or 96.3%,
to $3.2 million in the first six months of 1999 compared to $1.6 million in the
same period in 1998. As a percentage of sales of services, the cost of sales of
services increased to 46.4% in the first six months of 1999 compared to 40.0% in
1998 primarily due to increased costs of providing technical support relating to
software support agreements and to increased costs associated with new training
programs. The Company's overall gross profit margin declined to 82.9% in the
first six months of 1999 from 84.0% in the first six months of 1998, due to
decreased gross profit margin on services. Management expects that the overall
gross profit margin will remain relatively constant for the remainder of 1999.
Product Development. Product development expenses increased by
$908,000, or 39.3%, to $3.2 million for the six months ended June 30, 1999 as
compared to $2.3 million for the corresponding 1998 period. These expenses
increased primarily due to increased development staff and consulting costs
associated with the new math and writing products, new Accelerated Reader
quizzes, and new seminars introduced in 1998 and early 1999. As a percentage of
net sales, product development costs decreased to 8.3% in the first half of 1999
from 10.3% in the first half of 1998. 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 $3.6
million, or 56.6%, to $10.1 million in the first half of 1999 from $6.4 million
in the first half of 1998. These expenses increased primarily due to (i)
mailings to an increased customer and prospect base and increased
lead-generation advertising and (ii) salary and recruiting costs associated with
the hiring of new personnel. As a percentage of net sales, selling and marketing
expenses declined to 26.0% in the first half of 1999 from 28.7% of net sales in
the first six months of 1998. This decrease is primarily due to economies of
scale associated with increased product sales and service sales. Management
anticipates that selling and marketing expenses will generally continue to rise,
while remaining relatively constant as a percentage of sales, as the Company
expands its customer and prospect base and number of curricular areas its
products cover.
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General and Administrative. General and administrative expenses
increased by $1.0 million, or 30.1%, to $4.5 million for the six months ended
June 30, 1999 as compared to $3.5 million for the same period in 1998. The
higher expenses for 1999 are largely due to 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 11.7% in
the first six months of 1999 from 15.6% for the same period in 1998. Management
anticipates that general and administrative expenses will continue to rise,
while remaining relatively constant as a percentage of net sales.
Purchased Research and Development. In connection with the acquisitions
in June 1999 and June 1998, a portion of the purchase price of each acquisition
was allocated to acquired in-process research and development costs. This
resulted in a charge of $180,000 in the second quarter of 1999 and a charge of
$475,000 in the second quarter of 1998.
Operating Income. Operating income increased by $8.0 million, or
131.5%, to $14.1 million in the first six months of 1999 from $6.1 million in
the same period in 1998. As a percentage of net sales, operating income
increased to 36.4% in the first half of 1999 compared to 27.3% in the first half
of 1998.
Income Tax Expense. Income tax expense of $6.3 million was recorded in
the first six months of 1999 at an effective income tax rate, as a percent of
pre-tax income, of 41.3% compared to $2.9 million, or 41.0% of pre-tax income in
the second half of 1998. Management expects that the effective tax rate will
remain relatively constant in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's cash, cash equivalents and
short-term investments increased by $4.1 million to $37.2 million from $33.1
million at December 31, 1998. The net increase is due primarily to $7.9 million
in net cash provided by operating activities offset in part by $3.3 million used
in the purchase of property, plant and equipment. 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.
At June 30, 1999, the Company had a $10.0 million unsecured revolving
line of credit with a bank which is available until March 31, 2000. The line of
credit bears interest at either a floating rate based on the prime rate 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, 1999, the line of credit had not been used.
Effective June 9, 1999, the Company acquired the assets of Humanities
Software, Incorporated ("Humanities"), an Oregon-based firm specializing in
writing software. The transaction was accounted for using the purchase method of
accounting. The operating results of Humanities are included in the consolidated
financial statements of the Company since the date of acquisition. The allocated
purchase price includes valuation of certain acquired in-process research and
development costs which resulted in a pre-tax charge of $180,000 in the second
quarter of 1999. The acquisition is not expected to have a significant effect on
earnings in the near term.
On June 10, 1999 the Company announced the signing of a definitive
agreement to acquire Generation21 Learning Systems LLC, a Denver-based developer
of software for enterprise-wide training and knowledge management. The
transaction, which closed on July 1, 1999, will be accounted for as a
pooling-of-interests. In accordance with the pooling-of-interests method of
accounting, the Company will expense transaction costs of approximately $400,000
in the third quarter of 1999. The Company expects to make significant
investments in marketing and related areas with respect to Generation21. Based
on management's current expectations as to the Company's growth, the anticipated
investments in Generation21 are not expected to have a material impact on the
Company's results of operations.
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12
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 systems and products will not be adversely
impacted by Year 2000 issues. As of June 30, 1999, substantially all of the
Company's systems and products are Year 2000 compliant. The cost to the Company
for such compliance measures has been approximately $100,000, and management
believes that the cost of additional modifications will be approximately
$100,000. The cost of the Company's internal Year 2000 compliance measures is
being funded through operating cash flows.
In addition to assessing its own readiness for the Year 2000, the
Company has initiated 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. A
significant percentage of these suppliers have responded in writing to the
Company's Year 2000 readiness inquiries. The Company plans to continue
assessment of its third party business partners, including face-to-face meetings
with management and/or on site visits as deemed appropriate. Despite the
Company's diligence, 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. The cost to the Company for its third party compliance efforts as of
June 30, 1999 has been approximately $650,000, and management believes that the
cost of additional efforts in this regard will be approximately $150,000. The
cost of the Company's external Year 2000 compliance measures is being funded
through operating cash flows.
With respect to Year 2000 risks associated with the Company's systems,
the Company believes that the most reasonably likely worst case scenario is that
the Company will experience a number of minor systems malfunctions and errors in
the early part of the Year 2000 that were not detected during its compliance
efforts. The Company believes that these problems will not be overwhelming and
will not have a material effect on the Company's operations or financial
results.
With respect to Year 2000 risks associated with the Company's software
products, the Company cannot be certain that the software will operate error
free, or that the Company will not be subject to litigation, whether the
software operates error free or not. However, the Company believes that based on
its efforts to ensure compliance, it is not reasonably likely that the Company
will be subject to such litigation.
With respect to Year 2000 risks associated with third party suppliers,
the Company believes that the most reasonably likely worst case scenario is that
some of the Company's significant suppliers will not be Year 2000 compliant.
Management also believes that the number of such suppliers will have been
minimized by the Company's program of identifying non-compliant suppliers and
replacing or jointly developing alternative supply or delivery solutions prior
to the Year 2000.
The Company has limited the scope of its risk assessment to those
factors which it can reasonably be expected to have an influence upon. For
example, the Company has made the assumption that government agencies, utility
companies, airlines, parcel delivery services and national telecommunication
providers will continue to operate. Obviously, the lack of such services could
have a material effect on the Company's ability to operate, but the Company has
little, if any, ability to influence such an outcome, or to make alternative
arrangements in advance for such services in the event they are not available.
Based upon the modifications made to its products and the new internal
systems which have been put in place, the Company believes it has substantially
completed the contingency plan to handle the most reasonably likely worst case
scenarios described above. However, if unanticipated Year 2000 related problems
occur, it could result in a material financial risk to the Company.
- 10 -
13
FORWARD-LOOKING STATEMENTS
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, 1998, which factors are
incorporated herein by reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 1999, the Company had no material market risk exposure
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).
- 11 -
14
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; SEC Reg. No. 333-22519) through June 30, 1999, 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 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 $10.9 million was used to pay distributions of S
corporation retained profits to S corporation shareholders.
(v) Approximately $7.4 million was used to invest in Athena Holdings
LLC, a limited liability company formed for the purpose of constructing
the Company's facility in Madison, Wisconsin.
(vi) Approximately $1.7 million was used for pilot operations in
various markets and miscellaneous acquisitions.
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 14, 1999, the Company held its Annual Meeting of Shareholders
(b) Not applicable.
- 12 -
15
(c) Set forth below are descriptions of the matters voted upon at the
Annual Meeting of Shareholders and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes, as to each such matter.
1. Seven directors were elected to serve until the 2000 Annual Meeting
of Shareholders and until their successors are elected and
qualified. The results of this proposal are as follows:
For Withheld
--- --------
(1) Judith A. Paul 31,373,193 10,640
(2) Terrance D. Paul 31,372,533 11,300
(3) Michael H. Baum 31,372,333 11,500
(4) John R. Hickey 31,372,333 11,500
(5) Timothy P. Welch 31,372,427 11,406
(6) Perry S. Akins 31,380,033 3,800
(7) John H. Grunewald 31,380,033 3,800
2. Advantage Learning Systems, Inc.'s Employee Stock Purchase Plan was
approved with 31,195,589 votes for this action, 148,916 votes
against, 31,650 votes abstained and 7,678 broker non-votes.
3. The Company's Amended and Restated Articles of Incorporation were
amended to increase the authorized Common Stock of the Company from
50,000,000 shares to 150,000,000 shares with 31,061,761 votes for
this action, 316,961 votes against and 5,111 votes abstained.
(d) Not applicable.
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.
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16
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 12, 1999 /s/ Michael H. Baum
--------------- ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
August 12, 1999 /s/ John R. Hickey
--------------- ------------------------------
Date John R. Hickey
President, Chief Financial Officer and
Chief Accounting Officer
(Principal Financial and Accounting Officer)
17
Index to Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule