SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the quarterly period ended October 31, 2001 Commission File No. 1-11507 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from to JOHN WILEY & SONS, INC. (Exact name of Registrant as specified in its charter) NEW YORK 13-5593032 - -------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 605 THIRD AVENUE, NEW YORK, NY 10158-0012 - ---------------------------- ----------------------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (212) 850-6000 - ---------------------------------- NOT APPLICABLE ----------------------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report Indicate by check mark, whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of each of the Registrant's classes of common stock as of October 31, 2001 were: Class A, par value $1.00 - 49,513,015 Class B, par value $1.00 - 11,651,264 This is the first page of a 22 page document
JOHN WILEY & SONS, INC. INDEX PART I - FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements. Condensed Consolidated Statements of Financial Position - Unaudited as of October 31, 2001 and 2000, and April 30, 2001........... 3 Condensed Consolidated Statements of Income - Unaudited for the Three and Six Months ended October 31, 2001 and 2000.. 4 Condensed Consolidated Statements of Cash Flows - Unaudited for the Six Months ended October 31, 2001 and 2000............ 5 Notes to Unaudited Condensed Consolidated Financial Statements.. 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................13-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk......18-19 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............. 20 Item 6. Exhibits and Reports on Form 8-K................................. 20 "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995....................... 21 SIGNATURES 22 EXHIBITS None
JOHN WILEY & SONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands) <TABLE> <CAPTION> (UNAUDITED) October 31, April 30, -------------------------------------- Assets 2001 2000 2001 ------------------ ------------------ ------------------ <S> <C> <C> <C> Current Assets Cash and cash equivalents $ 21,719 10,565 $ 52,947 Accounts receivable 124,432 94,953 62,514 Income tax receivable 12,282 - - Inventories 73,027 49,952 50,763 Deferred income tax benefits 34,641 13,427 13,331 Prepaid expenses 11,631 7,293 9,980 ---------------- ------------------ ------------------ Total Current Assets 277,732 176,190 189,535 Product Development Assets 60,627 40,866 41,191 Property and Equipment 60,563 37,564 52,255 Intangible Assets 404,908 291,692 283,761 Deferred Income Tax Benefits 2,786 2,415 3,380 Other Assets 20,777 20,096 17,880 ------------------ ------------------ ------------------ Total Assets $ 827,393 568,823 $ 588,002 ================== ================== ==================== Liabilities & Shareholders' Equity Current Liabilities Notes payable and current portion of long-term debt $ 80,000 78,445 $ 30,000 Accounts and royalties payable 91,186 78,606 42,520 Deferred subscription revenues 35,658 38,535 117,103 Accrued income taxes 13,971 8,568 9,586 Other accrued liabilities 62,265 51,116 47,552 ---------------- ------------------ ------------------ Total Current Liabilities 283,080 255,270 246,761 Long-Term Debt 235,000 65,000 65,000 Other Long-Term Liabilities 44,929 33,091 34,901 Deferred Income Taxes 9,457 14,478 21,317 Shareholders' Equity 254,927 200,984 220,023 ----------------- ------------------ ------------------ Total Liabilities & Shareholders' Equity $ 827,393 568,823 $ 588,002 ================= ================== ==================== </TABLE> 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) <TABLE> <CAPTION> Three Months Six Months Ended October 31, Ended October 31, --------------------------------------- ------------------------------------- 2001 2000 2001 2000 -------------------- ---------------- ------------------- --------------- <S> <C> <C> <C> <C> Revenues $ 176,201 160,559 $ 337,245 314,487 Costs and Expenses Cost of sales 56,957 50,102 106,885 99,269 Operating and administrative expenses 86,011 77,866 162,244 150,540 Amortization of intangibles 4,320 4,286 8,666 8,430 -------------------- ---------------- ------------------- --------------- Total Costs and Expenses 147,288 132,254 277,795 258,239 -------------------- ---------------- ------------------- --------------- Operating Income 28,913 28,305 59,450 56,248 Interest Income and Other (181) 356 258 882 Interest Expense (1,816) (2,391) (2,959) (4,502) -------------------- ---------------- ------------------- --------------- Interest Expense - Net (1,997) (2,035) (2,701) (3,620) -------------------- ---------------- ------------------- --------------- Income Before Taxes 26,916 26,270 56,749 52,628 Provision For Income Taxes 9,002 9,325 19,294 19,209 -------------------- ---------------- ------------------- --------------- Net Income $ 17,914 16,945 $ 37,455 33,419 ==================== ================ =================== =============== Income Per Share Diluted $ 0.28 0.27 $ 0.59 0.53 Basic $ 0.29 0.28 $ 0.62 0.55 Cash Dividends Per Share Class A Common $ 0.05 0.04 $ 0.09 0.08 Class B Common $ 0.05 0.04 $ 0.09 0.08 Average Shares Diluted 63,175 63,534 62,977 63,438 Basic 60,862 60,607 60,578 60,481 </TABLE> The accompanying Notes are an integral part of the condensed consolidated financial statements.
JOHN WILEY & SONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands) <TABLE> <CAPTION> For The Six Months Ended October 31, ------------------------------------------ 2001 2000 -------------------- ------------------- <S> <C> <C> Operating Activities Net income $ 37,455 33,419 Non cash items Amortization of intangibles 8,667 8,430 Amortization of composition costs 12,093 11,374 Depreciation of property and equipment 8,337 7,095 Other non-cash items 13,148 11,298 Net change in operating assets and liabilities (97,952) (81,199) Payment of acquisition related liabilities (11,363) - -------------------- ------------------- Cash Used for Operating Activities (29,615) (9,583) -------------------- ------------------- Investing Activities Additions to product development assets (20,579) (16,376) Additions to property and equipment (13,014) (11,546) Proceeds from sale of publishing assets - 2,500 Acquisitions, net of cash acquired (184,742) (7,052) -------------------- ------------------- Cash Used for Investing Activities (218,335) (32,474) -------------------- ------------------- Financing Activities Net borrowings of short-term debt 50,000 48,731 Borrowings of long-term debt 200,000 - Repayment of long-term debt (30,000) (30,000) Cash dividends (5,490) (4,858) Purchase of treasury shares (2,204) (1,664) Proceeds from issuance of stock on option exercises and other 3,053 1,193 -------------------- ------------------- Cash Provided by Financing Activities 215,359 13,402 -------------------- ------------------- Effect of Exchange Rate Changes on Cash 1,363 (3,079) -------------------- ------------------- Cash and Cash Equivalents Decrease for Period (31,228) (31,734) Balance at Beginning of Period 52,947 42,299 -------------------- ------------------- Balance at End of Period $ 21,719 10,565 ==================== =================== Supplemental Information Businesses Acquired: Fair value of assets acquired $ 247,611 $ 7,188 Liabilities assumed (62,869) (136) -------------------- ------------------- Cash paid for businesses acquired $ 184,742 $ 7,052 -------------------- ------------------- Cash Paid During the Period for: Interest $ 3,405 $ 5,381 Income taxes $ 9,029 $ 14,468 </TABLE> The accompanying Notes are an integral part of the condensed consolidated financial statements.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's consolidated financial position as of October 31, 2001 and 2000, and April 30, 2001, and results of operations and cash flows for the periods ended October 31, 2001 and 2000. The results for the three and six months ended October 31, 2001 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the most recent audited financial statements contained in the Company's Form 10-K for the fiscal year ended April 30, 2001. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Certain prior year amounts have been restated to conform to the current year's presentation including the adoption in the fourth quarter of the prior fiscal year of the consensus of the Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" which resulted in the reclassification of shipping and handling fee income from cost of sales and operating and administrative expenses, where it was previously recorded, to revenues. This reclassification had the effect of increasing revenues and the prior year's costs and expenses in the second quarter and six months ended October 31, 2000 by $3.4 million and $6.5 million, respectively, with no effect on operating income or net income. Shipping and handling costs included in operating and administrative expenses amounted to $3.6 and $3.9 million, in the first six months of fiscal year 2002 and 2001, respectively. 3. At the beginning of the current fiscal year, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, which specifies the accounting and disclosure requirements for such instruments. Under the new standard, all derivatives are recognized as assets or liabilities and measured at fair value. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding effect on earnings. Changes in the fair value of derivatives that are designated and determined to be effective as part of a hedge transaction will have no immediate effect on earnings and depending on the type of hedge, are recorded either as part of other comprehensive income and will be included in earnings in the periods in which earnings are affected by the hedged item, or are included in earnings as an offset to the earnings impact of the hedged item. Any ineffective portions of hedges are reported in earnings as they occur. The adoption of these new standards as of May 1, 2001 resulted in a transition adjustment loss of $.5 million which is included as part of other comprehensive income. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. For hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction are specifically identified, and it must be probable that each forecasted transaction will occur. If it is deemed probable that the forecasted transaction will not occur, the gain or loss is recognized in earnings currently. During the period ending October 31, 2001, there was no material ineffectiveness related to the cash flow hedges, and the estimated amount of gains or losses that are expected to be reclassified into earnings over the next year are not material. The Company does not use derivative financial instruments for trading or speculative purposes. At October 31, 2001, the Company had open foreign exchange forward contracts expiring through January 2003 as follows: Currency Purchased U.S. $ Value Average Contract Rate ------------------ ------------ --------------------- UK(pound) $ 11,844 $ 1.4992 Euro $ 1,331 $ .9181 The U.K. (pound) contract has been designated a cash flow hedge of foreign currency exposures related to the payment of facility construction commitments. 4. Comprehensive income was as follows: <TABLE> <CAPTION> Three Months Six Months Ended October 31, Ended October 31, --------------------------------- -------------------------------- 2001 2000 2001 2000 -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> (thousands) Net Income $17,914 16,945 $37,455 33,419 Other Comprehensive Income (Loss) - Transition adjustment for cash flow hedges as of May 1, 2001 - - (454) - Current period change in fair value of cash 47 - (97) - flow hedges Foreign currency translation adjustments (824) (309) (267) (886) -------------- ------------- ------------- -------------- Comprehensive Income $17,137 16,636 $36,637 32,533 -------------- ------------- ------------- -------------- </TABLE> A reconciliation of accumulated other comprehensive loss follows:
<TABLE> <CAPTION> Three Months Ended October 31, 2001 Six Months Ended October 31, 2001 ----------------------------------- --------------------------------- Foreign Foreign Currency Cash Currency Translation Flow Translation Cash Flow Adjustments Hedges Total Adjustments Hedges Total ----------- ------ ----- ----------- ------ ----- <S> <C> <C> <C> <C> <C> <C> Beginning Balance $ (2,560) (598) (3,158) $ (3,117) - (3,117) Transition - - - - (454) (454) adjustment Change for period (824) 47 (777) (267) (97) (364) Reclassification to - - - - - - earnings -------------- -------------- ------------ --------------- --------------- ------------ Ending Balance $ (3,384) (551) (3,935) $ (3,384) (551) (3,935) -------------- -------------- ------------ --------------- --------------- ------------ </TABLE> 5. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for by a single method - the purchase method. In addition, the statement requires the purchase price to be allocated to identifiable intangible assets in addition to goodwill if certain criteria are met. The statement also requires additional disclosures related to the reasons for the business combination, the allocation of the purchase price, and if significant by reportable segment, to the assets acquired and liabilities assumed. SFAS No. 142 eliminates the requirement to amortize goodwill and those intangible assets that have indefinite useful lives, but requires an annual test for impairment at the reporting unit level. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. SFAS No. 142 will be effective for the Company's next fiscal year beginning May 1, 2002 for goodwill and other intangible assets acquired prior to July 1, 2001, and is effective immediately for acquisitions occurring after June 30, 2001. The Company is in the process of evaluating and reassessing its goodwill and other intangible assets to determine the impact of any impairment and the related useful lives and the corresponding amortization expense to be recorded. The Company anticipates that substantially all amortization of goodwill as a charge to earnings will be eliminated.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial results. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial results. 6. A reconciliation of the shares used in the computation of income per share follows: <TABLE> <CAPTION> Three Months Six Months Ended October 31, Ended October 31, ---------------------------------- -- --------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> (thousands) Weighted average shares outstanding 61,135 60,956 60,844 60,817 Less: Unearned deferred compensation shares (273) (349) (266) (336) --------------- --------------- -------------- --------------- Shares used for basic income per share 60,862 60,607 60,578 60,481 Dilutive effect of stock options and other stock awards 2,313 2,927 2,399 2,957 --------------- --------------- -------------- --------------- Shares used for diluted income per share 63,175 63,534 62,977 63,438 --------------- --------------- -------------- --------------- </TABLE> 7. Inventories were as follows: <TABLE> <CAPTION> October 31, -------------------------------- April 30, 2001 2000 2001 -------------- -------------- ------------- (thousands) <S> <C> <C> <C> Finished goods $67,797 46,318 $46,353 Work-in-process 4,479 2,183 4,481 Paper, cloth and other 4,042 4,990 3,020 -------------- -------------- ------------- 76,318 53,491 53,854 LIFO reserve (3,291) (3,539) (3,091) -------------- -------------- ------------- Total inventories $73,027 49,952 $50,763 -------------- -------------- ------------- </TABLE> 8. The Company is a global publisher providing must-have content and services to customers worldwide. Core businesses include scientific, technical, and medical journals, encyclopedias, books and online products and services; professional and consumer books and subscription services; and textbooks and educational materials for undergraduate and graduate students and lifelong learners. The Company has publishing, marketing, and distribution centers in the United States, Canada, Europe, Asia, and Australia. The Company's reportable segments are based on the management reporting structure used to evaluate performance. Segment information is as follows:
<TABLE> <CAPTION> Three Months Ended October 31, ---------------------------------------------------------------------------------- 2001 2000 --------------------------------------- --------------------------------------- (thousands) Inter- Inter- External segment External segment Customers Sales Total Customers Sales Total ----------- -------- -------- --------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues Domestic Segments: Scientific, Technical, and Medical $40,215 $1,565 $41,780 $37,823 $1,777 $39,600 Professional/Trade 53,782 3,844 57,626 39,254 4,516 43,770 Higher Education 27,835 7,103 34,938 30,910 6,911 37,821 European Segment 38,521 2,695 41,216 37,146 2,568 39,714 Other Segments 15,848 186 16,034 15,426 336 15,762 Eliminations - (15,393) (15,393) - (16,108) (16,108) -------------- ----------- ------------ -------------- ----------- ------------ Total Revenues $176,201 - $176,201 $160,559 - $160,559 -------------- ----------- ------------ -------------- ----------- ------------ Direct Contribution to Profit Domestic Segments: Scientific, Technical, and Medical $18,696 $18,339 Professional/Trade 15,018 10,907 Higher Education 10,997 11,755 European Segment 13,146 13,093 Other Segments 2,952 3,152 ------------ ------------ Total Direct Contribution to Profit 60,809 57,246 Shared Services and Administrative Costs (31,896) (28,941) ------------ ------------ Operating Income 28,913 28,305 Interest Expense - Net (1,997) (2,035) ------------ ------------ Income Before Taxes $26,916 $26,270 ------------ ------------ </TABLE> Certain prior year amounts have been reclassified to conform to the current year's presentation, including the restatement of revenues to include shipping and handling fee income in accordance with the new accounting standard as outlined in note 2. Previously, such amounts were classified as offsets to cost of sales and operating and administrative expenses.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> Six Months Ended October 31, ----------------------------------------------------------------------------------- 2001 2000 --------------------------------------- --------------------------------------- (thousands) Inter- Inter- External segment External segment Revenues Customers Sales Total Customers Sales Total ------------- ------------ ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Domestic Segments: Scientific, Technical, and Medical $78,769 3,127 81,896 $73,595 3,464 77,059 Professional/Trade 89,551 7,431 96,982 72,735 7,923 80,658 Higher Education 64,229 13,043 77,272 65,854 12,734 78,588 European Segment 72,910 6,061 78,971 70,939 5,208 76,147 Other Segments 31,786 405 32,191 31,364 655 32,019 Eliminations -- (30,067) (30,067) -- (29,984) (29,984) ------------- ------------ ------------ ------------- ------------ ------------ Total Revenues $337,245 -- 337,245 $314,487 -- $314,487 ------------- ------------ ------------ ------------- ------------ ------------ Direct Contribution to Profit Domestic Segments: Scientific, Technical, and Medical $36,635 $34,645 Professional/Trade 22,282 17,267 Higher Education 28,114 28,363 European Segment 26,496 25,251 Other Segments 6,372 6,959 ------------ ------------ Total Direct Contribution to Profit 119,899 112,485 Shared Services and Administrative Costs (60,449) (56,237) ------------ ------------ Operating Income 59,450 56,248 Interest Expense - Net (2,701) (3,620) ------------ ------------ Income Before Taxes $56,749 $52,628 ------------ ------------ </TABLE> Certain prior year amounts have been reclassified to conform to the current year's presentation, including the restatement of revenues to include shipping and handling fee income in accordance with the new accounting standard as outlined in note 2. Previously, such amounts were classified as offsets to cost of sales and operating and administrative expenses.
9. In September 2001, the Company acquired 100% of the outstanding shares of Hungry Minds, Inc. (Hungry Minds) for a total purchase price of approximately $184.7 million, consisting of approximately $90.2 million in cash for the common stock of Hungry Minds, $92.5 million in cash to enable Hungry Minds to repay its outstanding debt, and fees and expenses of approximately $2 million. Hungry Minds is a leading global knowledge company with an outstanding collection of respected brands in such areas as technology, business, consumer and how-to brands, computer-based learning tools, Web-based products and Internet e-services. Best-selling brands include the For Dummies series, the Unofficial Guide, the technological Bible and Visual series, Frommer's travel guides, CliffsNotes, Webster's New World Dictionary, Betty Crocker, Weight Watchers, and other market-leading brands. Hungry Minds has 2,500 active titles in 39 languages, including 600 frontlist titles and revisions per year. The acquisition of Hungry Minds' world-renowned brands is an excellent opportunity to accelerate revenue and earnings growth by enhancing the Company's already strong presence in the professional/trade market and exploiting its strong global position. The Company will obtain synergies by leveraging its sales forces and worldwide distribution channels, and eliminating redundant infrastructure costs. The cost of the acquisition has been allocated on the basis of preliminary estimates of the fair values of the assets acquired and the liabilities assumed. Final asset and liability fair values may differ based on finalization of appraisals, tax bases, and other considerations; however, it is anticipated that any changes will not have a material effect, in the aggregate, on the consolidated financial position of the Company. The excess of cost over the preliminary estimate of the fair value of the net tangible assets acquired relates primarily to goodwill and branded trademarks with indefinite lives that are not being amortized, and to acquired publication rights that are being amortized over lives ranging from ten to fifteen years. The accompanying condensed financial statements include the results of operations of Hungry Minds since the date of acquisition. The following unaudited pro forma financial information presents the results of operations of the Company as if the acquisition had been consummated as of May 1, 2000. The unaudited pro forma financial information is not necessarily indicative of the actual results that would have been achieved had the acquisition actually been consummated as of May 1, 2000, nor is it necessarily indicative of future results of operations. <TABLE> <CAPTION> Three Months Six Months Ended October 31, Ended October 31, ---------------------------------- -- --------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- --------------- (thousands except per share data) <S> <C> <C> <C> <C> Revenues $203,635 233,198 $407,823 435,419 Net Income $14,343 23,938 $31,852 34,910 Income Per Share $.23 .38 $.51 .55 </TABLE> The pro forma financial information for the three and six month periods ended October 31, 2000 included a non-recurring gain related to Hungry Minds revision of certain assumptions in the calculation of its sales returns reserve resulting in increased revenues, net income and income per share of approximately $5 million, $3 million, and $.05 per share, respectively.
10. To finance the Hungry Minds acquisition, as well as to provide funds for general working capital and other needs, the Company obtained an additional $300 million bank credit facility with 13 banks, consisting of a $200 million five-year term loan facility to be repaid in September 2006, and a $100 million five-year revolving credit facility expiring in September 2006. The Company has the option of borrowing at the following floating interest rates: (i) at a rate based on the London Interbank Offered Rate (LIBOR) plus an applicable margin ranging from .625% to 1.375% depending on the coverage ratio of debt to EBITDA; or (ii) at the higher of (a) the Federal Funds Rate plus .5% or (b) UBS's prime rate, plus an applicable margin ranging from 0% to .375% depending on the coverage ratio of debt to EBITDA. In addition, the Company pays a commitment fee ranging from .125% to .225% on the unused portion of the facility depending on the coverage ratio of debt to EBITDA. In the event of a change of control, as defined, the banks have the option to terminate the agreement and require repayment of any amounts outstanding. The credit facility contains certain restrictive covenants similar to the Company's existing credit agreements related to minimum net worth, funded debt levels, and interest coverage ratio, and restricted payments, including a cumulative limitation for dividends paid and share repurchases. 11. Subsequent to the end of the second quarter, in November 2001, the Company acquired 47 higher education titles from International Thomson for approximately $16 million in cash. The titles are in such publishing areas as business, earth and biological sciences, foreign languages, mathematics, nutrition and psychology. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION During this seasonal period of cash usage, operating activities used $29.6 million of cash, or $20 million more than the prior year's comparable period. The increase was primarily due the payment of Hungry Minds' acquisition related liabilities and lower levels of accounts payable and accrued liabilities. The use of cash during this period is consistent with the seasonality of the journal subscription business and the higher education segment's receipts cycle that occurs, for the most part, in the second half of the fiscal year. Investing activities used $218.3 million during the current year-to-date, or $185.9 million more than the comparable prior year period. Investing activities included the acquisition of Hungry Minds and certain other publishing assets amounting to $184.7 million. Current year financing activities primarily reflect the purchase of treasury shares, dividend payments, the $30 million scheduled repayment of existing long-term debt, short-term borrowings of $50 million and new long-term borrowings of $200 million to finance the acquisition of Hungry Minds. Although the statement of financial condition indicates a negative working capital of $5.3 million, current liabilities include $35.7 million of deferred income related to journal subscriptions for which the cash has been received and which will be recognized in income as the journals are delivered to customers. In addition, the Company
believes its cash balances together with existing credit facilities are sufficient to meet its obligations. RESULTS OF OPERATIONS SECOND QUARTER ENDED OCTOBER 31, 2001 Revenues for the second quarter advanced 10% to $176.2 million compared with $160.6 million in the prior year period. Operating income for the current quarter increased 2% to $28.9 million compared with $28.3 million in the prior year. Net income advanced 6% to $17.9 million, and income per diluted share increased 4% to $.28 compared with $.27 in the prior year. The second quarter revenue and operating income increase was primarily attributable to the inclusion of Hungry Minds results, which was acquired on September 21, 2001. Excluding Hungry Minds, revenues for the quarter were essentially on par with the prior year and operating income was approximately $1 million below the prior year period. Operating margins decreased to 16.4% from 17.6% in the prior year, also as a result of Hungry Minds. Although the Company's businesses are somewhat resistant to changing economic conditions, the tragic events of September 11th have affected results. Customer traffic at brick and mortar bookstores, in the United States and abroad, was down significantly in the weeks following the terrorist attacks. Although the Company will not fully recoup the lost sales following the tragedy, it is believed the aftermath effects of September 11th on the Company's business will be relatively short-term in duration. The current market for computer books has been soft, however there is strong customer interest in the recent release of Windows XP for Dummies. In addition, the Company's tax publishing program is capitalizing on changes in the tax laws. Wiley InterScience, the Company's online service continues to evolve as a profitable global enterprise. The integration of Hungry Minds has been proceeding ahead of schedule. The Company is already benefiting from the best practices approach which is being followed throughout the acquisition process. The Company is forecasting revenues for Hungry Minds in the range of $75-80 million through the end of the fiscal year. The Company expects the acquisition to be neutral to earnings this fiscal year and accretive thereafter. Cost of sales as a percentage of revenues increased to 32.3% compared with 31.2% in the prior year, primarily due to the inclusion of Hungry Minds which has lower gross margins than Wiley's other businesses. Operating expenses as a percentage of revenues were 48.8% in the current quarter, compared with 48.5% in the prior year's second quarter. The increase was primarily due to higher technology-related costs. Operating expenses increased 10.5% over the prior year, primarily due to the inclusion of Hungry Minds. Excluding Hungry Minds and foreign currency translation effects, operating expenses increased approximately 1% over the prior year period. The operating margin was 16.4% in the current quarter, compared with 17.6% in the prior year's second quarter. The effective tax rate was 33.4% in the current quarter, compared with 35.5% in the prior year. The decrease was due to lower state income taxes resulting from settlement of open tax issues at the end of the prior fiscal year, as well as lower foreign taxes on settlement of open tax issues during the current year.
SEGMENT RESULTS Scientific, Technical And Medical (STM) - --------------------------------------- Domestic STM revenues of $41.8 million increased 6% over the prior year, led by increases in the journal programs, which had stronger renewal rates compared with the prior year, as well as the addition of three society journals. The direct contribution to profit increased 2% to $18.7 million. The direct contribution margin declined to 44.7% in the current quarter compared with 46.3% in the prior year, as a result of higher royalties related to the new society journals, as well as lower gross margins on the IEEE book publishing program. During the quarter, Wiley InterScience launched OnlineBooks, a fully searchable and browseable database that integrates content from the Company's STM books with that of its online journals and reference works. This initiative represents the next step in the evolution of digital information resources provided by the Company globally. The Company announced an agreement with Celera Genomics to develop links between cited article references, abstracts, and full-text articles available on the Wiley InterScience online service and the Celera Discovery System (CDS). This agreement will provide subscribers of both services with more direct access to a broad range of bioinformatics data, full-text articles and abstracts. CDS is a web-based platform that integrates Celera's exclusive genomic and biological databases (e.g., the Human Genome Database and the Human Gene index), essential public and third party sources, and analysis and visualization tools into one system to advance the discovery process for researchers worldwide. The Company also signed an agreement to link EBSCO Online to Wiley InterScience. These agreements are examples of the Company's strategy to open new pathways for researchers to explore and access the Company's must-have content. Professional/Trade - ------------------ Domestic Professional/Trade segment revenues of $57.6 million for the second quarter advanced 32% over the comparable prior year period, and the direct contribution to profit advanced 38% to $15 million. The increase was attributable to the inclusion of Hungry Minds. Excluding Hungry Minds, revenues and direct contribution to profit declined by 2% and 5%, respectively. The direct contribution margin increased from 24.9% in the prior year to 26.1%. The Professional/Trade business was adversely impacted by the slowdown in retail and corporate sales in the aftermath of the September 11th terrorist attacks. Business and travel books have been most affected. The culinary, architecture, psychology and general interest areas continue to perform well. The most significant event of the second quarter was the completion of the Company's acquisition of Hungry Minds on September 21st. Together, the Company and Hungry Minds have a strong position in targeted markets, with a formidable collection of respected brands and a far-reaching global presence. The Company entered into an agreement with eBrary to provide online access to 100 of its Professional/Trade titles through multiple online channels, including libraries and other organizations. The license is based on an innovative sales model in which online access is provided free of charge, but a per-page fee is incurred for printing. During the quarter, the Company also selected Innodata as its new e-Book conversion partner, at a lower cost and with faster turnaround than previous vendors. Higher Education - ---------------- Domestic Higher Education segment revenues of $34.9 million decreased 8% for the quarter from the prior year and the direct contribution to profit decreased 6% to $11 million. Two factors contributed to these results. First, college
bookstores are promoting used textbooks more aggressively. This is reflected in Higher Education's performance, as frontlist sales are tracking to expectations, while backlist titles have experienced greater than anticipated attrition. The Company is hopeful that new, value-added materials and services that complement the educational packages will appeal to students and help to combat the growth in used book sales. Second, although overall demographic trends in higher education are favorable, enrollments in engineering, a key Wiley area, are currently down. It is noteworthy that the Company's programs in psychology and geography, two of its "soft side" disciplines, are performing well. The Company should benefit from the overall increase in enrollments as students move through their junior and senior years when they will take advanced courses in their major fields of study. The direct contribution margin improved to 31.5% compared with 31.1% in the prior year, as a result of expense contingency plans. In October, Wiley announced a partnership with Columbia Earthscape, a nonprofit, academic web-based service provided by Columbia University Press, to create the most comprehensive multimedia resources available for Earth Science education at the college and university level. As a result of this collaboration, Wiley and Columbia Earthscape will enhance their product costs with each other's content and resources and will coordinate editorial, production, marketing and sales efforts. Wiley is a leading publisher of reports and data from organizations such as ABC NewsOne, the American Museum of Natural History, the Lamont-Doherty Earth Observatory, MIT, UNESCO and a wealth of other online resources. Early in the third quarter, the Company acquired 47 higher education titles in business, earth and biological sciences, foreign languages, mathematics, nutrition and psychology from International Thomson. The acquisition will strengthen the Company's position in key markets. Europe - ------ European revenues of $41.2 million advanced 4% over the prior year's second quarter. Growth was driven by STM journals program. The direct contribution to profit of $13.0 million was essentially on par with the prior year. The direct contribution margin was 31.9% in the current period compared with 33% in the prior year, as a result of flat book sales for the quarter. During the quarter, Wiley Europe was selected as publisher of the British Journal of Surgery, one of the world's most prestigious and widely read general surgery publications. Factors that resulted in the Company's successful bid included the functionality of Wiley InterScience, the strength of its online communities and web portals, and Wiley's global market reach. InPharm, Wiley Europe's online information service for the pharmaceutical industry, signed a sales representation agreement during the quarter with drugdev123.com, a specialist website serving the clinical research market. Wiley-VCH also launched pro-physics.de, a community-of-interest site. In November, Wiley Europe introduced Express Exec, an extensive print and digital service that provides users with the latest business thinking and best practices in areas such as marketing, strategy, innovation, leadership and human resources. Other Segments - -------------- The other segment revenues advanced 2% for the quarter primarily as a result of a strong performance in Australia and the inclusion of Hungry Minds' international sales, offset to a large degree by market softness throughout Asia.
Wiley Australia has once again won the coveted Tertiary Publisher of the Year award for outstanding service to the higher education market. This is the fourth time Wiley Australia has achieved this honor, which is awarded by booksellers. RESULTS OF OPERATIONS SIX MONTHS ENDED OCTOBER 31, 2001 Revenues for the first six months of $337.2 million advanced 7% compared with $314.5 million in the prior year period. Operating income increased 6% to $59.5 million, compared with $56.2 million in the prior year. Net income advanced 12% to $37.5 million, and income per diluted share increased 11% to $.59 compared with $.53 in the prior year. Excluding the results of Hungry Minds and foreign currency translation effects, revenues and operating income advanced 3%, and 2%, respectively, for the first six months of the fiscal year. Cost of sales as a percentage of revenues was 31.7% compared with 31.6% in the prior year. Operating expenses as a percentage of revenues were 48.1%, compared with 47.9% in the prior year's first six months. Operating expenses increased 8% over the prior year. Excluding Hungry Minds and foreign currency translation effects, operating expenses increased 4% from the prior year period. The operating margin was 17.6% compared with 17.9% in the prior year period. Interest expense net of interest income declined by $.9 million as a result of lower interest rates and lower average debt outstanding. The effective tax rate was 34% in the current period compared with 36.5% in the prior year. The decrease was due to lower state income taxes resulting from settlement of open tax issues at the end of the prior fiscal year, as well as lower foreign taxes on settlement of open tax issues during the current year. SEGMENT RESULTS Scientific, Technical and Medical (STM) - --------------------------------------- Domestic STM revenues of $81.9 million increased 6% over the prior year led by stronger renewal rates in the journal programs and the addition of three new society journals. The direct contribution to profit increased 6% to $36.6 million. The direct contribution margin was 44.7% compared with 45% in the prior year. Professional/Trade - ------------------ Domestic Professional/Trade revenues of $97 million for the first six months advanced 20% over the comparable prior year period and the direct contribution to profit advanced 29% to $22.3 million. Excluding the results of the Hungry Minds acquisition, revenues and direct contribution to profit advanced 2% for the first six months, as sales were adversely impacted by the slowdown in retail and corporate sales in the aftermath of the September 11th terrorist attacks. The direct contribution margin increased from 21.4% in the prior year to 23%. Higher Education - ---------------- Domestic Higher Education revenues of $77.3 million declined 2% from the prior year. The direct contribution to profit decreased 1% to $28.1 million. Higher Education results were adversely affected by higher used textbook sales and lower enrollments in engineering. The direct contribution margin improved to 36.4% compared with 36.1% in the prior year, due to expense contingency measures.
Europe - ------ European revenues of $79 million for the first six months advanced 4% and the direct contribution to profit of $26.5 million increased 5% over the prior year. The direct contribution margin was 33.6% compared with 33.2% in the prior year. The improvement was primarily attributable to higher journal revenues. Other Segments - -------------- The other segment revenues advanced 1% for the first six months as higher Australian and Canadian revenues and the inclusion of Hungry Minds' international operations were offset to a large extent by recessionary environments in some key Asian markets. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for by a single method - the purchase method. In addition, the statement requires the purchase price to be allocated to identifiable intangible assets in addition to the goodwill if certain criteria are met. The statement also requires additional disclosures related to the reasons for the business combination, the allocation of the purchase price, and if significant by reportable segment, to the assets acquired and liabilities assumed. SFAS No. 142 eliminates the requirement to amortize goodwill and those intangible assets that have indefinite useful lives, but requires an annual test for impairment at the reporting unit level. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. SFAS No. 142 will be effective for the Company's next fiscal year beginning May 1, 2002 for goodwill and other intangible assets acquired prior to July 1, 2001, and is effective immediately for acquisitions occurring after June 30, 2001. The Company is in the process of evaluating and reassessing its goodwill and other intangible assets to determine the impact of any impairment and the related useful lives and the corresponding amortization expense to be recorded. The Company anticipates that substantially all amortization of goodwill as a charge to earnings will be eliminated. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial results. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company is exposed to market risk primarily related to interest rates, foreign exchange and credit risk. It is the Company's policy to monitor these exposures and to use derivative financial instruments and/or insurance contracts from time to time to reduce fluctuations in earning and cash flows when it is deemed appropriate to do so. The Company does not use derivative financial investments for trading or speculative purposes. Interest Rates The Company had $315 million of variable rate loans outstanding at October 31, 2001, which approximated fair value. The Company did not use any derivative financial investments to manage this exposure. The weighted average interest rate as of October 31, 2001 was approximately 3.2%. A hypothetical 10% change in interest rates for the variable rate debt would affect annual net income and cash flow by approximately $.5 million. Foreign Exchange Rates The Company is exposed to foreign currency exchange movements primarily in European, Asian, Canadian and Australian currencies. Consequently, the Company and its subsidiaries, from time to time, enter into foreign exchange forward contracts as a hedge against foreign currency asset, liability, commitment, and anticipated transaction exposures, including intercompany purchases. The Company does not use derivative financial instruments for trading or speculative purposes. For a more detailed description, reference is made to note 3 of the condensed financial statements. Credit Risk The Company's business is not dependent upon a single customer, however, the book publishing business has witnessed a significant concentration in national, regional and online bookstore chains in recent years. Although no one of such customers accounted for more than 6% of total annual consolidated revenues in fiscal year 2001, to mitigate its credit risk exposure the Company obtains credit insurance where available. In the journal publishing business, subscriptions are primarily sourced through independent subscription agents who facilitate the journal-ordering process by consolidating the subscription orders/billings of each subscriber with various publishers. Monies are collected in advance from subscribers by the subscription agents and are remitted to the journal publishers, including the Company, generally prior to the commencement of the subscriptions. Future calendar-year subscription receipts from these agents are highly dependent on their financial position and liquidity. Subscription agents accounted for approximately 24% of total annual consolidated revenues and no one agent accounted for more than 8% of total annual consolidated revenues in fiscal year 2001. Insurance for these accounts is not commercially feasible and/or available.
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were voted upon at the annual meeting of shareholders of the Company on September 20, 2001. Election of Directors - --------------------- Ten directors as indicated in the Proxy Statement were elected to the Board, three of whom were elected by the holders of Class A Common Stock, and seven by the holders of Class B Common Stock. Proposal to Amend and Restate the 1990 Director Stock Plan - ---------------------------------------------------------- The proposal was adopted as follows: Votes For 13,346,678 Votes Against 1,897,292 Abstentions 30,078 Ratification of Appointment of Arthur Andersen LLP, as Independent - ------------------------------------------------------------------ Public Accountants for the Year - --------------------------------- Ending April 30, 2002 - --------------------- The appointment was ratified as follows: Votes For 15,230,181 Votes Against 11,243 Abstentions 2,625 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 - Financial Data Schedule (b) Reports on Form 8-K The Company filed a Form 8-K dated August 12, 2001 under Item 5. Other Events relating to the acquisition of Hungry Minds, Inc. The Company filed a Form 8-K dated September 21, 2001 under Item 2. Acquisition or Disposition of Assets relating to the acquisition of Hungry Minds, Inc.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 This report contains certain forward-looking statements concerning the Company's operations, performance, and financial condition. Reliance should not be placed on forward-looking statements, as actual results may differ materially from those in any forward-looking statements. Any such forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to uncertainties and contingencies, many of which are beyond the control of the Company, and are subject to change based on many important factors. Such factors include, but are not limited to (i) the level of investment in new technologies and products; (ii) subscriber renewal rates for the Company's journals; (iii) the financial stability and liquidity of journal subscription agents; (iv) the consolidation of book wholesalers and retail accounts; (v) the market position and financial stability of key online retailers; (vi) the seasonal nature of the Company's educational business and the impact of the used book market; (vii) worldwide economic and political conditions; and (viii) other factors detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any such forward-looking statements to reflect subsequent events or circumstances.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JOHN WILEY & SONS, INC. Registrant By /s/William J. Pesce -------------- William J. Pesce President and Chief Executive Officer By /s/Ellis E. Cousens -------------- Ellis E. Cousens Executive Vice President and Chief Financial Officer Dated: December 13, 2001