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 January 31, 2002 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 0158-0012 - -------------------------- ------------------------------------ (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 January 31, 2002 were: Class A, par value $1.00 - 49,701,167 Class B, par value $1.00 - 11,650,764 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 January 31, 2002 and 2001, and April 30, 2001............. 3 Condensed Consolidated Statements of Income - Unaudited for the Three and Nine Months ended January 31, 2002 and 2001... 4 Condensed Consolidated Statements of Cash Flows - Unaudited for the Nine Months ended January 31, 2002 and 2001............. 5 Notes to Unaudited Condensed Consolidated Financial Statements.. 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 13-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19-20 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K/A................................ 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) January 31, April 30, --------------------------------------- Assets 2002 2001 2001 ------------------- ------------------ ------------------ <S> <C> <C> <C> Current Assets Cash and cash equivalents $ 80,487 80,151 $ 52,947 Accounts receivable 137,535 94,145 62,514 Income tax receivable 10,168 - - Inventories 68,994 49,691 50,763 Deferred income tax benefits 34,915 14,642 13,331 Prepaid expenses 11,194 9,023 9,980 ------------------- ------------------ ------------------ Total Current Assets 343,293 247,652 189,535 Product Development Assets 63,266 41,219 41,191 Property and Equipment 63,501 44,329 52,255 Intangible Assets 420,093 288,249 283,761 Deferred Income Tax Benefits 2,182 3,388 3,380 Other Assets 20,230 14,040 17,880 -------------------- ------------------ ------------------ Total Assets $ 912,565 638,877 $ 588,002 =================== ================== ==================== Liabilities & Shareholders' Equity Current Liabilities Notes payable and current portion of long-term debt $ 30,000 30,344 $ 30,000 Accounts and royalties payable 87,870 75,634 42,520 Deferred subscription revenues 146,224 134,618 117,103 Accrued income taxes 18,897 13,796 9,586 Other accrued liabilities 63,312 50,838 47,552 ---------------- ------------------ ------------------ Total Current Liabilities 346,303 305,230 246,761 Long-Term Debt 235,000 65,000 65,000 Other Long-Term Liabilities 46,428 34,334 34,901 Deferred Income Taxes 10,324 17,264 21,317 Shareholders' Equity 274,510 217,049 220,023 ------------------ ------------------ ------------------ Total Liabilities & Shareholders' Equity $ 912,565 638,877 $ 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 Nine Months Ended January 31, Ended January 31, --------------------------------------- ------------------------------------ 2002 2001 2002 2001 -------------------- ---------------- ------------------- -------------- <S> <C> <C> <C> <C> Revenues $ 207,981 163,800 $ 545,226 478,287 Costs and Expenses Cost of sales 70,657 53,308 177,542 152,577 Operating and administrative expenses 98,213 77,117 260,457 227,657 Amortization of intangibles 4,395 4,679 13,061 13,109 -------------------- ---------------- ------------------- -------------- Total Costs and Expenses 173,265 135,104 451,060 393,343 =================== =============== =================== ============== Operating Income 34,716 28,696 94,166 84,944 Interest Income and Other (215) 538 43 1,420 Interest Expense (2,149) (2,020) (5,108) (6,522) -------------------- ---------------- ------------------- -------------- Interest Expense - Net (2,364) (1,482) (5,065) (5,102) -------------------- ---------------- ------------------- -------------- Income Before Taxes 32,352 27,214 89,101 79,842 Provision For Income Taxes 11,000 9,933 30,294 29,142 ------------------ ---------------- ---------------- -------------- Net Income $ 21,352 17,281 $ 58,807 50,700 ==================== ================ =================== ============== Income Per Share Diluted $ 0.34 0.27 $ 0.93 0.80 Basic $ 0.35 0.28 $ 0.97 0.84 Cash Dividends Per Share Class A Common $ 0.05 0.04 $ 0.14 0.12 Class B Common $ 0.05 0.04 $ 0.14 0.12 Average Shares Diluted 63,376 63,414 63,036 63,378 Basic 60,961 60,644 60,632 60,484 </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 Nine Months Ended January 31, ------------------------------------------ 2002 2001 -------------------- ------------------- <S> <C> <C> Operating Activities Net income $ 58,807 50,700 Non cash items Amortization of intangibles 13,061 13,109 Amortization of composition costs 18,206 16,911 Depreciation of property and equipment 12,315 10,019 Other non-cash items 29,351 20,805 Net change in operating assets and liabilities (1,635) (12,079) Payment of acquisition related liabilities (12,544) - -------------------- ------------------- Cash Provided by Operating Activities 117,561 123,623 -------------------- ------------------- Investing Activities Additions to product development assets (32,921) (25,733) Additions to property and equipment (20,059) (16,648) Proceeds from sale of publishing assets - 2,500 Acquisitions, net of cash acquired (200,599) (7,052) -------------------- ------------------- Cash Used for Investing Activities (253,579) (46,933) -------------------- ------------------- Financing Activities Net borrowings of short-term debt - 351 Borrowings of long-term debt 200,000 - Repayment of long-term debt (30,000) (30,000) Cash dividends (8,245) (7,294) Purchase of treasury shares (2,783) (2,694) Proceeds from issuance of stock on option exercises and other 3,722 1,490 -------------------- ------------------- Cash Provided (Used for) by Financing Activities 162,694 (38,147) -------------------- ------------------- Effect of Exchange Rate Changes on Cash 864 (691) -------------------- ------------------- Cash and Cash Equivalents Increase for Period 27,540 37,852 Balance at Beginning of Period 52,947 42,299 -------------------- ------------------- Balance at End of Period $ 80,487 80,151 ==================== =================== Supplemental Information Businesses Acquired: Fair value of assets acquired $ 268,258 7,188 Liabilities assumed (67,659) (136) -------------------- ------------------- Cash paid for businesses acquired $ 200,599 7,052 -------------------- ------------------- Interest $ 5,028 7,169 Income taxes $ 10,261 15,369 </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 January 31, 2002 and 2001, and April 30, 2001, and results of operations and cash flows for the periods ended January 31, 2002 and 2001. The results for the three and nine months ended January 31, 2002 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 third quarter and nine months ended January 31, 2001 by $2.8 million and $9.3 million, respectively, with no effect on operating income or net income. Shipping and handling costs included in operating and administrative expenses amounted to $5.5 and $5.8 million, in the first nine 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 January 31, 2002, 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 January 31, 2002, the Company had open foreign exchange forward contracts expiring through January 2003 as follows: <TABLE> <CAPTION> Currency Purchased U.S. $ Value Average Contract Rate ------------------ ------------ --------------------- <S> <C> <C> UK(pound) $ 11,844 $ 1.4992 Euro $ 599 $ .9212 </TABLE> 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 Nine Months Ended January 31, Ended January 31, --------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- ------------- -------------- -------------- (thousands) <S> <C> <C> <C> <C> Net Income $21,352 17,281 $58,807 50,700 Other Comprehensive Income (Loss) - Transition adjustment for cash flow hedges as of May 1, 2001 - - (454) - Current period change in fair value of cash flow hedges (115) - (212) - Foreign currency translation adjustments (447) 1,711 (714) 825 -------------- ------------- -------------- -------------- Comprehensive Income $20,790 18,992 $57,427 51,525 -------------- ------------- -------------- -------------- </TABLE>
A reconciliation of accumulated other comprehensive loss follows: <TABLE> <CAPTION> Three Months Ended January 31, 2002 Nine Months Ended January 31, 2002 ----------------------------------- ---------------------------------- Foreign Foreign Currency Cash Currency Cash Translation Flow Translation Flow Adjustments Hedges Total Adjustments Hedges Total ----------- ------ ----- ----------- ------ ----- <S> <C> <C> <C> <C> <C> <C> Beginning Balance $ (3,384) (551) (3,935) $ (3,117) - (3,117) Transition adjustment - - - - (454) (454) Change for period (447) (115) (562) (714) (212) (926) Reclassification to earnings - - - - - - -------------- ------------- ------------- --------------- ------------ ---------- Ending Balance $ (3,831) (666) (4,497) $ (3,831) (666) (4,497) -------------- ------------- ------------- --------------- ------------ ---------- </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 Nine Months Ended January 31, Ended January 31, ---------------------------------- -- --------------------------------- 2002 2001 2002 2001 --------------- --------------- --------------- -------------- (thousands) <S> <C> <C> <C> <C> Weighted average shares outstanding 61,238 60,983 60,901 60,821 Less: Unearned deferred compensation shares (277) (339) (269) (337) --------------- --------------- --------------- -------------- Shares used for basic income per share 60,961 60,644 60,632 60,484 Dilutive effect of stock options and other stock awards 2,415 2,770 2,404 2,894 --------------- --------------- --------------- -------------- Shares used for diluted income per share 63,376 63,414 63,036 63,378 --------------- --------------- --------------- -------------- </TABLE> 7. Inventories were as follows: <TABLE> <CAPTION> January 31, April 30, -------------------------------- 2002 2001 2001 -------------- -------------- ------------- (thousands) <S> <C> <C> <C> Finished goods $62,278 45,839 $46,353 Work-in-process 5,602 2,492 4,481 Paper, cloth and other 4,505 4,999 3,020 -------------- -------------- ------------- 72,385 53,330 53,854 LIFO reserve (3,391) (3,639) (3,091) -------------- -------------- ------------- Total inventories $68,994 49,691 $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 January 31, ----------------------------------------------------------------------------------- 2002 2001 ----------------------------------------- --------------------------------------- (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 $36,619 $2,126 $38,745 $34,928 $2,311 $37,239 Professional/Trade 76,105 3,569 79,674 40,171 3,707 43,878 Higher Education 36,071 5,730 41,801 33,513 5,384 38,897 European Segment 38,229 3,251 41,480 34,773 3,900 38,673 Other Segments 20,957 153 21,110 20,415 242 20,657 Eliminations - (14,829) (14,829) - (15,544) (15,544) -------------- ------------ ------------- -------------- ----------- ------------ Total Revenues $207,981 - $207,981 $163,800 - $163,800 -------------- ------------ ------------- -------------- ----------- ------------ Direct Contribution to Profit Domestic Segments: Scientific, Technical, and Medical $15,162 $15,293 Professional/Trade 20,797 11,376 Higher Education 16,729 14,828 European Segment 13,541 11,304 Other Segments 6,101 6,293 ------------- ------------ Total Direct Contribution to Profit 72,330 59,094 Shared Services and Administrative Costs (37,614) (30,398) ------------- ------------ Operating Income 34,716 28,696 Interest Expense - Net (2,364) (1,482) ------------- ------------ Income Before Taxes $32,352 $27,214 ------------- ------------ </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> Nine Months Ended January 31, ----------------------------------------------------------------------------------- 2002 2001 --------------------------------------- --------------------------------------- (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 $115,388 5,253 120,641 $108,523 5,775 114,298 Professional/Trade 165,656 11,000 176,656 112,906 11,630 124,536 Higher Education 100,300 18,773 119,073 99,367 18,118 117,485 European Segment 111,139 9,312 120,451 105,712 9,108 114,820 Other Segments 52,743 558 53,301 51,779 897 52,676 Eliminations - (44,896) (44,896) - (45,528) (45,528) ------------- ------------ ------------ ------------- ------------ ------------ Total Revenues $545,226 - 545,226 $478,287 - $478,287 ------------- ------------ ------------ ------------- ------------ ------------ Direct Contribution to Profit Domestic Segments: Scientific, Technical, and Medical $51,797 $49,938 Professional/Trade 43,079 28,643 Higher Education 44,843 43,191 European Segment 40,037 36,555 Other Segments 12,473 13,252 ------------ ------------ Total Direct Contribution to Profit 192,229 171,579 Shared Services and Administrative Costs (98,063) (86,635) ------------ ------------ Operating Income 94,166 84,944 Interest Expense - Net (5,065) (5,102) ------------ ------------ Income Before Taxes $89,101 $79,842 ------------ ------------ </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 Nine Months Ended January 31, Ended January 31, ---------------------------------- -- --------------------------------- 2002 2001 2002 2001 --------------- --------------- -------------- --------------- (thousands except per share data) <S> <C> <C> <C> <C> Revenues $207,981 213,340 $615,129 646,449 Net Income $21,352 14,958 $52,180 49,551 Income Per Share $.34 .24 $.83 .78 </TABLE> The pro forma financial information for the nine months ended January 31, 2001 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. In November 2001, the Company acquired 47 higher education titles from 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 Operating activities provided $117.6 million in cash, or $6.1 million less than the prior year's comparable period. The decrease was primarily due to the paydown of acquisition related liabilities. Investing activities used $253.6 million during the current year-to-date, or $206.6 million more than the comparable prior year period. Investing activities included the acquisition of Hungry Minds and certain other publishing assets amounting to $200.6 million. Current year financing activities primarily reflect the purchase of treasury shares, dividend payments, the $30 million scheduled repayment of existing long-term debt 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 $3 million, current liabilities include $146.2 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 THIRD QUARTER ENDED JANUARY 31, 2002 Revenues for the third quarter advanced 27% to $208 million compared with $163.8 million in the prior year period. Operating income for the current quarter increased 21% to $34.7 million compared with $28.7 million in the prior year. Net income advanced 24% to $21.4 million, and income per diluted share increased 26% to $.34 compared with $.27 in the prior year. In a difficult environment resulting from a sluggish economy and increased anxiety in world financial markets, the Company continued to report strong results. The combination of organic growth and strategic acquisitions have resulted in consistent increases in revenues, earnings, cash flow and shareholder value during the past decade, and continues to have a positive effect on current performance. The third quarter results were primarily driven by the inclusion of Hungry Minds results, which was acquired on September 21, 2001, and the Scientific, Technical and Medical journal programs in the United States and Europe. Excluding Hungry Minds, revenues for the quarter were up 4% over the prior year and operating income was approximately $1.5 million above the prior year period. Operating margins decreased to 16.7% from 17.5% in the prior year, primarily due to reduced STM margins attributable to new society journals and lower gross margins on the IEEE book publishing program. Hungry Minds has been performing better than expected and the integration is proceeding smoothly. The Company is forecasting the acquisition will be slightly accretive to earnings in fiscal year 2002, which is better that previously forecast. Hungry Minds revenues are currently forecast to be in the range of $80-85 million, also better than previous projections. The planned $10 million in annualized cost savings will be achieved by the end of this fiscal year. Cost of sales as a percentage of revenues increased to 34% compared with 32.5% 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 47.2% in the current quarter, essentially flat with the prior year's second quarter. Operating expenses increased 27.4% over the prior year, primarily due to the inclusion of Hungry Minds. Excluding Hungry Minds and foreign currency translation effects, operating expenses increased approximately 5% over the prior year period. The operating margin was 16.7% in the current quarter, compared with 17.5% in the prior year's second quarter. The effective tax rate was 34% in the current quarter, 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. Corporate Headquarters Relocation - --------------------------------- The upcoming relocation of our corporate headquarters may result in one-time charges to earnings for payments through April 2003 for the existing lease on the New York location after the premises is vacated and for the write-off of furniture, fixtures and leasehold improvements that will be disposed. The amount of any charge will be dependent upon the completion date, which at present is uncertain. Such charges however, may be recorded in the fourth quarter of this fiscal year. In addition, to complete the physical relocation, Wiley will incur one-time moving and other relocation-related expenses in fiscal year 2003.
The Company's relocation will provide a significantly improved and efficient work environment and will meet the Company's growth needs. This is being accomplished on attractive financial terms, including the one-time relocation charges, which were anticipated when analyzing a variety of options. SEGMENT RESULTS Scientific, Technical And Medical (STM) - --------------------------------------- Domestic STM revenues of $38.7 million increased 4% 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 was essentially flat. The direct contribution margin declined to 39.1% in the current quarter compared with 41.1% 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 continued to evolve as a global enterprise, with its growth underpinning the global research communities' need for quality content, when and where they want it. Over the past year, the online service experienced a significant increase in user sessions, with over 31,000 sessions recorded on a daily basis by the end of the quarter, as compared with about 18,000 sessions per day a year ago. This growth is also reflected in the number of full-text article views by institutional customers, which increased more than 50% during the fall. The number of academic institutions, companies, and consortia signing on quadrupled during 2001; Wiley InterScience is now licensed by customers in 87 countries - delivering must-have content to almost six million scientists, researchers, academics, and professionals around the world. The growth in usage also reflects the value to customers of its linking agreements with third party providers. The Company is adding functionality and features to make Wiley InterScience an even more powerful tool for its customers, thereby expanding its revenue base. During the quarter, Wiley and the International Union of Cancer (UICC) launched TNM MobileEdition, the first portable electronic version of the TNM classification system, which Wiley publishes in print. TNM MobileEdition is designed specifically for use on Personal Digital Assistants and wireless devices. Article Select, a feature launched last year that allows Wiley InterScience's customers to purchase individual journal articles not covered by their subscriptions, has now been extended to include OnlineBook chapters from the 136 titles now available through that service. Researchers can search the complete content of Wiley InterScience's books together with that of its online journals and reference works. If a customer is not subscribed to a certain book, but finds a particular chapter imperative to ongoing research, Article Select allows immediate access for a limited period of time. The Company also continued to build Wiley InterScience by adding more content. In January, five more reference works were added to the growing selection of online major reference works. The addition of these titles brings the total number of major reference works and Current Protocols online to twenty-four, representing in excess of 100,000 pages of equivalent print information, but with the added value of online functionality. Dr. H. Robert Horvitz of the Massachusetts Institute of Technology and Dr. Stanley J. Korsmeyer of the Dana Farber Cancer Institute were named as the winners of the first annual Wiley Prize in the Biomedical Sciences. The researchers were chosen for their work in defining the genetic and molecular basis of programmed cell death -- findings that may lead to understanding the
molecular basis of human development and the development of many diseases. The Company has developed a successful business and a strong reputation by publishing and disseminating information on significant advances in science, technology, and medicine, contributed by prominent researchers and scientists from a vast community of scholars. By creating this prize, the company wishes to acknowledge the contributions of that community, as well as to recognize and foster ongoing excellence in scientific achievement and discovery. Professional/Trade - ------------------ Domestic Professional/Trade segment revenues of $79.7 million for the third quarter advanced 82% over the comparable prior year period, and the direct contribution to profit advanced 83% to $20.8 million. The increase was attributable to the inclusion of Hungry Minds. The direct contribution margin increased from 25.9% in the prior year to 26.1%. The Professional/Trade business continued to experience some negative effects of the slowdown in retail and corporate sales in the early part of the quarter, the after-effects 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 pace of sales improved in the latter part of the quarter. During the quarter, the Company launched TheraForms, a new website from which customers can purchase single-copy downloads of forms from its best-selling Practice Planners, Healing Journeys, and other practice management books. The site includes over 250 handouts and homework exercises for adults, children, couples, and families. The Company's successful partnership with the National Restaurant Association's Educational Foundation was reinforced with the execution of an agreement covering a major new edition of the Foundation's flagship publication, ServSafe, which instructs readers on food sanitation procedures and leads to certification required for food service employees in nearly all states. The Company's culinary books won three awards at the Gourmand World Cookbook Awards in France: Sweet Seasons by Richard Leach won Best Desserts Book; Barbara Ostmann's The Recipe Writer's Handbook was selected Best Book for Food Professionals and Le Cordon Bleu's Wine Essentials was named Best Wine Education Book. Higher Education - ---------------- Domestic Higher Education segment revenues of $41.8 million increased 7% for the quarter from the prior year and the direct contribution to profit increased 13% to $16.7 million. The revenue growth was in part attributable to the November acquisition of certain higher education titles from Thomson. The list strengthens the Company's positions in key markets. The Company's programs in psychology and geography continue to perform well. Higher Education rolled out a strong frontlist, publishing 26 textbooks during the quarter, including the innovative Chemistry, Third Edition, by John Olmsted and Gregory Williams. Overall enrollments in higher education continue to increase with more high school students going onto college than ever before. Moreover, the softening economy has resulted in more students applying to graduate programs than in the
past. We anticipate some positive effects from this trend beginning this fall, partially offsetting continued sluggish engineering enrollments. The Company continues to combat used books. The Web Access License (WAL) program gained traction during the quarter, with the first orders coming in for fee-based access to online supplements from customers who have not purchased new textbooks. Other initiatives counter the used book market by adding value to learning materials for students and professors, thereby impacting adoptions and sales. Market penetration of eGrade, our online homework and quizzing system, expanded during the quarter. The Company extended its Faculty Resource Network (FRN), which it established to provide professor-to-professor support for its textbooks and technology products. Two agreements were signed during the quarter to produce a series of books with the magazine, Fast Company, as well as a series of laboratory manuals with PASCO, a company that produces microcomputer-based physics labs. Europe - ------ European revenues of $41.5 million advanced 7% over the prior year's third quarter. The revenue growth was driven by STM journals and Higher Education programs. The direct contribution to profit of $13.5 million was 20% over the prior year. The direct contribution margin was 32.6% in the current period compared with 29.2% in the prior year. In Europe, the journals business is strong with lower-than-expected attrition rates and growing electronic access revenues. The Company's major reference works program is also a key revenue driver. Over the past year, the Company joined forces with the Publishers' Association (UK), the Association of American Publishers, the International Publishers Association and other companies to urge the Chinese government to remedy a long-standing problem: the proliferation of pirated journals in library collections. Over the last quarter, our efforts have resulted in concrete results, with the Chinese government closing down the largest publisher of unlicensed reprints and issuing a decree to universities banning use of pirated journals. These developments are already having a positive impact on our business results. Other Segments - -------------- The other segment revenues advanced 2% for the quarter primarily as a result of a strong performance in Australia and Canada, and the inclusion of Hungry Minds' international sales, offset to a large degree by market softness throughout Asia. RESULTS OF OPERATIONS NINE MONTHS ENDED JANUARY 31, 2002 Revenues for the first nine months of $545.2 million advanced 14% compared with $478.3 million in the prior year period. Operating income increased 11% to $94.2 million, compared with $84.9 million in the prior year. Net income advanced 16% to $58.8 million, and income per diluted share increased 16% to $.93 compared with $.80 in the prior year. Excluding the results of Hungry Minds, revenues advanced 3%, for the first nine months of the fiscal year.
Cost of sales as a percentage of revenues was 32.6% compared with 31.9% in the prior year. Operating expenses as a percentage of revenues were 47.8%, compared with 47.6% in the prior year's first nine months. Operating expenses increased 14% 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 17.3% compared with 17.8% in the prior year period. Interest expense net of interest income remained essentially flat mostly due to lower interest income offset by lower interest expense resulting from the decline in interest rates. 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 $120.6 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 4% to $51.8 million. The direct contribution margin was 42.9% compared with 43.7% in the prior year. Professional/Trade - ------------------ Domestic Professional/Trade revenues of $176.7 million for the first nine months advanced 42% over the comparable prior year period and the direct contribution to profit advanced 50% to $43.1 million, reflecting the positive effect of the Hungry Minds acquisition. The direct contribution margin increased from 23% in the prior year to 24.4%. Higher Education - ---------------- Domestic Higher Education revenues of $119.1 million increased 1% from the prior year. The direct contribution to profit increased 4% to $44.8 million. The direct contribution margin improved to 37.7% compared with 36.8% in the prior year. Higher Education results were helped by the titles acquired from Thomson in November. Europe - ------ European revenues of $120.5 million for the first nine months advanced 5% and the direct contribution to profit of $40 million increased 10% over the prior year. The direct contribution margin was 33.2% compared with 31.8% in the prior year. The improvement was primarily attributable to higher journal revenues. Other Segments - -------------- The other segment revenues advanced 1% for the first nine 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 $265 million of variable rate loans outstanding at January 31, 2002, which approximated fair value. The Company did not use any derivative financial investments to manage this exposure. The weighted average interest rate as of January 31, 2002 was approximately 2.7%. A hypothetical 10% change in interest rates for the variable rate debt would affect annual net income and cash flow by approximately $1.1 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 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/A dated September 21, 2001 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: March 12, 2002