<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO
------------ ------------
COMMISSION FILE NUMBER: 0-22187
ADVANTAGE LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1559474
(STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
PO BOX 8036
2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
54495-8036
(ZIP CODE)
(715) 424-3636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS JULY 31, 2000
----- -------------
Common Stock, $0.01 par value 34,213,870
<PAGE> 2
ADVANTAGE LEARNING SYSTEMS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
Number
------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 ......................................................... 1
Unaudited Consolidated Statements of Income for
the Three Months and Six Months Ended
June 30, 2000 and 1999 ........................................................ 2
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999............................................ 3
Notes to Unaudited Consolidated Financial Statements.................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................. 10
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................................... 12
</TABLE>
-Index-
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 22,021 $ 23,016
Investment securities 30,491 18,012
Accounts receivable, less allowance of
$1,188,000 in 2000 and $1,200,000 in 1999 9,243 11,796
Inventories 1,217 1,707
Prepaid expenses 989 1,287
Prepaid income taxes - 292
Deferred tax asset 2,868 2,559
Other current assets 826 -
--------------- ----------------
Total current assets 67,655 58,669
Property, plant and equipment, net 24,866 24,256
Deferred tax asset 2,337 2,297
Intangibles, net 2,283 2,702
Capitalized software, net 315 495
--------------- ----------------
Total assets $ 97,456 $ 88,419
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,827 $ 2,521
Deferred revenue 3,979 4,852
Payroll and employee benefits 2,078 1,981
Income taxes payable 227 -
Other current liabilities 3,055 2,392
--------------- ----------------
Total current liabilities 11,166 11,746
Deferred revenue 1,459 1,485
--------------- ----------------
Total liabilities 12,625 13,231
Minority interest 185 253
Shareholders' equity 84,646 74,935
--------------- ----------------
Total liabilities and shareholders' equity $ 97,456 $ 88,419
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE> 4
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales:
Products $ 22,195 $ 16,881 $ 40,567 $ 32,025
Services 4,227 3,670 9,925 7,115
-------------- -------------- --------------- --------------
Total net sales 26,422 20,551 50,492 39,140
-------------- -------------- --------------- --------------
Cost of sales:
Products 2,881 1,901 5,398 3,477
Services 2,167 1,497 5,216 3,229
-------------- -------------- --------------- --------------
Total cost of sales 5,048 3,398 10,614 6,706
-------------- -------------- --------------- --------------
Gross profit 21,374 17,153 39,878 32,434
Operating expenses:
Product development 3,838 1,901 7,008 3,355
Selling and marketing 6,129 5,504 12,762 10,388
General and administrative 3,030 2,304 5,863 4,561
Purchased research and development - 180 - 180
-------------- -------------- --------------- --------------
Total operating expenses 12,997 9,889 25,633 18,484
-------------- -------------- --------------- --------------
Operating income 8,377 7,264 14,245 13,950
Other income (expense):
Interest income 666 399 1,241 812
Other, net 117 268 263 426
-------------- -------------- --------------- --------------
Income before taxes 9,160 7,931 15,749 15,188
Income taxes 3,623 3,343 6,214 6,344
-------------- -------------- --------------- --------------
Net income $ 5,537 $ 4,588 $ 9,535 $ 8,844
============== ============== =============== ==============
Basic and diluted earnings per share $ 0.16 $ 0.13 $ 0.28 $ 0.26
============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 9,535 $ 8,844
Noncash (income) expenses included in net income -
Depreciation and amortization 2,223 1,337
Purchased research and development - 180
Deferred income taxes (349) (128)
Change in assets and liabilities -
Accounts receivable 2,543 (1,214)
Inventory 490 (53)
Prepaid expenses 590 (31)
Accounts payable and other current liabilities 294 (1,217)
Deferred revenue (899) 192
Other current assets (817) -
Other (48) (45)
-------------- --------------
Net cash provided by operating activities 13,562 7,865
-------------- --------------
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment (2,233) (3,314)
Proceeds from (purchase of) short-term investments, net (12,479) 6,915
Capitalized software development costs - (183)
Acquisition - (850)
-------------- --------------
Net cash provided by (used in) investing activities (14,712) 2,568
-------------- --------------
Cash flows provided by financing activities:
Proceeds from issuance of stock 490 222
Return of capital to minority interest (60) -
Purchase of treasury stock (325) -
Proceeds from exercise of stock options 50 314
-------------- --------------
Net cash provided by financing activities 155 536
-------------- --------------
Net increase (decrease) in cash (995) 10,969
Cash and cash equivalents, beginning of period 23,016 14,264
-------------- --------------
Cash and cash equivalents, end of period $ 22,021 $ 25,233
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 6
ADVANTAGE LEARNING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The consolidated financial statements include the financial results of
Advantage Learning Systems, Inc. ("ALS") and its consolidated subsidiaries
(collectively the "Company"). All significant intercompany transactions have
been eliminated in the consolidated financial statements.
2. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
periods, and are presented on an unaudited basis. These financial statements
should be read in conjunction with the Company's financial information contained
in the Company's Annual Report on Form 10-K which is on file with the U.S.
Securities and Exchange Commission.
Effective July 1, 1999, the Company acquired Generation21 Learning
Systems LLC ("Generation21"), a training and knowledge management enterprise
software firm in Golden, Colorado. The transaction was accounted for as a
pooling-of-interests. Accordingly, financial information for all periods
presented has been restated to include the results of Generation21.
The results of operations for the three and six month periods ended
June 30, 2000 and 1999 are not necessarily indicative of the results to be
expected for the full year.
3. EARNINGS PER COMMON SHARE
Basic earnings per common share has been computed based on the weighted
average number of common shares outstanding. Diluted earnings per common share
has been computed based on the weighted average number of common shares
outstanding, increased by the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
On January 3, 2000, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock. No time
limit was placed on the duration of the repurchase program. Repurchased shares
will become treasury shares and will be used for stock-based employee benefit
plans and for other general corporate purposes. As of June 30, 2000, the Company
had repurchased 25,100 shares.
The weighted average shares outstanding during the three months and six
months ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic Weighted Average Shares 34,213,934 34,059,323 34,217,379 34,046,496
Impact of Stock Options 95,909 224,135 105,319 272,937
Diluted Weighted Average Shares 34,309,843 34,283,458 34,322,698 34,319,433
</TABLE>
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<PAGE> 7
4. SEGMENT REPORTING
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: software and training.
The software segment produces learning information systems software for
the K-12 school market in the United States, Canada, the United Kingdom and
Australia. The software assists educators in assessing and monitoring student
development by increasing the quantity, quality and timeliness of student
performance data in the areas of reading, math and writing. The software segment
also includes training and knowledge management enterprise software, which is
currently sold primarily to corporate customers. Revenue from the software
segment includes product revenue from the sale of software and service revenue
from the sale of software support agreements.
The training segment provides professional development training
seminars. Its programs train educators on how to accelerate learning in the
classroom through use of the information that the Company's learning information
systems provide. Revenue from the training segment includes service revenue from
a variety of seminars presented in hotels and schools across the country, and
product revenue from training materials.
The Company evaluates the performance of its operating segments based
on operating income before nonrecurring items. Intersegment sales and transfers
and revenue derived outside of the United States are not significant. Summarized
financial information concerning the Company's reportable segments is shown in
the following table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Software $ 23,223 $ 18,096 $ 42,686 $ 34,610
Training 3,199 2,455 7,806 4,530
--------------- -------------- --------------- ---------------
Total revenues $ 26,422 $ 20,551 $ 50,492 $ 39,140
=============== ============== =============== ===============
Operating income:
Software $ 8,859 $ 8,196 $ 14,898 $ 15,586
Training (482) (752) (653) (1,456)
--------------- -------------- --------------- ---------------
Total operating income (1) $ 8,377 $ 7,444 $ 14,245 $ 14,130
=============== ============== =============== ===============
</TABLE>
(1) Total operating income differs from Operating income in the
Consolidated Statements of Income due to a nonrecurring charge of
$180,000 for purchased research and development in the second quarter
of 1999 not included above.
The reported measures are consistent with those used in measuring
amounts in the consolidated financial statements. Such measurements are
generally along legal entity lines as aggregated. Effective January 1, 2000, the
Company re-evaluated and changed certain cost allocations between the software
and training segments. The result of the re-evaluation on previously reported
segment disclosures is not material.
It is management's opinion, however, that because many flows of value
between the segments cannot be precisely quantified, this information provides
an incomplete measure of the training segment profit or loss, and should not be
viewed in isolation. Management evaluates the performance of the training
segment based on many factors not captured by the financial accounting system
and often evaluates the Company's financial performance on a total entity basis.
5. COMPREHENSIVE INCOME
Total comprehensive income was $9,496,000 and $8,850,000 in the first
six months of 2000 and 1999, respectively. The Company's comprehensive income
includes foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities.
-5-
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales:
Products 84.0 % 82.1 % 80.3 % 81.8 %
Services 16.0 17.9 19.7 18.2
------------- ------------- ------------ ------------
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
============= ============= ============ ============
Cost of sales:
Products 13.0 % 11.3 % 13.3 % 10.9 %
Services 51.3 40.8 52.6 45.4
Total cost of sales 19.1 16.5 21.0 17.1
Gross profit:
Products 87.0 88.7 86.7 89.1
Services 48.7 59.2 47.4 54.6
Total gross profit 80.9 83.5 79.0 82.9
Operating expenses:
Product development 14.5 9.2 13.9 8.6
Selling and marketing 23.2 26.8 25.3 26.5
General and administrative 11.5 11.2 11.6 11.7
Purchased research and development 0.0 0.9 0.0 0.5
------------- ------------- ------------ ------------
Total operating expenses 49.2 48.1 50.8 47.3
------------- ------------- ------------ ------------
Operating income 31.7 35.4 28.2 35.6
Other income (expense):
Interest income 2.5 1.8 2.5 2.1
Other, net 0.5 1.4 0.5 1.1
------------- ------------- ------------ ------------
Total other income 3.0 3.2 3.0 3.2
------------- ------------- ------------ ------------
Income before taxes 34.7 38.6 31.2 38.8
Income taxes 13.7 16.3 12.3 16.2
------------- ------------- ------------ ------------
Net income 21.0 % 22.3 % 18.9 % 22.6 %
============= ============= ============ ============
</TABLE>
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<PAGE> 9
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net Sales. The Company's net sales increased by $5.9 million, or 28.6%,
to $26.4 million in the second quarter of 2000 from $20.6 million in the second
quarter of 1999. Product sales increased by $5.3 million, or 31.5%, to $22.2
million in the second quarter of 2000 from $16.9 million in the second quarter
of 1999. The increase in product sales is primarily attributable to (i)
increased sales of the Company's Accelerated Math products, including subject
libraries and optical-mark card scanners, (ii) increased sales of Accelerated
Reader title disks, with about 35,000 available book titles, to a larger base of
Accelerated Reader schools and (iii) strong sales of the Company's upgraded
version of STAR Reading.
Service revenue, which consists of revenue from sales of training
sessions and software support agreements, increased by $557,000, or 15.2%, to
$4.2 million in the second quarter of 2000 from $3.7 million in the second
quarter of 1999. This increase is primarily attributable to an increased number
of Renaissance training sessions.
Cost of Sales. The cost of sales of products increased by $980,000, or
51.6%, to $2.9 million in the second quarter of 2000 from $1.9 million in the
second quarter of 1999. As a percentage of product sales, the cost of sales of
products increased to 13.0% in the second quarter of 2000 from 11.3% in the
second quarter of 1999. The increase in cost of sales of products is primarily
due to increased sales of optical-mark card scanners. A scanner is included with
the sale of all Accelerated Math software and many additional scanners are sold
separately. Although scanners are profitable, the gross profit margin on
hardware is not as high as the gross profit margin on software. The cost of
sales of services increased by $670,000, or 44.8%, to $2.2 million in the second
quarter of 2000 from $1.5 million in the second quarter of 1999. As a percentage
of sales of services, the cost of sales of services increased to 51.3% in the
second quarter of 2000 from 40.8% in the second quarter of 1999. This increase
is primarily due to increased costs of providing technical support related to
the late 1999 and early 2000 shipment of Accelerated Reader and STAR Reading
upgrades. The Company's overall gross profit margin decreased to 80.9% in the
second quarter of 2000 from 83.5% in the second quarter of 1999, due to
decreased gross profit margins on both products and services. Management expects
that the overall gross profit margin will remain relatively constant for the
remainder of 2000.
Product Development. Product development expenses increased by $1.9
million, or 101.9%, to $3.8 million in the second quarter of 2000 from $1.9
million in the second quarter of 1999. These expenses increased primarily due to
increased staff and consulting costs associated with new product development
including three new products announced during the second quarter of 2000:
Surpass test-preparation software, eSchoolOffice Web-based school administration
software, and new versions of Generation21's Total Knowledge Management
enterprise training software, all of which are expected to be available in late
2000 or 2001. Increased product development expenses are also attributed to the
development of localized versions of the Company's products for international
markets; the completion of new Accelerated Reader quizzes; continued development
of a suite of Web-based versions of the Company's existing core products; and a
number of new products at various stages of development which the Company
expects to announce in the future. As a percentage of net sales, product
development costs increased to 14.5% in the second quarter of 2000 from 9.2% in
the second quarter of 1999. The Company anticipates that product development
costs will continue to increase with the Company's continued emphasis on product
development and new business initiatives as a key to achieving future growth.
Selling and Marketing. Selling and marketing expenses increased by
$625,000, or 11.4%, to $6.1 million in the second quarter of 2000 from $5.5
million in the second quarter of 1999. These expenses increased primarily due to
(i) costs of marketing the Company's new Generation21 enterprise-wide training
and knowledge management software and (ii) international marketing efforts. As a
percentage of net sales, selling and marketing expenses declined to 23.2% in the
second quarter of 2000 from 26.8% in the second quarter of 1999. Management
anticipates that selling and marketing expenses will generally continue to rise
as the Company expands its product lines and customer and prospect base.
General and Administrative. General and administrative expenses
increased by $726,000, or 31.5%, to $3.0 million in the second quarter of 2000
from $2.3 million in the second quarter of 1999. The higher expenses for the
second quarter of 2000 are largely due to increased costs associated with the
hiring of additional personnel, including wages and related benefits, to support
a larger base of business including new initiatives such as Generation21 and the
expansion internationally. As a percentage of net sales, general and
administrative costs increased slightly to 11.5% in the second quarter of 2000
from 11.2% in the second quarter of 1999.
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<PAGE> 10
Purchased Research and Development. In connection with an acquisition
in June 1999, a portion of the purchase price was allocated to acquired
in-process research and development costs. This resulted in a charge of $180,000
in the second quarter of 1999.
Operating Income. Operating income increased by $1.1 million to $8.4
million in the second quarter of 2000 from $7.3 million in the second quarter of
1999. As a percentage of net sales, operating income decreased to 31.7% in the
second quarter of 2000 from 35.4% in the second quarter of 1999.
Income Tax Expense. Income tax expense of $3.6 million was recorded in
the second quarter of 2000 at an effective income tax rate of 39.6% of pre-tax
income compared to $3.3 million, or 42.2% of pre-tax income in the second
quarter of 1999. The Company expects to maintain its effective tax rate at
between 39% and 40% for 2000.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net Sales. The Company's net sales increased by $11.4 million, or
29.0%, to $50.5 million in the six months ended June 30, 2000 from $39.1 million
in the first six months of 1999. Product sales increased by $8.5 million, or
26.7%, to $40.6 million in the first six months of 2000 from $32.0 million in
the same period in 1999. The increase in product sales is primarily attributable
to (i) increased follow-on sales of the Company's Accelerated Math products,
including subject libraries and optical-mark card scanners, (ii) increased sales
of Accelerated Reader title disks, with about 35,000 available book titles, to a
larger base of Accelerated Reader schools and (iii) strong sales of the
Company's upgraded version of STAR Reading.
Service revenue increased by $2.8 million, or 39.5%, to $9.9 million in
the first six months of 2000 from $7.1 million in the same period in 1999.
Approximately $2.0 million of this increase is attributable to the Company's
first annual National School Renaissance Conference presented in February 2000
and the balance of the increase is due to an increased number of Renaissance
training sessions.
Cost of Sales. The cost of sales of products increased by $1.9 million,
or 55.2%, to $5.4 million in the first six months of 2000 from $3.5 million in
the first six months of 1999. As a percentage of product sales, the cost of
sales of products increased to 13.3% in the first half of 2000 from 10.9% in the
first half of 1999. The increase in cost of sales of products is primarily due
to increased sales of optical-mark card scanners. A scanner is included with the
sale of all Accelerated Math software and many additional scanners are sold
separately. Although scanners are profitable, the gross profit margin on
hardware is not as high as the gross profit margin on software. The cost of
sales of services increased by $2.0 million, or 61.5%, to $5.2 million in the
first six months of 2000 from $3.2 million in the same period in 1999. As a
percentage of sales of services, the cost of sales of services increased to
52.6% in the first six months of 2000 from 45.4% in the first six months of
1999. This increase is primarily the result of costs associated with (i) the
Company's first annual National School Renaissance Conference presented in the
first quarter of 2000 and (ii) increased technical support costs due to broader
product lines and the introduction of new versions of existing products. The
Company's overall gross profit margin declined to 79.0% in the first six months
of 2000 from 82.9% in the first six months of 1999. Management expects that the
overall gross profit margin will remain relatively constant for the remainder of
2000.
Product Development. Product development expenses increased by $3.7
million, or 108.9% to $7.0 million in the six months ended June 30, 2000 as
compared to $3.4 million in the corresponding 1999 period. These expenses
increased primarily due to increased staff and consulting costs associated with
new product development including three new products announced during the second
quarter of 2000: Surpass test-preparation software, eSchoolOffice Web-based
school administration software, and new versions of Generation21's Total
Knowledge Management enterprise training software, all of which are expected to
be available in late 2000 or 2001. Increased product development expenses are
also attributed to the development of localized versions of the Company's
products for international markets; the completion of new Accelerated Reader
quizzes; continued development of a suite of Web-based versions of the Company's
existing core products; and a number of new products at various stages of
development which the Company expects to announce in the future. As a percentage
of net sales, product development costs increased to 13.9% in the first half of
2000 from 8.6% in the first half of 1999. The Company anticipates that product
development costs will continue to increase with the Company's continued
emphasis on product development and new business initiatives as a key to
achieving future growth.
-8-
<PAGE> 11
Selling and Marketing. Selling and marketing expenses increased by $2.4
million, or 22.9%, to $12.8 million in the first half of 2000 from $10.4 million
in the first half of 1999. These expenses increased primarily due to (i) salary
and recruiting costs associated with the hiring of additional personnel to
market and promote a broader product line, (ii) costs of marketing the Company's
new Generation21 enterprise-wide training and knowledge management software,
(iii) expenses related to the Company's National School Renaissance Conference
in February 2000 and (iv) international marketing efforts. As a percentage of
net sales, selling and marketing expenses declined to 25.3% in the first half of
2000 from 26.5% in the first six months of 1999. This decrease is primarily due
to economies of scale associated with increased product sales and service sales.
Management anticipates that selling and marketing expenses will generally
continue to rise as the Company expands its product lines and customer and
prospect base.
General and Administrative. General and administrative expenses
increased by $1.3 million, or 28.6%, to $5.9 million in the six months ended
June 30, 2000 from $4.6 million in the same period in 1999. The higher expenses
for 2000 are largely due to increased costs associated with the hiring of
additional personnel, including wages and related benefits, to support a larger
base of business including new initiatives such as Generation21 and the
expansion internationally. As a percentage of net sales, general and
administrative costs remained relatively constant at 11.6% and 11.7% in the
first six months of 2000 and 1999, respectively.
Purchased Research and Development. In connection with an acquisition
in June 1999, a portion of the purchase price was allocated to acquired
in-process research and development costs. This resulted in a charge of $180,000
in the second quarter of 1999.
Operating Income. Operating income increased by $295,000, or 2.1%, to
$14.2 million in the first six months of 2000 from $14.0 million in the same
period in 1999. As a percentage of net sales, operating income decreased to
28.2% in the first half of 2000 from 35.6% in the first half of 1999.
Income Tax Expense. Income tax expense of $6.2 million was recorded in
the first six months of 2000 at an effective income tax rate of 39.5% of pre-tax
income compared to $6.3 million, or 41.8% of pre-tax income in the second half
of 1999. The Company expects to maintain its effective tax rate at between 39%
and 40% for 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's cash, cash equivalents and
short-term investments increased to $52.5 million from the December 31, 1999
total of $41.0 million. The increase of $11.5 million in the first half of 2000
is primarily due to $13.6 million in cash provided by operating activities
offset by $2.2 million used in the purchase of property, plant and equipment.
The Company believes cash flow from operations and its current cash position
will be sufficient to meet its working capital requirements and fund future
growth acquisition opportunities for the foreseeable future.
At June 30, 2000, the Company had a $10.0 million unsecured revolving
line of credit with a bank which is available until March 31, 2001. The line of
credit bears interest at either a floating rate based on the prime rate less
1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%.
The rate is at the option of the Company and is determined at the time of
borrowing. The Company also has a $1.0 million unsecured revolving line of
credit with a bank which is available until April 30, 2001. The line of credit
bears interest at a fixed rate of 7.5%. As of June 30, 2000, the lines of credit
had not been used.
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<PAGE> 12
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of
1995, the Company can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ materially from those in the forward-looking statements. Accordingly, the
foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. The Company's actual results may differ
materially from those contained in the forward-looking statements herein.
Factors which may cause such a difference to occur include those factors
identified in Item 1, Business, Forward-Looking Statements, contained in the
Company's Form 10-K for the year ended December 31, 1999, which factors are
incorporated herein by reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000, the Company had no material market risk exposure
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).
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<PAGE> 13
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The net proceeds to the Company from its initial public offering, after
deducting underwriting discounts of $3,606,400 and other expenses of
approximately $941,000, were approximately $46,972,000. From September
24, 1997 (the effective date of the Company's Form S-1 Registration
Statement; SEC Reg. No. 333-22519) through June 30, 2000, the Company
used the net proceeds from the offering as follows:
(i) Approximately $1.6 million was used to pay compensation expenses
related to the termination of the Company's phantom stock plan.
(ii) Approximately $7.2 million was used to pay the entire principal
and accrued interest on the mortgage note and an unsecured note, both
related to the construction of the Company's facility in Wisconsin
Rapids, Wisconsin.
(iii) Approximately $5.1 million was used to pay the entire principal
and accrued interest on notes from the Company's principal shareholders
related to the 1996 acquisition of IPS Publishing, Inc.
(iv) Approximately $10.9 million was used to pay distributions of S
corporation retained profits to S corporation shareholders.
(v) Approximately $7.4 million was used to invest in Athena Holdings
LLC, a limited liability company formed for the purpose of constructing
the Company's facility in Madison, Wisconsin.
(vi) Approximately $2.4 million was used for pilot operations in
various markets and miscellaneous acquisitions.
(vii) Approximately $5.0 million was used for capital expenditures for
expansion of operations.
The Company has broad discretion with respect to the use of the remaining
proceeds.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 19, 2000, the Company held its Annual Meeting of Shareholders.
(b) Not applicable.
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<PAGE> 14
(c) Set forth below are descriptions of the matters voted upon at the
Annual Meeting of Shareholders and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes, as to each such matter.
1. Nine directors were elected to serve until the 2001 Annual Meeting
of Shareholders and until their successors are elected and
qualified. The results of this proposal are as follows:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
(1) Judith A. Paul 33,280,693 45,994
(2) Terrance D. Paul 33,308,143 18,544
(3) Michael H. Baum 33,308,389 18,298
(4) John R. Hickey 33,305,954 20,733
(5) Timothy P. Welch 33,308,513 18,174
(6) Perry S. Akins 33,309,017 17,670
(7) John H. Grunewald 33,308,367 18,320
(8) Gordon H. Gunnlaugsson 33,308,217 18,470
(9) Harold E. Jordan 33,307,867 18,820
</TABLE>
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No Description
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter covered by this
report.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANTAGE LEARNING SYSTEMS, INC.
(Registrant)
August 11, 2000 /s/ Michael H. Baum
--------------- -------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
August 11, 2000 /s/ Steven A. Schmidt
--------------- ---------------------
Date Steven A. Schmidt
Secretary, Vice President, and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE> 16
Index to Exhibits
Exhibit No Description
27.1 Financial Data Schedule
