<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
OR
[ ] 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: 0-24617
IDG BOOKS WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3078409
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 East Hillsdale Blvd., Suite 400, Foster City, California 94404
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 655-3000
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 ___ No X
The number of shares outstanding of the issuer's Common Stock as of July 31,
1998 was 14,280,000.
This quarterly report on Form 10-Q contains a total of 17 pages, of which this
page is page 1.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1: Financial Statements
Balance Sheets
as of June 30, 1998 (Unaudited) and September 30, 1997 3
Statements of Income
for the Three and Nine Months Ended June 30, 1998 and 1997 (Unaudited) 4
Statements of Cash Flows
for the Nine Months Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds 16
Item 6: Exhibits 16
Signatures 17
</TABLE>
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDG BOOKS WORLDWIDE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, 1998 SEPTEMBER 30, 1997
------------- ------------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash $ 6,006 $ 74
Accounts receivable - net 21,504 26,561
Inventory - net 11,983 7,927
Other current assets 1,865 6
Deferred tax assets 19,906 14,860
-------- --------
Total current assets 61,264 49,428
Royalty Advances - net 5,627 3,078
Property and Equipment - net 5,059 4,657
Publishing Rights - net 3,708 --
-------- --------
TOTAL $ 75,658 $ 57,163
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,063 $ 3,128
Accrued liabilities 33,142 27,592
Note payable to Parent 38,400 --
-------- --------
Total current liabilities 75,605 30,720
-------- --------
Stockholders' Equity:
Preferred stock, $.001 par value; authorized:
5,000 shares; issued and outstanding: 0 shares
Common stock, $.001 par value; authorized:
25,000 Class A shares and
400 Class B shares;
Issued and outstanding:
1998 - 10,900 Class A shares and
200 Class B shares 11
1997 - 11,100 shares, undesignated 11
Retained Earnings 1,176 30,764
Advances due to (from) Parent (1,134) (4,332)
-------- --------
Total stockholders' equity 53 26,443
-------- --------
TOTAL $ 75,658 $ 57,163
======== ========
</TABLE>
See notes to financial statements
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<PAGE> 4
IDG BOOKS WORLDWIDE, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Net Sales $33,159 $25,063 $102,742 $85,624
Licensing revenues and other 1,133 1,147 3,466 3,050
------- ------- -------- -------
Net revenue 34,292 26,210 106,208 88,674
------- ------- -------- -------
Operating Costs and Expenses:
Cost of sales 17,832 13,433 55,688 45,508
Selling, general and administrative 13,018 9,766 34,258 29,984
Parent corporate services fee 150 918 1,325 2,754
------- ------- -------- -------
Total operating costs and expenses 31,000 24,117 91,271 78,246
------- ------- -------- -------
Income Before Provision for Income Taxes 3,292 2,093 14,937 10,428
Provision for Income Taxes 1,350 927 6,125 4,275
------- ------- -------- -------
Net Income $ 1,942 $ 1,166 $ 8,812 $ 6,153
======= ======= ======== =======
Basic and Diluted Net Income per Share $ 0.17 $ 0.11 $ 0.79 $ 0.55
======= ======= ======== =======
Pro Forma Net Income per Share:
- Basic $ 0.14 $ 0.08 $ 0.64 $ 0.44
======= ======= ======== =======
- Diluted $ 0.14 $ 0.08 $ 0.63 $ 0.44
======= ======= ======== =======
Shares Used in per Share Calculations:
Basic net income 11,100 11,100 11,100 11,100
======= ======= ======== =======
Diluted net income 11,220 11,100 11,140 11,100
======= ======= ======== =======
Shares Used in Pro Forma per Share Calculations:
Pro forma basic net income 13,873 13,873 13,873 13,873
======= ======= ======== =======
Pro forma diluted net income 13,993 13,873 13,913 13,873
======= ======= ======== =======
</TABLE>
See notes to financial statements
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<PAGE> 5
IDG BOOKS WORLDWIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1998 1997
------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 8,812 $ 6,153
------- -------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,542 1,168
Deferred income taxes (5,046) (3,511)
Changes in operating assets and liabilities:
Accounts receivable 4,107 (8,074)
Inventory (3,556) (4,713)
Royalty advances (2,149) (1,862)
Other current assets (1,859) 348
Accounts payable 935 563
Accrued liabilities 5,039 8,744
------- -------
Net cash provided (used) by operating
activities 8,825 (1,184)
------- -------
Cash Flows from Investing Activities:
Capital expenditures (2,652) (1,296)
Acquisition of publishing rights and related assets (3,439) --
------- -------
Net cash (used) by investing activities (6,091) (1,296)
------- -------
Cash Flows from Financing Activities:
Advances due to Parent - net change 3,198 2,463
------- -------
Net Increase (Decrease) in Cash 5,932 (17)
Cash, Beginning of Period 74 83
------- -------
Cash, End of Period $ 6,006 $ 66
======= =======
Noncash Investing Activity:
Acquisition of publishing rights and related assets (Note 8):
Current Assets $ 1,400
Publishing rights 4,000
Less cash paid (3,439)
-------
Liabilities assumed $ 1,961
=======
</TABLE>
See notes to financial statements
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<PAGE> 6
IDG BOOKS WORLDWIDE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997 AND
YEAR ENDED SEPTEMBER 30, 1997
(Information for the Three and Nine months ended June 30, 1998
and 1997 are unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements for the three months ended June
30, 1998 and 1997 and for the nine months ended June 30, 1998 and 1997 are
unaudited but have been prepared in accordance with generally accepted
accounting principles for interim financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the results
of the operations for the full year. These financial statements should be read
in conjunction with the audited financial statements as of September 30, 1997
and 1996, including notes thereto, included in the Company's Registration
Statement on Form S-1 (file no. 333-53433) filed with the SEC.
Organization and Description of Business -- IDG Books Worldwide, Inc. ("the
Company"), was founded in 1990 as a wholly-owned subsidiary (through
intermediate companies) of International Data Group, Inc. ("Parent"). On July
31, 1998, the Company consummated its initial public offering (the "Offering")
of 3,180,000 shares of Class A common stock at an offering price of $15.50 per
share pursuant to a Registration Statement declared effective by the SEC on July
27, 1998. Aggregate proceeds from the Offering were $49,290,000. After deducting
expenses, the net proceeds to the Company from the Offering were $44,034,700.
Due to the fact that the Offering occurred subsequent to June 30, 1998, the
ending date of the reporting period, no net proceeds from the Offering were used
by the Company during the reporting period. Subsequent to June 30, 1998, the
Company used $38,400,000 of the net proceeds of the Offering to repay
indebtedness owed to Parent.
Basis of Presentation and Transactions with Parent -- The Company has
historically depended on the Parent (or affiliates thereof) for corporate
administrative functions, as well as for strategic marketing and brand-building,
financing, cash management, tax and payroll administration, property/casualty
insurance, employee benefits administration, and certain other services. The
fees for these services have been charged to the Company, and reflected in the
accompanying financial statements, through a Parent corporate services fee based
on a percentage of budgeted net sales plus a fixed charge which is consistent
with the method that the Parent charges its other controlled subsidiaries.
Effective January 1, 1998, the Company assumed responsibility for certain
corporate administrative functions, as well as for the Company's strategic
marketing and brand-building, the costs for which had constituted a significant
portion of the parent corporate services fee. Accordingly, the parent corporate
services fee decreased to $150,000 per quarter and, effective July 27, 1998, the
fee decreased to $132,000 per quarter. In the opinion of management, the parent
corporate services fees included in the accompanying financial statements
reflect a reasonable amount for the services received; however, such amounts
were not established on an arm's-length basis and may not be the same as would
have been incurred had the Company operated independent of its Parent.
Nevertheless, management does not believe the Company would have incurred
materially different operating expenses as an independent company.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- The Company's fiscal year ends on the Saturday closest to
September 30. Fiscal year 1997 ended on September 27, 1997 and consisted of 52
weeks. For convenience, fiscal year-ends are denoted in the accompanying
financial statements as September 30. Similarly, the thirteen-week and the
thirty-nine-week periods ended June 27, 1998 and June 28, 1997 are referred to
as the three-months and nine-months ended June 30, 1998 and 1997, respectively.
-6-
<PAGE> 7
IDG BOOKS WORLDWIDE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates. The
primary estimates underlying the Company's financial statements include
allowances for sales returns, doubtful accounts, inventory obsolescence,
reserves for royalty advances and recoverability of deferred tax assets. Actual
results could differ from those estimates.
Advances due to (from) Parent are included as a component of stockholders'
equity, as no interest was charged for such balances and there was no scheduled
repayment. As of June 22, 1998, the Parent suspended the cash sweep process
allowing cash receipts and excess cash generated by the Company to be retained
by the Company. Subsequent to June 30, 1998 the Company used $38.4 million of
the net proceeds from the initial public offering for repayment of indebtedness
owed to Parent.
Income Taxes -- The Company's taxable income has been included in the Parent's
consolidated tax returns. The accompanying financial statements include a charge
in lieu of taxes paid which approximates the current income tax provision, as if
the Company were a separate taxpayer. Amounts which would represent current
income taxes payable are included in Advances due to (from) Parent. The Company
accounts for deferred income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, which requires that deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial statement carrying amount and the tax bases of
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts, more likely than not, to be realized.
Net Income Per Share -- Net income per share is computed using the basic and
diluted weighted average number of common shares outstanding during the year in
accordance with SFAS No. 128, Earnings Per Share. Basic net income per share
excludes dilution and is computed using the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (stock options) were exercised or converted into common stock. On
May 6, 1998 the Company granted options to purchase shares of Class A common
stock. As of June 30, 1998 these options were reflected in the diluted net
income per share calculations. See Note 7 for discussion of stock options.
Unaudited Pro Forma Information -- Unaudited pro forma basic net income per
share amounts were calculated using common shares outstanding (11,100,000) plus
the number of shares (2,773,000) whose proceeds were required to be used to
repay the note payable at the $15.50 initial public offering price reduced by
per share offering costs. The pro forma diluted net income per share amounts
also reflect the dilutive effect of outstanding stock options. The balance sheet
impact, on a pro forma basis, of the net proceeds received from the initial
public offering would have resulted in total stockholders' equity of $45.2
million, assuming the offering had been consummated June 30, 1998, compared to
actual stockholders' equity of $.5 million at June 30, 1998.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
<S> <C> <C>
Accounts receivable $ 49,039 $ 47,859
Allowance for doubtful accounts (3,037) (3,465)
Allowance for sales returns (24,498) (17,833)
------- -------
Total $ 21,504 $ 26,561
======== ========
</TABLE>
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<PAGE> 8
IDG BOOKS WORLDWIDE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
<S> <C> <C>
Books (finished goods) $ 22,011 $ 17,038
Paper 2,457 2,823
-------- --------
Total Inventory 24,468 19,861
Reserve for obsolescence (12,485) (11,934)
-------- --------
Net Inventory $ 11,983 $ 7,927
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
<S> <C> <C>
Computers and equipment $ 5,649 $ 5,094
Furniture and fixtures 1,337 1,334
Leasehold improvements 2,208 1,286
Internal-use software 1,808 635
-------- -------
Total 11,002 8,349
Less accumulated depreciation and amortization (5,943) (3,692)
-------- -------
Property and equipment -- net $ 5,059 $ 4,657
======== =======
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
<S> <C> <C>
Accrued royalties $11,937 $ 9,403
Accrued compensation and benefits 7,954 6,389
Accrued promotion 8,059 7,518
Other accrued liabilities 5,192 4,282
------- -------
Total $33,142 $27,592
======= =======
</TABLE>
7. STOCKHOLDERS' EQUITY
Each outstanding share of Class A common stock is entitled to one vote and each
outstanding share of Class B common stock is entitled to ten votes. Holders of
Class A common stock and Class B common stock are entitled to receive dividends
at the same rate and in such amounts as the Board of Directors may from time to
time determine.
Class A common stock is not convertible. Class B common stock is convertible at
any time into Class A common stock on a share-for-share basis and will
automatically convert upon the transfer by the holder thereof.
-8-
<PAGE> 9
IDG BOOKS WORLDWIDE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In the event of any dissolution, liquidation, or winding up of the affairs of
the Company, whether voluntary or involuntary, after payment of the debts and
other liabilities of the Company, the remaining assets of the Company will be
distributed ratably among the holders of the Class A common stock and the Class
B common stock, treated as a single class.
Stock Option Plan
Effective May 6, 1998, the Company's Board of Directors approved a stock option
plan under which 2,850,000 shares of common stock are reserved for issuance to
employees, consultants and directors. Under the plan, both incentive and
nonstatutory stock options may be granted to purchase common stock at not less
than the fair market value of the common stock at the date of grant. Effective
May 6, 1998, the Company granted options to purchase 1,500,900 shares of Class A
common stock at an exercise price of $11.88 per share. Options generally vest
over 4 years and expire ten years after date of grant. As of June 30, 1998
options to purchase 1,480,250 shares of Class A common stock at an exercise
price $11.88 were outstanding.
8. PUBLISHING RIGHTS
On December 1, 1997, the Company acquired from Henry Holt and Company the
publishing rights for the books published under the names "MIS:Press" and "M&T
Books," and the related inventory and other assets, for $5,400,000 in cash and
assumed liabilities. The cost of this acquisition was allocated to the assets
acquired, including $4,000,000 allocated to publishing rights which is being
amortized over eight years.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IDG Books is a leading publisher of computer, business and self-help books
designed to make learning accessible and fun. The Company publishes and markets
18 book series under well-known brand names, including its popular "...For
Dummies(R)" series. These books have created widespread recognition of the
Company's brands by consumers enabling it to successfully publish across a
variety of categories in technology, business and self-help. The Company's
portfolio of brand names includes more than 700 active titles. The Company has
approximately 65 million English-language books in print and has translated its
books into 36 languages. The Company believes that its readers value and trust
its products and brands to help obtain computer proficiency and professional
certification, general business know-how, career growth and personal enrichment.
Sales of technology-related books account for a substantial majority of the
Company's net revenue. In this regard, sales of books devoted to the use of
software products sold by Microsoft, including its Windows operating system,
accounted for approximately one-half of the Company's net revenue for the nine
months ended June 30, 1998. The Company expects to continue to depend upon sales
of technology books, particularly those related to Microsoft products, for a
substantial majority of the Company's net revenue for the foreseeable future.
Federal and various state regulators have raised legal issues with respect to
Windows 98 in its current form. The Company has printed Windows 98 products for
Windows 98 in its current form. A hearing regarding the federal regulators'
request for an injunction relating to Windows 98 is currently scheduled for
September 1998. Any significant modification in Windows 98 as a result of these
regulatory concerns could result in excess returns of Windows 98 books
previously shipped by the Company. In addition, this modification could require
the Company to revise its Windows 98 books which could have an adverse effect on
the Company's financial results.
The Company's customers consist principally of national retail chain
booksellers, wholesale distributors, office superstores, membership clubs and
computer/electronic superstores located primarily in the United States and
Canada. Over the last several years, there has been significant consolidation in
the distribution channels for books, including retail outlets, although
alternative distribution channels have emerged. As a result, the Company expects
that this trend will lead to increased concentration within each distribution
channel. During the nine months ended June 30, 1998, the Company's top three
customers accounted for approximately 34.1% of the Company's net sales, and the
Company's top ten customers accounted for approximately 63.8% of the Company's
net sales.
The Company's fiscal year ends on the Saturday closest to September 30. Fiscal
year 1997 ended on September 27, 1997 and consisted of 52 weeks. For
convenience, throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the fiscal year-end is denoted as September
30. Similarly, the thirteen-week and the thirty-nine-week periods ended June 27,
1998 and June 28, 1997 are referred to as the three-months and nine-months ended
June 30, 1998 and 1997, respectively.
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<PAGE> 11
RESULTS OF OPERATIONS
The following table summarizes the results of operations as a percentage of net
revenue for the periods shown:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net Revenue:
"...For Dummies(R)" ........................ 60.0% 66.5% 63.4% 69.0%
IDG Books Technology ....................... 40.0 33.5 36.6 31.0
----- ----- ----- -----
Total Net Revenue .......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 52.0% 51.3% 52.4% 51.3%
Selling, general and administrative expenses 38.0 37.3 32.3 33.8
Parent corporate services fee .............. 0.4 3.5 1.2 3.1
----- ----- ----- -----
Income before provision for income taxes ... 9.6 8.0 14.1 11.8
----- ----- ----- -----
Net Income ................................. 5.7% 4.4% 8.3% 6.9%
===== ===== ===== =====
OTHER DATA:
EBITDA (1) ................................. 12.1% 9.7% 16.5% 13.1%
===== ===== ===== =====
</TABLE>
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company
believes EBITDA is a standard measure commonly reported and widely used by
analysts, investors and other interested parties in the publishing and
media industries, however, EBITDA as presented herein may not be
comparable to similarly titled measures reported by other companies.
EBITDA for the three months ended June 30, 1998 was $4.2 million compared
to $2.5 million for the three months ended June 30, 1997. EBITDA for the
nine months ended June 30, 1998 was $17.5 million compared to $11.6
million for same period the prior year.
THIRD QUARTER ENDED JUNE 30, 1998 COMPARED TO THIRD QUARTER ENDED JUNE 30, 1997
Net Revenue. Net revenue increased $8.1 million, or 30.8%, to $34.3
million for the three months ended June 30, 1998 from $26.2 million for three
months ended June 30, 1997. This increase was primarily the result of an
increase in net revenues of $3.2 million, or 18.1%, for the "...For Dummies(R)"
group and $4.9 million, or 56.2%, for the IDG Technology group. Of the Company's
net revenue for the three months ended June 30, 1998, $12.8 million was
attributable to sales of new titles first published during that period as
compared to $5.0 million for new titles first published during the same period
for 1997.
Cost of Sales. Cost of sales increased $4.4 million, or 32.7%, to $17.8
million for the three months ended June 30, 1998 from $13.4 million for the
three months ended June 30, 1997. Cost of sales as a percentage of net revenue
was 52.0% and 51.3% for the three months ended June 30, 1998 and June 30, 1997,
respectively. Product costs, including paper, printing and binding expenses
increased as a percentage of net revenue to 14.5% for the three months ended
June 30, 1998 from 13.3% for the three months ended June 30, 1997 as a result of
a small change in product mix. Fulfillment expense decreased as a percentage of
net revenue to 7.6% for the three months ended June 30, 1998 from 8.7% for the
three months ended June 30, 1997 as a result of efficiencies achieved in the
Company's distribution facilities.
-11-
<PAGE> 12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.2 million, or 33.3%, to $13.0 million for
the three months ended June 30, 1998 from $9.8 million for the three months
ended June 30, 1997. Approximately 56.9% of this increase was attributable to
increased selling and marketing expenses including increases as a result of the
implementation of a new retail marketing incentive program and expenses for
other marketing programs where costs increase as net revenues increase. The
remainder of the increase was attributed to general and administrative expenses,
including costs assumed by the Company and previously charged as parent
corporate services fee. These costs include increased depreciation and costs
incurred relating to the upgrade of computer systems. Selling, general and
administrative expenses increased as a percentage of net revenue to 38.0% for
the three months ended June 30, 1998 from 37.3% for the three months ended June
30, 1997. The Company's selling and marketing costs increased to 20.4% of net
revenue for the three months ended June 30, 1998 compared to 19.7% for the same
period the prior year.
Parent Corporate Services Fee. Parent corporate services fee decreased
$.7 million, or 83.7%, to $.2 million for the three months ended June 30, 1998
from $.9 million for the three months ended June 30, 1997. Effective January 1,
1998, the Company assumed responsibility for certain corporate administrative
functions, as well as for its own strategic marketing and brand-building, the
costs for which had constituted a significant portion of the parent corporate
services fee. For the three months ended June 30, 1998, these costs were
included with selling, general and administrative expenses.
Income before Provision for Income Taxes. Income before provision for
income taxes increased $1.2 million, or 57.3%, to $3.3 million for the three
months ended June 30, 1998 from $2.1 million for the three months ended June 30,
1997. Income before provision for income taxes increased as a percentage of net
revenue to 9.6% in the three months ended June 30, 1998 from 8.0% for the same
period the prior year due to an increase in sales and a decrease in parent
corporate service fees as a percentage of net revenue, offset by an increase in
cost of sales and selling, general and administrative expense as a percentage of
net revenue, as described above.
Net Income. Net income of $1.9 million for the three months ended June
30, 1998 increased $.7 million, or 66.5%, from net income of $1.2 million for
the three months ended June 30, 1997. This increase was primarily the result of
an increase in sales and a decrease in parent corporate service fees as a
percentage of net revenue, offset by an increase in cost of sales and selling,
general and administrative expenses as a percentage of net revenue, as described
above.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Net Revenue. Net revenue increased $17.5 million, or 19.8%, to $106.2
million for the nine months ended June 30, 1998 from $88.7 million for the nine
months ended June 30, 1997. This increase was primarily the result of an
increase in net revenues of $6.2 million, or 10.1%, for the "...For Dummies(R)"
group and an increase of $11.3 million, or 41.2%, for the IDG Technology group.
Of the Company's net revenue in the first nine months of 1998, $36.4 million was
attributable to sales of new titles first published during that period as
compared to $33.8 million for new titles first published during the same period
for 1997.
Cost of Sales. Cost of sales increased $10.2 million, or 22.4%, to
$55.7 million for the nine months ended June 30, 1998 from $45.5 million for the
nine months ended June 30, 1997. Cost of sales as a percentage of net revenue
was 52.4% and 51.3% for the nine months periods ended June 30, 1998 and June 30,
1997, respectively. Product development costs increased as a percentage of net
revenue to 11.6% for the nine months ended June 30, 1998 from 10.6% for the nine
months ended June 30, 1997, reflecting the Company's planned increase in title
output for the remainder of 1998. Product costs, including paper, printing and
binding expenses, remained unchanged as a percentage of net revenue at
approximately 16.2% for both periods. Fulfillment expense decreased as a
percentage of net revenue to 7.2% for the nine months ended June 30, 1998 from
8.2% for the nine months ended June 30, 1997 as a result of efficiencies
achieved in the Company's distribution facilities.
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<PAGE> 13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.3 million, or 14.3%, to $34.3 million for
the nine months ended June 30, 1998 from $30.0 million for the nine months ended
June 30, 1997. Approximately 53.9% of this increase was attributable to
increased selling and marketing expenses including increases as a result of the
implementation of a new retail marketing incentive program during the three
months ended June 30, 1998 and expenses for other marketing programs where costs
increase as net revenues increase. The remainder of the increase was attributed
to general and administrative expenses, including costs assumed by the Company
and previously charged as parent corporate services fee. These costs include
increased depreciation and costs incurred relating to the upgrade of computer
systems. Selling, general and administrative expenses decreased as a percentage
of net revenue to 32.3% for the nine months ended June 30, 1998 from 33.8% for
the nine months ended June 30, 1997. The Company's selling and marketing costs
decreased to 17.6% of net revenue for the nine months ended June 30, 1998
compared to 18.5% for the same period the prior year primarily as a result of
increased efficiencies.
Parent Corporate Services Fee. Parent corporate services fee decreased
$1.4 million, or 51.9%, to $1.3 million for the nine months ended June 30, 1998
from $2.7 million for the nine months ended June 30, 1997. Effective January 1,
1998, the Company assumed responsibility for certain corporate administrative
functions, as well as for its own strategic marketing and brand-building, the
costs for which had constituted a significant portion of the parent corporate
services fee. For the period January 1, 1998 through June 30, 1998, these costs
were included with selling, general and administrative expenses.
Income before Provision for Income Taxes. Income before provision for
income taxes increased $4.5 million, or 43.2%, to $14.9 million for the nine
months ended June 30, 1998 from $10.4 million for the nine months ended June 30,
1997. Income before provision for income taxes increased as a percentage of net
revenue to 14.1% in the nine months ended June 30, 1998 from 11.8% for the same
period the prior year due to an increase in sales and decrease in selling,
general and administrative expense and parent corporate service fees as a
percentage of net revenue, offset by an increase in cost of sales as a
percentage of net revenue, as described above.
Net Income. Net income of $8.8 million for the nine months ended June
30, 1998 increased $2.6 million, or 43.2%, from net income of $6.2 million for
the nine months ended June 30, 1997. This increase was primarily the result of
an increase in sales and decrease in selling, general and administrative
expenses and parent corporate service fees as a percentage of net revenue,
offset by an increase in cost of sales as a percentage of net revenue, as
described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company paid a $38.4 million dividend to IDG, the Company's
Parent, in the form of a promissory note. This dividend represented
substantially all of the Company's retained earnings through April 1998. On July
31, 1998, the Company completed its initial public offering of common stock. The
net proceeds to the Company from the sale of the Class A common stock in the
offering, after deducting expenses and underwriting discounts and commissions of
$5.2 million, was $44.0 million. The Company used $38.4 million of the net
proceeds from the offering for the repayment of indebtedness owed to IDG. The
Company currently expects to use the remaining $5.6 million of net proceeds for
general corporate purposes, including approximately $3.6 million for working
capital and approximately $2.0 million to complete the Company's computer system
upgrade.
Historically, the financing requirements of the Company were funded through
intercompany advances from IDG while excess cash generated by the Company was
remitted to IDG. Accordingly, the Company maintained minimal cash balances. In
addition, balances owed to or due from IDG were non-interest bearing and
periodic settlements of the net amounts were not made. Accordingly, such amounts
are reflected as a component of stockholders' equity. As of June 22, 1998, IDG
suspended the cash sweep process allowing cash receipts and excess cash
generated by the Company to be retained by the Company.
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<PAGE> 14
As of June 30, 1998 the Company had a working capital deficit of $14.3 million.
Excluding the impact of the $38.4 million note payable to Parent, working
capital would have been $24.1 million at June 30, 1998. Working capital at
September 30, 1997 was $18.7 million. The increase in working capital (excluding
the impact of the note payable) at June 30, 1998 was seasonal in nature and
reflected a $5.9 million increase in cash, a $4.1 million increase in net
inventory, a $5.0 million increase in deferred tax assets and a $1.9 million
increase in other current assets, offset by a $5.1 million decrease in accounts
receivable, a $2.5 million increase in accrued royalties, a $3.0 million
increase in other accrued liabilities and a $0.9 million increase in accounts
payable.
EBITDA increased $5.9 million, or 50.7%, to $17.5 million for the nine months
ended June 30, 1998 from $11.6 million for the nine months ended June 30, 1997.
The Company's net cash provided by operations was $8.8 million for the nine
months ended June 30, 1998 compared to net cash used by operations of $1.2
million for the nine months ended June 30, 1997. The increase in cash provided
by operations was primarily due to increased net income ($2.6 million), a
decrease in accounts receivable ($4.1 million) for the nine months ended June
30, 1998 compared to an increase in accounts receivable ($8.1 million) for the
nine months ended June 30, 1997, and a smaller increase in inventory ($1.2
million) partially offset by an increase in other current assets ($1.9 million)
for the current nine month period compared to a decrease ($.4 million) for the
prior nine month period and a smaller increase in accrued liabilities ($3.7
million).
The Company's net cash used in investing activities for the nine months ended
June 30, 1998 was $6.1 million and included $3.4 million used to acquire certain
publishing rights and $2.7 million used for capital expenditures, including
purchases of computer equipment and leasehold improvements. The Company's net
cash used in investing activities for the nine months ended June 30, 1997 was
$1.3 million and included capital expenditures for computer equipment and other
furniture and equipment.
The Company's cash flows from financing activities related solely to changes in
the net amount of intercompany advances from IDG or excess cash generated by the
Company and retained by IDG prior to June 22, 1998. The Company's net cash
provided by financing activities was $3.2 million for the nine months ended June
30, 1998 and $2.5 million for the nine months ended June 30, 1997. Subsequent to
June 30, 1998 the Company repaid the $38.4 million principal amount of the note
owed to the Parent from the initial public offering proceeds
The Company has received a commitment letter from a bank regarding a revolving
credit facility in an amount of up to $20.0 million, which would be available to
the Company for seasonal working capital requirements. The credit facility is
subject to customary closing conditions.
The Company believes that the net proceeds from its initial public offering,
together with any cash generated from operations and any funds available under
any future credit facilities, will be sufficient to meet the liquidity
requirements of the Company for the foreseeable future. The Company's future
capital requirements will depend on many factors, including, but not limited to,
the levels at which the Company maintains inventory, the market acceptance of
the Company's products, the levels of promotional activities and advertising
required to launch the Company's products and any future acquisitions. To the
extent that the funds generated by the offering, together with existing
resources and future earnings, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financing. No assurance can be given that any such additional funding
will be available or that, if available, it can be obtained on terms favorable
to the Company.
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<PAGE> 15
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Historically, the Company's business has been seasonal. The Company's net
revenue and net income has been higher during fiscal quarters when major
software manufacturers release new or revised versions of popular products, as
exemplified by the Company's fiscal quarter ending June 30, 1998, corresponding
to the release of Microsoft's Windows 98 products. In addition, personal
computer sales, especially to entry-level users, are traditionally higher during
the Christmas selling season, and the Company has benefited from increased
purchases of its products during the Christmas season, as well as in the
immediately following months, generally resulting in higher net revenue and net
income during the Company's first two fiscal quarters. Because a substantial
portion of the Company's selling, general and administrative expenses are
incurred evenly throughout the year, the Company generally experiences
relatively lower net profit during quarters not impacted by increases in sales
due to seasonal or other factors discussed above.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Management has not yet determined the Company's SFAS 131 reporting segments.
These statements will not affect the Company's financial position, results of
operations or cash flows. Both statements are effective for the Company in
fiscal year 1999, with earlier application permitted.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which standardizes
the accounting and reporting for derivative instruments and for hedging
activities by requiring that an entity recognize such instruments as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement is effective for the Company in fiscal year 2000, with
earlier application permitted. Management believes this statement will have no
impact on the Company's statement of financial position or results of
operations.
YEAR 2000 COMPLIANCE
The Company uses and is installing a number of computer software programs and
operating systems, including applications for its internal electronic
communications network and for various administrative and billing functions. The
Company has assessed the scope of the Company's risks related to problems these
computer systems may have related to the year 2000 and believes such risks are
not significant. The Company has identified all of its significant internal
software applications which contain source codes that may be unable to
appropriately interpret the year 2000 and has already begun to modify or replace
those applications. The estimated costs to modify or replace these applications
are included in the Company's cost for its computer system upgrade.
In addition, the Company is in the process of inquiring of its vendors and
business partners about their progress in identifying and addressing problems
related to the year 2000. No assurance can be given that all of these third
party systems will be year 2000 compliant.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinion only as of the date hereof. The Company undertakes
no obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the SEC,
including the Company's Registration Statement on Form S-1 (file no. 333-53433)
filed with the SEC in connection with the Company's initial public offering.
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<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 1998, the Company consummated its initial public offering (the
"Offering") of 3,180,000 shares of Class A common stock at an offering price of
$15.50 per share pursuant to a registration statement (file no. 333-53433)
declared effective by the SEC on July 27, 1998. The managing underwriters for
the Offering were Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Offering has been
terminated and all shares have been sold, although the underwriters have the
right to purchase up to an additional 477,000 shares of the Company's Class A
common stock to cover over-allotments, if any.
Aggregate proceeds from the Offering were $49,290,000. The Company incurred the
following expenses in connection with the Offering: underwriters' discounts and
commissions of $3,450,300 and approximately $1,805,000 in other expenses for
total expenses of $5,225,300. No payments included in these expenses constituted
direct or indirect payments to directors, officers or general partners of the
Company or their associates, to persons owning 10% or more of any class of
equity securities of the Company, or to any affiliates of the Company.
After deducting expenses, the net proceeds to the Company from the Offering were
$44,034,700. Due to the fact that the Offering occurred subsequent to June 30,
1998, the ending date of the reporting period, no net proceeds from the Offering
were used by the Company during the reporting period. Subsequent to June 30,
1998, the Company used $38,400,000 of the net proceeds of the Offering to repay
$38,400,000 of indebtedness owed to its parent, International Data Group, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 27, 1998
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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<PAGE> 17
SIGNATURE
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.
IDG BOOKS WORLDWIDE, INC.
Date: August 20, 1998 By: /s/ James A. Doehrman
-----------------------------------------
James A. Doehrman,
Vice President and Chief Financial Officer
(Principal Accounting Officer
and Duly Authorized Officer)
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<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
Ex. 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUN-27-1998
<CASH> 6,006
<SECURITIES> 0
<RECEIVABLES> 49,039
<ALLOWANCES> (27,535)
<INVENTORY> 11,983
<CURRENT-ASSETS> 61,264
<PP&E> 11,002
<DEPRECIATION> (5,943)
<TOTAL-ASSETS> 75,658
<CURRENT-LIABILITIES> 75,605
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 42
<TOTAL-LIABILITY-AND-EQUITY> 75,658
<SALES> 102,742
<TOTAL-REVENUES> 106,208
<CGS> 55,688
<TOTAL-COSTS> 91,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,937
<INCOME-TAX> 6,125
<INCOME-CONTINUING> 8,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,812
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.63
</TABLE>
