<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 DECEMBER 26, 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 X No
--- ---
The number of shares outstanding of the issuer's Common Stock as of
January 31, 1999 was 14,378,552.
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>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 (Unaudited) and September 30, 1998.....................3
Consolidated Statements of Income
for the Three Months Ended December 31, 1998 and 1997 (Unaudited)..............4
Consolidated Statements of Cash Flows
for the Three Months Ended December 31, 1998 and 1997 (Unaudited)..............5
Notes to Consolidated Financial Statements.....................................6-8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................9-15
PART II. OTHER INFORMATION
Item 6: Exhibits...................................................................16
Signatures.................................................................17
</TABLE>
-2-
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash ................................................................... $ 1,399 $ 15,466
Accounts receivable - net .............................................. 36,380 27,477
Inventory - net ........................................................ 10,451 10,367
Receivable from parent ................................................. -- 1,514
Other current assets ................................................... 1,077 903
Deferred tax assets .................................................... 20,823 18,144
-------- --------
Total current assets ................................................ 70,130 73,871
Royalty advances - net ................................................. 5,322 5,195
Property and equipment - net ........................................... 5,187 5,605
Intangible assets - net ................................................ 19,549 3,583
Other assets ........................................................... 1,900 --
-------- --------
Total Assets .................................................... $102,088 $ 88,254
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................................... $ 3,910 $ 5,885
Accrued liabilities .................................................... 42,451 35,779
Line of credit ......................................................... 4,438 --
-------- --------
Total current liabilities ........................................... 50,799 41,664
-------- --------
Stockholders' Equity:
Preferred stock, $.001 par value; authorized:
5,000,000 shares; issued and outstanding: 0 shares .................. -- --
Common stock, $.001 par value; authorized:
25,000,000 Class A shares and 400,000 Class B shares; Issued and
outstanding:
FY 1999 - 14,178,552 Class A and 200,000 Class B shares .............. 14
FY 1998 - 14,080,000 Class A and 200,000 Class B shares .............. 14
Additional paid-in capital ................................................. 45,548 44,029
Retained earnings .......................................................... 5,727 2,547
-------- --------
Total stockholders' equity .......................................... 51,289 46,590
-------- --------
Total Liabilities and Stockholders' Equity ...................... $102,088 $ 88,254
======== ========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE> 4
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1998 1997
------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue:
Net Sales ................................................. $36,094 $32,120
Licensing revenues and other .............................. 1,211 851
------- -------
Net revenue ......................................... 37,305 32,971
------- -------
Operating Costs and Expenses:
Cost of sales ............................................. 18,297 17,134
Selling, general and administrative ....................... 12,483 10,747
Depreciation and amortization ............................. 1,186 792
------- -------
Total operating costs and expenses .................. 31,966 28,673
------- -------
Operating Income .............................................. 5,339 4,298
------- -------
Interest Income - net ..................................... 104 --
Income Before Provision for Income Taxes ...................... 5,443 4,298
------- -------
Provision for Income Taxes ................................ 2,263 1,763
------- -------
Net Income .................................................... $ 3,180 $ 2,535
======= =======
Basic and Diluted Net Income per Share ........................ $ 0.22 $ 0.23
======= =======
Basic and Diluted Pro Forma Net Income per Share (1) .......... $ 0.18
=======
Shares Used in per Share Calculations:
Basic net income .......................................... 14,302 11,100
======= =======
Diluted net income ........................................ 14,409 11,100
======= =======
Pro forma basic net income (1) ............................ 13,873
=======
Pro forma diluted net income (1) .......................... 13,873
=======
</TABLE>
(1) Pro forma amounts for the three months ended December 31, 1997 reflect as
outstanding the number of shares required to be sold in the July 1998 initial
public offering to pay a $38.4 million dividend declared prior to the offering
(see Note 2).
See notes to consolidated financial statements
-4-
<PAGE> 5
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1998 1997
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income ........................................................ $ 3,180 $ 2,535
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ................................ 1,186 792
Deferred income taxes ........................................ (835) (1,458)
Changes in operating assets and liabilities:
Accounts receivable ....................................... (7,115) (7,829)
Inventory ................................................. 1,052 (798)
Royalty advances .......................................... (127) (1,287)
Other current assets ...................................... 1,414 (1,557)
Accounts payable .......................................... (2,515) (2,369)
Accrued liabilities ....................................... 4,835 3,941
-------- --------
Net cash provided (used) by operating activities ....... 1,075 (8,030)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures .............................................. (360) --
Acquisitions ...................................................... (17,118) (3,439)
Other investments ................................................. (1,760) --
-------- --------
Net cash used by investing activities .................. (19,238) (3,439)
-------- --------
Cash Flows from Financing Activities:
Advances on the line of credit .................................... 4,438 --
Repayment of Cliffs Notes, Inc. line of credit .................... (342) --
Advances due to Parent - net change ............................... -- 11,471
-------- --------
Net cash provided by financing activities .............. 4,096 11,471
-------- --------
Net Increase (Decrease) in Cash ....................................... (14,067) 2
Cash, Beginning of Period ............................................. 15,466 74
-------- --------
Cash, End of Period ................................................... $ 1,399 $ 76
======== ========
Noncash Investing Activity:
Acquisitions (Note 7):
Assets ......................................................... $ 5,217 $ 1,400
Goodwill (Notes 2 and 5) ....................................... 15,449 --
Other intangible assets (Notes 2 and 5) ........................ 700 --
Publishing rights .............................................. -- 4,000
Less: cash paid ................................................ (17,118) (3,439)
-------- --------
Liabilities assumed ............................................ $ 4,248 $ 1,961
======== ========
Noncash Financing Activity:
Issuance of Class A common stock under the ESOP plan (98,552 shares) $ 1,519 $ --
======== ========
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE> 6
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 AND AS OF
DECEMBER 31, AND SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements for the three months
ended December 31, 1998 and 1997, and as of December 31, 1998 are unaudited, but
have been prepared in accordance with generally accepted accounting principles
for interim consolidated financial statements. Certain information or footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted in
accordance with guidance 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 consolidated financial statements
should be read in conjunction with the audited, consolidated financial
statements as of and for the year ended September 30, 1998, and the related
notes thereto, included in the Company's Form 10-K filed with the SEC.
Organization and Description of Business -- IDG Books Worldwide, Inc. ("the
Company"), a Massachusetts company, was founded in 1990 as a wholly-owned
subsidiary (through intermediate companies) of International Data Group, Inc.
("Parent"). On March 24, 1998, the Company was reincorporated in Delaware. 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. After deducting expenses, the net proceeds to the Company
from the Offering were $44,032,000. The Company used $38,400,000 of the net
proceeds of the Offering to repay indebtedness owed to the Parent. At December
31, 1998, the Parent held approximately 78% of the voting power of the Company's
common stock.
The Company is a leading global knowledge company with best-selling technology,
business and general know-how books and computer-based training tools designed
to make learning accessible and fun. The Company publishes and markets its books
under brand names, including the "... For Dummies(R)" series.
Principles of Consolidation -- The consolidated financial statements include the
accounts of IDG Books Worldwide, Inc. and its majority controlled subsidiary
(collectively referred to as the Company). All significant intercompany accounts
and transactions have been eliminated.
Reclassifications -- Certain amounts in prior years' consolidated financial
statements and related notes have been reclassified to conform to the fiscal
1999 presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- The Company's fiscal year ends on the last Saturday of each
September. Fiscal year 1998, ended on September 26, 1998, and consisted of 52
weeks. For convenience, fiscal year-ends are denoted in the accompanying
consolidated financial statements as September 30. Similarly, the thirteen-week
periods ended December 26, 1998 and December 27, 1997 are referred to as the
three-months ended December 31, 1998 and 1997, respectively.
Intangible Assets - Intangible assets represent goodwill, publishing rights and
other intangible assets, as applicable to the period reported. Amortization is
provided on a straight-line method over the estimated useful lives of these
assets, not exceeding forty years.
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 Statement of Financial Accounting Standards (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. For the three months ended December
31, 1998, 106,356 shares reflecting the dilutive effects of outstanding stock
options, were included in computing diluted net income per share.
-6-
<PAGE> 7
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Unaudited Pro Forma Earnings Per Share - For the three months ended December 31,
1997, unaudited pro forma basic net income per share amounts were calculated
using common shares outstanding plus the number of shares (2,773,000) whose
proceeds were required to be used to repay a $38.4 million note payable (issued
as a pre-offering dividend) 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.
Comprehensive Income - Under SFAS No. 130, an enterprise is required to report
the change in its net assets during the period from nonowner sources
("Comprehensive Income"). The Company's comprehensive income for the three
months ended December 31, 1998 and 1997 was equal to its net income for those
periods ($3,180,000 and $2,535,000, respectively).
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
-------------------------------------
December 31, 1998 September 30, 1998
-------------------------------------
(unaudited)
<S> <C> <C>
Accounts receivable ..................... $ 62,962 $ 53,922
Allowance for doubtful accounts ......... (4,620) (4,555)
Allowance for sales returns ............. (21,962) (21,890)
-------------------------------------
Total ............................... $ 36,380 $ 27,477
=====================================
</TABLE>
4. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
-------------------------------------
December 31, 1998 September 30, 1998
-------------------------------------
(unaudited)
<S> <C> <C>
Books (finished goods) .................. $ 23,445 $ 22,185
Paper ................................... 1,713 2,560
-------------------------------------
Total Inventory...................... 25,158 24,745
Reserve for obsolescence ................ (14,707) (14,378)
-------------------------------------
Net Inventory ....................... $ 10,451 $ 10,367
=====================================
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
-------------------------------------
December 31, 1998 September 30, 1998
-------------------------------------
(unaudited)
<S> <C> <C>
Goodwill ................................ $ 15,449 $ --
Publishing rights ....................... 3,958 3,958
Other intangible assets ................. 700 --
-------------------------------------
Total gross intangible assets ....... 20,107 3,958
Less: accumulated amortization ........... (558) (375)
-------------------------------------
Net intangible assets ............... $ 19,549 $ 3,583
=====================================
</TABLE>
-7-
<PAGE> 8
IDG BOOKS WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
-------------------------------------
December 31, 1998 September 30, 1998
-------------------------------------
(unaudited)
<S> <C> <C>
Accrued royalties ............................ $11,611 $11,545
Accrued compensation and benefits ............ 7,495 9,315
Accrued promotion ............................ 11,336 9,923
Accrued federal and state corporate taxes .... 3,519 1,272
Other accrued liabilities ................... 8,490 3,724
-------------------------------------
Total .................................. $42,451 $35,779
=====================================
</TABLE>
7. ACQUISITION ACTIVITY
In December 1998, the Company purchased all of the capital stock of Cliffs
Notes, Inc., a privately held publisher of the popular study guides. The
acquisition price included approximately $17.1 million in payments to Cliffs'
shareholders, retirement of shareholder notes and bank debt, plus $.5 million in
transaction costs. The acquisition was accounted for as a purchase business
combination and, accordingly, the acquisition cost has been allocated to the
fair value of the assets acquired of $5.2 million and liabilities assumed of
$4.2 million. Assumed liabilities include $1.8 million for the cost of a
restructuring plan to relocate certain employees of Cliffs and terminate certain
facility leases and other business contracts. Of the acquisition cost, $15.4
million was allocated to goodwill. Such allocation is preliminary and subject to
revision upon receipt of final information concerning the amounts of working
capital at closing and the cost of such restructuring plan. The Company's pro
forma net income, assuming such acquisition had been made as of the beginning of
the periods presented herein, would not differ materially from actual net income
reported for those periods.
Also in December 1998, the Company made a $1.8 million investment to acquire a
49% interest in a Canadian publisher, CDG Books Canada, Inc., a newly formed
company with Macmillan Canada (a division of Canada Publishing Company). The
Company's investment is accounted for using the equity method. The Company's
equity in operating results for the quarter was insignificant.
In December 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 $5.4 million in cash and
assumed liabilities. The cost of this acquisition was allocated to the assets
acquired, including $4.0 million allocated to publishing rights, which is being
amortized over eight years.
8. CREDIT AGREEMENT
During the three months ended December 31, 1998, the Company received borrowings
on the line of credit of $4.4 million in accordance with the acquisition of
Cliffs Notes, Inc.'s capital stock. Additionally, the Company assumed $.3
million of the Cliffs Notes, Inc. line of credit which was paid off on December
18, 1998.
9. SUBSEQUENT EVENTS
In January 1999, the Company reached an agreement with Banta Book Group of Banta
Corporation (Banta) for Banta to build a 250,000 square foot distribution
facility dedicated to the distribution of all Company product. As part of this
agreement, the two companies have also signed a 10-year manufacturing and
distribution agreement. The Company expects to ship its products from this
facility by the end of calendar year 1999. During the contract period, the
minimum annual payment is $3.6 million.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
IDG Books is a leading global knowledge company featuring a diverse portfolio of
technology, business and general know-how books and computer-based learning
tools. 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 general know-how. The Company's portfolio of brand names includes more than
780 active titles. The Company has approximately 75 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 forty percent of the Company's net revenue for the
three months ended December 31, 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.
In December 1998, the Company purchased all of the capital stock of Cliffs
Notes, Inc., a privately held publisher of the popular literary study guides.
Cliffs Notes currently publishes approximately 300 titles, including its
original Cliffs Notes(R) plus Cliffs Quick Review(R) for high school and college
courses, Test Preparation guides, Advanced Placement study aids, and Test
Preparation software.
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 three months ended December 31, 1998, the Company's top
three customers accounted for approximately 40.5% of the Company's net revenue
as compared to 38.5% in 1997, and the Company's top ten customers accounted for
approximately 65.4% of the Company's net revenue in 1998 as compared to 71.0% in
1997.
-9-
<PAGE> 10
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 ended December 31,
1998 1997
-------------------------------
<S> <C> <C>
Statement of Income Data:
Net Revenue:
"...For Dummies(R)" .......................... 63.9% 68.1%
IDG Books Technology ......................... 36.1 31.9
-------------------------------
Total Net Revenue ............................ 100.0% 100.0%
-------------------------------
Cost of Sales ................................ 49.0% 52.0%
Selling, general and administrative expenses.. 33.5 32.6
Depreciation and amortization ................ 3.2 2.4
-------------------------------
Operating Income ............................. 14.3 13.0
Interest Income - net ........................ 0.3 --
-------------------------------
Income before provision for income taxes ..... 14.6 13.0
-------------------------------
Net income ................................... 8.5% 7.7%
-------------------------------
Other Data:
EBITDA(1) .................................... 17.5% 15.5%
-------------------------------
</TABLE>
FIRST QUARTER ENDED DECEMBER 31, 1998 COMPARED TO FIRST QUARTER ENDED
DECEMBER 31, 1997
Net Revenue. Net revenue increased $4.3 million, or 13.1%, to $37.3
million for the three months ended December 31, 1998 from $33.0 million for the
three months ended December 31, 1997. This increase was primarily the result of
an increase in net revenue of $1.4 million, or 6.1%, for the Company's branded
franchise group, which includes the "... For Dummies(R)" brand and Cliffs
Notes brand, and $2.9 million, or 28.2%, for the IDGB Technology Group. Of the
Company's net revenue for the three months ended December 31, 1998, $6.0 million
was attributable to sales of titles (including new editions) first published
during that period, as compared to $5.9 million for titles (including new
editions) first published during the same period for 1997.
Cost of Sales. Cost of sales increased $1.2 million, or 6.8%, to $18.3
million for the three months ended December 31, 1998 from $17.1 million for the
three months ended December 31, 1997. Cost of sales as a percentage of net
revenue was 49.0% and 52.0% for the three months ended December 31, 1998 and
December 31, 1997, respectively. Product costs, including paper, printing,
binding, royalty, and inventory obsolescence expenses decreased as a percentage
of net revenue to 31.6% for the three months ended December 31, 1998 from 33.4%
for the three months ended December 31, 1997 as a result of favorable paper,
printing and binding prices. Product development costs decreased as a percentage
of net revenue to 10.1% for the three months ended December 31, 1998 from 10.9%
for the three months ended December 31, 1997, reflecting the Company's decrease
in new title releases as compared to the same quarter of 1997. Fulfillment and
distribution expense decreased as a percentage of net revenue to 7.4% for the
three months ended December 31, 1998 from 7.6% for the three months ended
December 31, 1997 as a result of efficiencies achieved in the Company's
distribution facilities.
- -------------------
(1) "EBITDA" is defined as income before provision for income taxes, interest,
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 December 31, 1998 was $6.5 million compared to
$5.1 million for the three months ended December 31, 1997.
-10-
<PAGE> 11
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million, or 16.2%, to $12.5 million for
the three months ended December 31, 1998 from $10.8 million for the three months
ended December 31, 1997. Approximately $1.4 million 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 a $0.3 million
increase in general and administrative expenses, including costs incurred
relating to the upgrade of computer systems. Selling, general and administrative
expenses increased as a percentage of net revenue to 33.5% for the three months
ended December 31, 1998 from 32.6% for the three months ended December 31, 1997.
The Company's selling and marketing costs increased as a percentage of revenue
to 19.9% of net revenue for the three months ended December 31, 1998 compared to
18.3% for the same period the prior year.
Parent Corporate Services Fee (included with selling, general and
administrative expense). 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
previously been paid to the Company's parent and recorded as parent corporate
services fee. These fees are included in selling, general and administrative
expenses.
Depreciation and Amortization. Depreciation and amortization expenses
increased $.4 million or 49.7% to $1.2 million for the three months ended
December 31, 1998 from $.8 million for the three months ended December 31, 1997.
The increase was due to an increase in the depreciable asset base and
amortization of publishing rights, over the prior year fiscal quarter.
Operating Income. Operating income increased $1.0 million, or 24.2%, to
$5.3 million for the three months ended December 31, 1998 from $4.3 million for
the three months ended December 31, 1997. Operating income increased as a
percentage of net revenue to 14.3% in the three months ended December 31, 1998
from 13.0% for the same period the prior year due to an increase in sales and a
decrease in cost of sales, offset by an increase in selling, general and
administrative expense as a percentage of net revenue, as described above.
Income before Provision for Income Taxes. Income before provision for
income taxes increased $1.1 million, or 26.6%, to $5.4 million for the three
months ended December 31, 1998 from $4.3 million for the three months ended
December 31, 1997. Income before provision for income taxes increased as a
percentage of net revenue to 14.6% in the three months ended December 31, 1998
from 13.0% for the same period the prior year due to an increase in sales and a
decrease in cost of sales, offset by an increase in selling, general and
administrative expense as a percentage of net revenue, as described above.
Net Income. Net income of $3.2 million for the three months ended
December 31, 1998 increased $.7 million, or 25.4%, from net income of $2.5
million for the three months ended December 31, 1997. This increase was
primarily due to an increase in sales and a decrease in cost of sales, offset by
an increase in selling, general and administrative expense as a percentage of
net revenue, as described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Historically, the financing requirements of the Company were funded through
intercompany advances from IDG, its parent, 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. As of June
22, 1998, IDG suspended the cash sweep process allowing cash receipts and cash
generated by the Company to be retained by the Company. During the Company's
fiscal fourth quarter ended September 30, 1998, the advances due to Parent
account balance was paid by IDG and reduced to zero.
As of December 31, 1998 the Company's working capital decreased $12.9 million to
$19.3 million from $32.2 million at December 31, 1997. The decrease in working
capital at December 31, 1998 was primarily the result of a net decrease in cash
of $14.1 million due to the acquisition of Cliffs Notes, Inc. Additionally,
there was a $1.5 million decrease in the receivable from parent, a $6.7 million
increase in accrued liabilities, and a $4.4 million increase in the line of
credit, offset by an $8.9 million increase in net accounts receivable, a $2.9
million increase in other current assets and deferred tax assets, and a $2.0
million decrease in accounts payable.
-11-
<PAGE> 12
The Company's net cash used in investing activities for the three months ended
December 31, 1998 was $19.2 million. In December 1998, the Company acquired all
of the capital stock of Cliffs Notes, Inc. which included $17.1 million in
payments to Cliffs' shareholders, retirement of stockholder notes and bank debt.
As of this report date, the purchase price allocation, subject to final working
capital adjustments is not final. During December 1998 the Company acquired a
49% ownership interest in a Canadian publisher, CDG Books Canada, Inc., for $1.8
million.
The Company's net cash provided by financing activities was $4.0 million for the
three months ended December 31, 1998 as a result of borrowing on the line of
credit and $11.5 million for the three months ended December 31, 1997, as a
result of 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Dependence on the Computer Industry. The Company writes many of its
books for users of information technology, particularly personal computers and
software. Technology-related books accounted for a substantial majority of the
Company's net revenue in the three months ended December 31, 1998, and it is
expected that technology books will continue to account for a substantial
majority of the Company's book sales for the foreseeable future. As a result,
the Company's future success depends on the growth and development of the market
for personal computers and related applications. If this grows at a rate less
than expected, or if consumer demand for technology-related books declines for
any reason, the Company's future financial results could be adversely affected.
Dependence on Microsoft Products and Competition with Microsoft Press.
Sales of books devoted to the use of software products sold by Microsoft
Corporation ("Microsoft"), including its Windows operating system, accounted for
approximately forty percent of the Company's net revenue in the three months
ended December 31, 1998. As a result, future financial results will depend in
large part on continued consumer demand for Microsoft products. A decline in the
use of Microsoft products would likely result in decreased demand for the
Company's books and could adversely affect future financial results.
In addition to relying on the sales of books devoted to Microsoft
products, the Company competes with Microsoft's publishing division, Microsoft
Press, for readers of computer-related books, including books covering Microsoft
products. Microsoft Press has substantially greater financial resources than the
Company and, because it is owned by Microsoft, may have better access to planned
and new Microsoft products. As a result, Microsoft Press may have a competitive
advantage over the Company in providing books devoted to the use of software
products sold by Microsoft.
Dependence on " . . . For Dummies(R)" Publications. The Company
derives a substantial proportion of its net revenue from the sale of the " . . .
For Dummies(R)" family of books. In addition, the Company has devoted
substantial resources to the publication of these books and the development of
the " . . . For Dummies(R)" brand name. As a result, any change in reader
preferences leading to a decline in demand for the " . . . For Dummies(R)"
books would likely have a material adverse effect on future financial results.
Risks of New Product Introductions. Generally as a particular book gets
older, the Company sells fewer copies of that book. Consequently, the Company's
future success depends on its ability to identify trends in the technology,
business and general know-how markets and to offer new titles, as well as other
products and services, that address the changing needs of the target audiences.
To establish market acceptance of a new publication, the Company must dedicate
significant resources to research and editorial development, production and
sales and marketing. The Company incurs significant costs in developing,
publishing and selling a new book, which often significantly precede meaningful
revenues from its sale. Consequently, new publications can require significant
time and investment to achieve profitability. Investors should note, however,
that there can be no assurance that the Company's efforts to introduce new
publications or other products or services will be successful or profitable.
The Company records as an expense the costs related to the development
of new publications and products, other than author advances, as they are
incurred. As a result, the Company's profitability from quarter-to-quarter and
from year-to-year may be adversely affected by the number and timing of new
publications and product launches in any period and the level of acceptance
gained by such publications and products.
-12-
<PAGE> 13
Risks Associated with Fluctuations in Paper Costs. Paper is the
principal raw material used in the Company's business. The Company generally
purchases paper from merchants representing the paper mills. The Company does
not have long-term paper supply contracts with these paper merchants. The
arrangements with merchants are negotiated each year and provide for quarterly
price adjustments. Paper prices have been volatile over the past several years
and are affected by many factors, including demand, mill capacity, pulp supply,
energy costs and general economic conditions. Consequently, the Company's cost
of paper, relative to our net revenue, can vary from period-to-period. In the
past, paper has also been difficult to obtain due to industry-wide shortages.
Significant paper price increases, sustained over a period of time, could
adversely affect the Company's future financial condition or operating results.
Fluctuations in Quarterly Results and Cyclicality of Revenue. The
Company's operating expenses, which include product development costs and
selling, general and administrative expenses, are relatively fixed in the
short-term and are based on our long-term revenue expectations. If the Company
sells fewer books or otherwise has lower revenue than expected, the Company may
not be able to quickly reduce its spending. Any shortfall in the Company's
revenue would have a direct impact on its results of operations, and
fluctuations in quarterly results could affect the market price of its Class A
common stock in a manner unrelated to the Company's long-term operating
performance. The Company typically sells more books during the first and second
quarters because of increased sales during the Christmas season. In addition,
the Company sells more books in quarters in which software manufacturers release
new or updated versions of popular software products. 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 net
revenue due to seasonal or other factors discussed above.
In addition, the Company typically publishes books relating to new
trends and technologies. Accordingly, if general economic conditions worsen,
people may defer spending on these new trends and technologies, which could
reduce the number of books sold.
Risks Associated with Product Distribution Channels; Risk of Product
Returns. The Company sells its books primarily to large retail chains, large
wholesalers, warehouse clubs, office superstores and computer and electronics
superstores. In the three months ended December 31, 1998, the Company's three
largest customers, Barnes & Noble, Inc., Ingram Book Company and Borders, Inc.,
accounted for approximately 16%, 14% and 11% of net revenue, respectively. The
Company's future financial results depend in large part on its relationships
with its customers. Any disruption in relationships with its customers could
adversely affect financial performance.
The Company's sales policy generally permits book customers to return
any unsold or damaged books for full credit. The Company records as revenue all
books sold to its customers in a particular quarter and, at the same time,
records a provision for estimated returns. During the three months ended
December 31, 1998, the Company recorded a provision for returns of approximately
22% of its gross sales. If, during any period, customers return more books than
previously estimated, the Company's financial results in that period would be
adversely affected.
Competition. The Company faces competition directly from other book
publishers and indirectly from non-print media. Competition in book publishing
stems mainly from editorial quality, timely introduction of new titles, product
positioning, pricing and brand name recognition. In addition to the Company,
Pearson Education, Microsoft Press and McGraw-Hill all have a strong market
presence in the United States and internationally in technology publishing. The
principal competitors for the Company's business and general know-how titles
include Random House, Simon & Schuster and HarperCollins. Each of these
competitors has substantially greater financial resources than the Company.
Non-print media, such as the Internet and CD-ROMs, may also present
substantial competition. If computer users increase their reliance on
instruction and other information disseminated on-line, the Company's business
could be adversely affected.
Potential Competition with IDG. IDG publishes magazines and on-line
services and, to a lesser extent, books that may be competitive with the
Company's publications. Certain of IDG's current publications and products
compete with our books. As a result, the Company may compete with IDG for
certain readers. IDG has substantially greater resources than the Company. Any
increased competition from IDG for readers could have an adverse impact on the
Company's business and operating results.
-13-
<PAGE> 14
Control by IDG; Potential Conflicts of Interests; Benefits to IDG. IDG
owns all of the shares of the Class B common stock, each share of which is
entitled to ten votes per share on most stockholder actions, and has
approximately 78% of the combined voting power of both classes of common stock
as of December 31, 1998. The remaining holders of the shares of Class A common
stock are entitled to one vote per share and have approximately 22% of the
combined voting power. IDG has two representatives on the Company's Board of
Directors and has enough votes to elect all members of the Board of Directors.
As a result of its stock ownership, IDG is in a position, without the
approval of the Company's public stockholders, to: amend the Company's charter
or approve a merger, sale of assets or other major corporate transaction; defeat
any non-negotiated takeover attempt that might otherwise benefit the public
stockholders; determine the amount and timing of dividends paid to itself and to
the Company's public stockholders; and otherwise control the Company's
management and operations and the outcome of all matters submitted for a
stockholder vote that could conflict with the interests of its public
stockholders.
Dependence on Key Personnel. The Company relies, and will continue to
rely, on its senior executive officers and other key management personnel. If
any of these people leaves the Company, the relationships that these people have
with the Company's authors, customers or manufacturers could be lost, and the
Company would need to find people that could develop new relationships. In
addition, the Company expects that it will need to hire additional employees,
including a senior executive officer for marketing. The competition for
employees at all levels of the book publishing industry is intense and is
increasing. In our Northern California operations, in particular, the Company
has experienced increased turnover of employees and is experiencing difficulty
in attracting new employees. If the Company does not succeed in attracting new
employees or retaining and motivating current employees, the Company's business
could suffer significantly.
Transition to New Distribution Service. The Company outsources
distribution and fulfillment functions to retail and wholesale customers through
two vendors. The contracts with these vendors expire in September 1999. One of
these vendors accounted for more than 60% of our distribution and order
fulfillment costs in each of fiscal 1996, 1997 and 1998. The Company has
selected a single-source vendor for distribution and fulfillment, but has not
started the transition to the new vendor. Any difficulties in transitioning to
the new distribution vendor could adversely impact day-to-day operating
performance and future financial results.
Risks Associated with Acquisitions. As part of the Company's growth
strategy, it may buy, or make significant investments in complementary
companies, publications or products. The Company recently completed the
acquisition of Cliffs Notes, Inc. This acquisition as well as any future
acquisition will be accompanied by the risks commonly encountered in making
acquisitions of products, companies and technologies.
For example, it could have difficulty assimilating the personnel and
operations of the acquired company. This could cause a disruption of its ongoing
business, distraction of management and other resources, and difficulty in
maintaining uniform standards, controls and procedures. There can be no
assurance that the Company would succeed in overcoming these risks or any other
problems encountered in connection with any acquisitions it may make. In
addition, the Company may be required to incur debt or issue equity to pay for
any future acquisitions.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in 2000, these
date code fields will need to accept four-digit entries in order to distinguish
21st Century dates from 20th Century dates. As a result, the computer
systems and/or software used by many companies will need to be upgraded to
comply with "Year 2000" requirements by the end of 1999. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance issues.
The Company has essentially completed the review of its computer systems to
determine the extent and impact of the Year 2000 issues. 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 begun testing
its systems for compliance in preparation for implementing the needed changes.
Many of the Company's systems are new and were designed to accommodate the Year
2000 issue when originally installed. The Company currently anticipates
completing corrective measures to its systems by mid-year of calendar 1999.
-14-
<PAGE> 15
The Company has assessed the scope of its risks related to problems its
computer systems may have related to the Year 2000 issue and believes such risks
are not material. The estimated costs to modify or replace these applications
are included in the Company's cost for its computer system upgrade. The Company
currently does not have a contingency plan in the event that it is unable to
make its systems Year 2000 compliant. There can be no assurance, however, that
the Company's systems will be fully Year 2000 compliant in a timely manner, and
a failure by the Company to make its internal systems Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
The Company is in the process of communicating with its customers, suppliers,
and business partners in an effort to assess how they intend to resolve their
Year 2000 issues. The Company, at this time, is not able to form an opinion as
to whether its customers or suppliers will be able to resolve their Year 2000
issues in a satisfactory and timely manner, or the magnitude of the adverse
impact it would have on the Company's operations if they fail to do so. No
assurance can be given that all of these third party systems will be Year 2000
compliant. Any failure of the Company's customers, suppliers, or business
partners to satisfactorily address their Year 2000 problems could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Financial Market Risk
For the three months ended December 31, 1998, there were no material changes in
the Company's exposure to financial market risks, including changes in interest
rates and foreign currency exchange rates.
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 in connection with the Company's initial public offering, and Form 10-K as
of and for the year ended September 30, 1998.
-15-
<PAGE> 16
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
No reports on Form 8-K were filed during the quarter ended
December 31, 1998
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
-16-
<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: February 9, 1998 By: /s/ James A. Doehrman
---------------------------------------
James A. Doehrman,
Vice President and Chief Financial Officer
(Principal Accounting Officer
and Duly Authorized Officer)
-17-
<PAGE> 18
EXHIBIT INDEX
Exhibit 27 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-27-1998
<PERIOD-END> DEC-26-1998
<CASH> 1,399
<SECURITIES> 0
<RECEIVABLES> 62,962
<ALLOWANCES> (26,582)
<INVENTORY> 10,451
<CURRENT-ASSETS> 70,130
<PP&E> 12,883
<DEPRECIATION> (7,696)
<TOTAL-ASSETS> 102,088
<CURRENT-LIABILITIES> 50,799
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102,088
<SALES> 36,094
<TOTAL-REVENUES> 37,305
<CGS> 18,297
<TOTAL-COSTS> 31,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (104)
<INCOME-PRETAX> 5,443
<INCOME-TAX> 2,263
<INCOME-CONTINUING> 3,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,180
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
