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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-109381
HAIGHTS CROSS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE NO. 13-4087398
(State of Incorporation) (I.R.S. Employer Identification No.)
10 NEW KING STREET, SUITE 102
WHITE PLAINS, NY 10604
(Address of principal executive offices) (Zip Code)
(914) 289-9400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act.)
Yes [ ] No [X].
1
HAIGHTS CROSS COMMUNICATIONS, INC.
QUARTERLY REPORT FOR THE
QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2004 and 2003 (unaudited).......................................................... 3
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003.............. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and 2003 (unaudited).......................................................... 5
Notes to Consolidated Financial Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 25
Item 4. Controls and Procedures............................................................... 25
Signatures..................................................................................... 28
PART II -- OTHER INFORMATION PAGE
- ---------------------------- ----
Item 1. Legal Proceedings..................................................................... 26
Item 2. Unregistered Sales of Equity Securities............................................... 26
Item 6. Exhibits and Reports on Form 8-K...................................................... 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(IN THOUSANDS)
Revenue $ 50,892 $ 44,109 $ 90,455 $ 82,236
Costs and expenses:
Cost of goods sold 17,762 13,281 29,734 25,197
Marketing and sales 10,216 9,194 19,301 17,422
Fulfillment and distribution 3,810 3,214 6,871 5,949
General and administration 5,471 5,282 10,618 10,335
Restructuring charges 528 910 882 1,432
Amortization of pre-publication costs 3,078 2,065 5,672 4,018
Depreciation and amortization of
property and equipment 616 565 1,197 1,041
Amortization of intangible assets 336 - 336 -
------------ ------------ ------------ ------------
Total costs and expenses 41,817 34,511 74,611 65,394
------------ ------------ ------------ ------------
Income from operations 9,075 9,598 15,844 16,842
Other (income) expenses:
Interest expense 11,883 4,342 23,300 8,861
Interest income (182) (91) (316) (91)
Amortization of deferred financing
costs 647 675 1,446 975
Other (income) expense (63) 103 (61) 103
------------ ------------ ------------ ------------
Total other expenses 12,285 5,029 24,369 9,848
------------ ------------ ------------ ------------
Income (loss) before discontinued
operations (3,210) 4,569 (8,525) 6,994
Loss from discontinued operations
(including loss on disposal of
$911,000 and $911,000, respectively) - (1,006) - (1,156)
Net income (loss) (3,210) 3,563 (8,525) 5,838
Non-cash preferred stock dividends
and accretion (679) (4,746) (1,300) (9,320)
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (3,889) $ (1,183) $ (9,825) $ (3,482)
============ ============ ============ ============
See accompanying notes.
3
HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
-------------- ---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents $ 60,496 $ 32,389
Accounts receivable, net 26,203 16,459
Inventory, net 22,912 22,150
Direct response advertising costs - current portion, net 2,756 2,431
Prepaid royalties 4,904 5,342
Prepaid expenses and other current assets 1,832 2,908
-------------- ---------------
Total current assets 119,103 81,679
Pre-publication costs, net 29,092 28,197
Direct response advertising costs, net 6,762 6,504
Property and equipment, net 7,568 7,098
Goodwill 136,490 125,005
Intangible assets, net 12,330 -
Deferred financing costs, net 15,996 13,944
Other assets 3,125 3,095
-------------- ---------------
Total assets $ 330,466 $ 265,522
============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 18,898 $ 18,449
Accrued interest 6,993 6,742
Deferred subscription revenue 13,507 13,272
Current portion of long term debt 1,000 1,000
-------------- ---------------
Total current liabilities 40,398 39,463
Long term liabilities:
Senior secured term loan $ 98,250 $ 98,750
11 3/4% senior notes 140,000 140,000
12 1/2% senior discount notes 77,417 -
Series B Senior preferred stock, redeemable, $.001 par value,
6,000,000 shares authorized, 2,000,230 shares issued and
outstanding as of June 30, 2004 (approximate aggregate
liquidation value as of June 30, 2004
of $102,248) 100,143 -
Deferred gain on Series B cancellation and other long-term
liabilities 4,959 -
-------------- ---------------
Total long term liabilities 420,769 238,750
Commitments
Redeemable preferred stock:
Series B Senior preferred stock, redeemable, $.001 par value,
6,000,000 shares authorized, 2,400,000 shares issued and
outstanding as of December 31, 2003 - 109,364
Series A preferred stock, redeemable, $.001 par value, 30,000
shares authorized, 22,476 shares issued and outstanding
(approximate aggregate liquidation value as of June 30,
2004 of $32,252) 34,308 34,299
Series C preferred stock, redeemable, $.001 par value, 3,500
shares authorized, issued and outstanding (approximate
aggregate liquidation value as of June 30, 2004 of $3,536) 1,139 -
-------------- ---------------
Total redeemable preferred stock 35,447 143,663
Stockholders' deficit:
Common stock, $.001 par value, 30,000,000 shares authorized,
20,000,000 shares issued and outstanding 20 20
Accumulated other comprehensive income 330 299
Accumulated deficit (166,498) (156,673)
-------------- ---------------
Total stockholders' deficit (166,148) (156,354)
-------------- ---------------
Total liabilities, redeemable preferred stock and stockholders'
deficit $ 330,466 $ 265,522
============== ===============
See accompanying notes.
4
HAIGHTS CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2004 2003
--------------- ---------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net cash provided by operating activities: $ 4,839 $ 12,938
--------------- ---------------
INVESTING ACTIVITIES
Additions to pre-publication costs (6,563) (6,810)
Additions to property and equipment (1,129) (1,847)
Acquisition of business (25,078) -
Proceeds from sale of businesses - 7,550
Proceeds from sale of assets 4 18
--------------- ---------------
Net cash used in investing activities: (32,766) (1,089)
--------------- ---------------
FINANCING ACTIVITIES
Proceeds from senior credit facility - 12,000
Repayment of senior credit facility - (17,520)
Repayment of senior secured term loan (500) -
Proceeds from 12 1/2% senior discount notes 73,653 -
Purchase of Series B Senior preferred stock (13,999) -
Additions to deferred financing costs (3,151) (753)
--------------- ---------------
Net cash provided by (used in) financing activities: 56,003 (6,273)
--------------- ---------------
Effect of exchange rate changes on cash 31 97
Net change in cash and cash equivalents 28,107 5,673
Cash and cash equivalents at beginning of period 32,389 2,701
--------------- ---------------
Cash and cash equivalents at end of period $ 60,496 $ 8,374
=============== ===============
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for:
Interest $ 11,422 $ 4,371
Assets acquired under capital leases $ 350 $ -
Issuance of Series C preferred stock in connection with
business acquisition $ 1,093 $ -
See accompanying notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements contained herein consist
of the accounts of Haights Cross Communications, Inc. (the "Company"), a
Delaware corporation formed in January 1997 to create and build an education and
library publishing business, and its subsidiaries. The Company is a holding
company that conducts all of its operations through its direct and indirect
subsidiaries.
The Company is a creator and publisher of high quality education and library
materials. Products include K-12 curriculum-based student books, workbooks and
study guides, test preparation publications, teacher materials, audiobooks,
library books for children and young adults, and continuing professional
education materials. The Company markets its products primarily to school
administrators, educators, librarians and other professionals. Products are
distributed via market-specific field and telesales representatives, direct mail
and web/e-commerce to the North American market, and to the rest of the world
via licensing and distribution arrangements.
Our business is subject to modest seasonal fluctuations. Our revenue and income
from operations have historically been higher during the second and third
calendar quarters. In addition, our quarterly results of operations have
fluctuated in the past, and can be expected to continue to fluctuate in the
future, as a result of many factors, including general economic trends; the
traditional cyclical nature of educational material sales; school, library, and
consumer purchasing decisions, unpredictable funding of schools and libraries by
Federal, state, and local governments, consumer preferences and spending trends;
the need to increase inventories in advance of our primary selling season; and
timing of introductions of new products.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The unaudited interim consolidated financial
statements reflect all adjustments (consisting of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair statement of the
consolidated results for the interim periods presented. The consolidated results
of operations of interim periods are not necessarily indicative of results for a
full year. All material intercompany accounts and transactions have been
eliminated upon consolidation. These financial statements should be read in
conjunction with the consolidated financial statements and related notes for the
fiscal year ended December 31, 2003. Certain prior year amounts have been
reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
From time to time, the Company may be involved in various litigation relating to
claims which have arisen in the ordinary course of its business. In the opinion
of management, the outcome of any such litigation will not have a material
adverse impact on the Company's consolidated financial position or results of
operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. Instruments that are indexed to and potentially settled in an
issuer's own shares that are not within the scope of SFAS No. 150 remain subject
to existing guidance.
The adoption of SFAS No. 150 requires that the Company's Series B Senior
preferred stock be classified as debt on the Company's consolidated balance
sheet because it is mandatorily redeemable at a fixed and determinable date.
Dividends and accretion related to the Series B Senior preferred stock, which
previously had been recorded below net income (loss)
6
as a charge in determining net income (loss) available to common stockholders,
has been charged to interest expense in the accompanying consolidated statement
of operations since the January 1, 2004 adoption of this standard. The Company's
Series A preferred stock and Series C preferred stock, which are redeemable
beginning in the year 2019 and 2012, respectively, are redeemable at the option
of the holders and are not mandatorily redeemable. Accordingly, SFAS No. 150 is
not applicable to the Company's Series A preferred stock or Series C preferred
stock.
3. ACQUISITION
On April 15, 2004, the Company acquired certain assets and assumed certain
liabilities of Buckle Down Publishing Company ("Buckle Down"), an Iowa-based
company and a wholly owned subsidiary of Profiles Corporation. The Company
acquired Buckle Down to compliment and expand their growing Triumph Learning
segment which provides test-prep materials to the supplemental education market.
The Company paid $24,000,000 in cash and issued 3,500 shares of newly authorized
Series C preferred stock with a face value of $1,000 per share. The holder of
the Series C preferred stock is entitled to a cumulative 5% dividend per year,
compounded quarterly. The initial fair value of the Series C preferred stock was
$1,093,000, at the date of issuance.
This acquisition was accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standard No. 141, Business
Combinations, and, accordingly the results of operations have been included in
the Triumph Learning segment of the consolidated financial statements since the
date of acquisition.
The following table presents the preliminary allocation of the purchase price as
of June 30, 2004:
Working capital $ 1,893,000
Fixed assets 193,000
Trademarks (indefinite lived) 2,700,000
Customer relationships (definite lived) 6,050,000
Backlist (definite lived) 3,600,000
Non-compete agreement (definite lived) 250,000
Goodwill (indefinite lived) 11,485,000
--------------
Total purchase price $ 26,171,000
==============
The total purchase price of $26,171,000 includes acquisition costs of
$1,029,000. The allocation of the purchase price is based upon preliminary data
and could change upon completion of the independent valuation of intangible
assets by a third party valuation firm. The purchase price and its allocation
are expected to be completed by September 30, 2004. If, through the valuation
process, additional definite lived intangible assets related to the Buckle Down
acquisition are identified, amortization expense over the estimated useful lives
of the assets will be required, and may impact the balance sheet and results of
operations.
The pro-forma results of operations assumes the acquisition of Buckle Down
occurred at the beginning of the year.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenue $ 51,195,000 $ 46,425,000 $ 93,177,000 $ 86,903,000
Depreciation and amortization 4,078,000 2,883,000 7,528,000 5,564,000
Operating income 9,062,000 10,289,000 16,282,000 18,070,000
Net (loss) income (3,223,000) 4,256,000 (8,086,000) 7,071,000
4. DISCONTINUED OPERATIONS
On March 31, 2003, and May 30, 2003, in two separate transactions, the Company
sold the assets of its subsidiary Andrews Communications, LLC (including its
divisions Oakstone Legal & Business Publishing and Andrews Publishing) for gross
proceeds of $7,991,000 and net proceeds of $7,550,000. On May 30, 2003, in
conjunction with the second transaction, a loss of $911,000 was recorded on the
sale. Andrews Communications, LLC published legal newsletters, books, reports,
and related publications to attorneys, law firms, employment professionals, and
others.
7
For the three and six months ended June 30, 2003, Andrews Communications, LLC
had revenue of $456,000 and $2,005,000, and loss from operations and disposal of
discontinued operations of $1,006,000 and $1,156,000, respectively.
On April 19, 2004, the Company announced its intention to sell the Oakstone
Publishing business. While there was strong interest from prospective purchasers
through a sale process conducted in the second quarter, valuations did not meet
the Company's expectations and accordingly Oakstone will remain a continuing
business of Haights Cross within the Educational Publishing Group.
5. COMPREHENSIVE LOSS
Assets and liabilities of the Company's wholly-owned international subsidiary,
WF Howes Ltd., which is located in the United Kingdom, are translated at their
respective period-end exchange rates and revenues and expenses are translated at
average currency exchange rates for the period. The resulting foreign currency
translation adjustments from assets and liabilities are included as "Accumulated
other comprehensive loss" and are reflected as a separate component of
stockholders' deficit.
The following table sets forth the calculation of comprehensive loss for the
periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Net (loss) income $ (3,210,000) $ 3,563,000 $ (8,525,000) $ 5,838,000
Add: foreign currency translation
adjustment (35,000) 127,000 31,000 97,000
-----------------------------------------------------------
$ (3,245,000) $ 3,690,000 $ (8,494,000) $ 5,935,000
===========================================================
6. INVENTORY
The following table sets forth the components of inventory for the periods
indicated:
JUNE 30, DECEMBER 31,
2004 2003
-------------------------------
(UNAUDITED)
Supplies $ 1,184,000 $ 1,015,000
Work-in-process 529,000 642,000
Finished goods 25,553,000 22,137,000
-------------------------------
27,266,000 23,794,000
Less allowance for obsolescence 4,354,000 1,644,000
-------------------------------
$ 22,912,000 $ 22,150,000
===============================
The Company recorded an additional $2,095,000 in inventory obsolescence in the
second quarter of 2004 due to a change in estimate at the Chelsea House segment.
This change was necessitated due to the declining sales performance at that
segment.
7. FINANCING ARRANGEMENTS
On August 20, 2003, Haights Cross Operating Company ("HCOC") entered into a
$30,000,000 four-year and nine-month senior secured revolving credit facility,
and a $100,000,000 five-year senior secured term loan and issued $140,000,000 of
11 3/4% senior notes due 2011. HCOC used the net proceeds of these transactions
to repay indebtedness under its old senior secured credit facility and to redeem
its then outstanding 13.0% senior subordinated notes due 2009. In connection
with this refinancing transaction, HCOC incurred an early redemption
8
premium of $9,236,000 which was paid to the senior subordinated note holders. As
part of the redemption transaction, the Company also cancelled 1,880 warrants
for Series A preferred stock with an assigned value of $1,880,000 and 1,692,169
warrants for common stock held by the senior subordinated note holders.
On December 10, 1999, DLJ Merchant Banking Partners II, L.P. and its affiliates
(the "DLJ Parties") acquired shares of the Company's Series B Senior preferred
stock and warrants to purchase shares of the Company's Series A preferred stock
and common stock. In addition, the DLJ Parties became parties to an investors
agreement with the Company pursuant to which DLJ Merchant Banking Partners II,
L.P. had the right to designate one member of the Company's board of directors
and such director had the right to approve various transactions, including the
incurrence, assumption or guarantee by the Company of any indebtedness for
borrowed money. On January 22, 2004, the DLJ Parties sold substantially all of
their shares and warrants to third parties. In connection with such sale, the
investors agreement was amended to eliminate the DLJ Parties' board designation
right and the related director approval rights, and the DLJ Parties' board
designee resigned from the Company's board of directors. In addition, the DLJ
Parties returned to the Company for cancellation 104,770 shares of Series B
Senior preferred stock having a liquidation value of $5,000,000, warrants to
purchase 778 shares of Series A preferred stock having a value of $778,000, and
warrants to purchase 743,148 shares of common stock. The Company reversed
$904,000 of discount and fees associated with the return of the Series B Senior
preferred stock. The net gain resulting from this transaction has been deferred
and classified as a liability in the accompanying consolidated balance sheet.
The deferred gain will be amortized against interest expense through December
10, 2011, the date upon which the Series B Senior preferred stock is mandatorily
redeemable.
On February 2, 2004, the Company completed an offering of 12 1/2% senior
discount notes and received net proceeds of $73,653,000. The Company used a
portion of the proceeds from the sale of the Company's 12 1/2% senior discount
notes to repurchase 295,000 outstanding shares of Series B Senior preferred
stock at a price equal to 99% of its liquidation value of $14,140,000. In
connection with this repurchase, warrants to purchase 467 shares of Series A
preferred stock having a value of $467,000 and warrants to purchase 451,666
shares of common stock were returned to the Company for cancellation. The
Company intends to use the remaining proceeds to fund future acquisitions and
for general corporate purposes.
On April 15, 2004, the Company issued 3,500 shares of Series C preferred stock.
The Series C preferred stock has a liquidation value of $1,000 per share plus
any accrued but unpaid dividends. The Series C preferred stock accrues quarterly
cumulative dividends at an annual rate of 5%. Beginning on April 15, 2012, any
Series C preferred stock holder may require the Company to redeem the
outstanding shares of Series C preferred stock held by that holder, at a
redemption price equal to $1,000 per share plus any accrued but unpaid
dividends. The holder of shares of Series C preferred stock is not entitled to
any voting rights. The initial carrying value of the Series C preferred stock
was $1,093,000 and the Company will accrete to the aggregate liquidation value
of $5,209,000 through April 15, 2012 the date the shareholder can require
redemption. The Company may, at its option, at any time, redeem shares of Series
C preferred stock, in whole or in part at a price equal to 101% of the per share
liquidation value.
The Company accounts for their Series B Senior preferred stock, which is
mandatorily redeemable, in accordance with Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." The Company's Series B Senior
preferred stock is mandatorily redeemable on December 10, 2011, at its
liquidation value, plus any accrued but unpaid dividends. The Company's Series A
preferred stock and Series C preferred stock, which are redeemable beginning on
December 31, 2019 and April 15, 2012, respectively, are redeemable at the option
of the holder and are not mandatorily redeemable. Accordingly, SFAS No. 150 is
not applicable to our Series A preferred stock or Series C preferred stock.
8. RESTRUCTURING CHARGES
Restructuring charges generally consist of employee termination benefits, costs
incurred to consolidate facilities or relocate employees, or costs to terminate
contracts, such as operating leases.
During the fourth quarter of 2002, the Company initiated an operations
consolidation project under which it consolidated the warehousing and order
fulfillment functions of its Triumph Learning, Chelsea House and
Sundance/Newbridge subsidiaries at a new warehouse facility. The customer
service functions of Triumph Learning
9
and Sundance/Newbridge were also combined. The objective of the consolidation
was to reduce payroll costs and avoid expected increases in lease costs, while
providing faster and more accurate order and delivery services. In January 2003,
the Company signed the lease for the new warehouse facility and overall
completion of the project occurred in March 2004. In connection with this
effort, the Company recorded a total restructuring charge of $2,430,000. In
accordance with Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, these costs were not
accrued as of December 31, 2002.
Operations consolidation project restructuring activity by type for the
three months ended June 30, 2004 (unaudited) is as follows:
ACCRUED ACCRUED
AMOUNT RESTRUCTURING RESTRUCTURING
EXPECTED TO LIABILITY AS RESTRUCTURING LIABILITY AS
BE OF EXPENSE CASH PAID OF
INCURRED MARCH 31, 2004 IN 2004 IN 2004 REVERSALS JUNE 30, 2004
-------- -------------- ------- ------- --------- -------------
Severance and related......... $ 600,000 $ 173,000 $ -- $ 94,000 $ -- $ 79,000
Lease terminations costs...... 730,000 111,000 -- 30,000 -- 81,000
Relocation and other.......... 1,100,000 47,000 -- 22,000 -- 25,000
----------- ----------- ------------ ------------ ----------- -----------
$ 2,430,000 $ 331,000 $ -- $ 146,000 $ -- $ 185,000
=========== =========== ============ ============ =========== ===========
Operations consolidation project restructuring activity by segment for the
three months ended June 30, 2004 (unaudited) is as follows:
ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
AMOUNT LIABILITY AS RESTRUCTURING LIABILITY AS
EXPECTED TO BE OF EXPENSE CASH PAID OF
INCURRED MARCH 31, 2004 IN 2004 IN 2004 REVERSALS JUNE 30, 2004
-------- -------------- ------- ------- --------- -------------
Sundance/Newbridge.... $ 750,000 $ 49,000 $ -- $ 36,000 $ -- $ 13,000
Chelsea House......... 1,000,000 282,000 -- 110,000 -- 172,000
Triumph Learning...... 560,000 -- -- -- -- --
Corporate............. 120,000 -- -- -- -- --
------------- ----------- ------------ ------------- ------------ ------------
$ 2,430,000 $ 331,000 $ -- $ 146,000 $ -- $ 185,000
============= =========== ============ ============= ============ ============
Operations consolidation project restructuring activity by type for the
six months ended June 30, 2004 (unaudited) is as follows:
ACCRUED
RESTRUCTURING ACCRUED
AMOUNT LIABILITY AS RESTRUCTURING
EXPECTED TO OF RESTRUCTURING LIABILITY AS
BE DECEMBER 31, EXPENSE CASH PAID OF
INCURRED 2003 IN 2004 IN 2004 REVERSALS JUNE 30, 2004
-------- ---- ------- ------- --------- -------------
Severance and related......... $ 600,000 $ 103,000 $ 244,000 $ 268,000 $ -- $ 79,000
Lease terminations costs...... 730,000 155,000 -- 74,000 -- 81,000
Relocation and other.......... 1,100,000 33,000 110,000 118,000 -- 25,000
----------- ----------- ------------ ------------ ----------- -----------
$ 2,430,000 $ 291,000 $ 354,000 $ 460,000 $ -- $ 185,000
=========== =========== ============ ============ =========== ===========
The Company has expensed inception to date for this project $827,000,
$523,000 and $1,144,000 for severance and related, lease termination costs and
relocation and other, respectively.
10
Operations consolidation project restructuring activity by segment for the
six months ended June 30, 2004 (unaudited) is as follows:
ACCRUED ACCRUED
AMOUNT RESTRUCTURING RESTRUCTURING
EXPECTED TO LIABILITY AS RESTRUCTURING LIABILITY AS
BE OF EXPENSE CASH PAID OF
INCURRED MARCH 31, 2004 IN 2004 IN 2004 REVERSALS JUNE 30, 2004
-------- -------------- ------- ------- --------- -------------
Sundance/Newbridge............ $ 750,000 $ 93,000 $ -- $ 81,000 $ -- $ 12,000
Chelsea House................. 1,000,000 198,000 354,000 379,000 -- 173,000
Triumph Learning.............. 560,000 -- -- -- -- --
Corporate..................... 120,000 -- -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------
$ 2,430,000 $ 291,000 $ 354,000 $ 460,000 $ -- $ 185,000
=========== ============ ============ ============ ============ ============
The Company has expensed inception to date for this project $639,000,
$1,257,000, $479,000 and $119,000 at Sundance/Newbridge, Chelsea House, Triumph
Learning and Corporate, respectively.
During the second quarter of 2004, the Company initiated a management
restructuring project under which it consolidated the executive management and
accounting functions of its Chelsea House subsidiary into Sundance/Newbridge.
The objective of the consolidation was to reduce payroll costs and avoid
expected increases in lease costs. In connection with this effort, the Company
expects to record a total restructuring charge of $528,000 at the Chelsea House
segment.
Management restructuring project activity by type for the three and six
months ended June 30, 2004 (unaudited) is as follows:
ACCRUED ACCRUED
AMOUNT RESTRUCTURING RESTRUCTURING
EXPECTED TO LIABILITY AS RESTRUCTURING LIABILITY AS
BE OF EXPENSE CASH PAID OF
INCURRED MARCH 31, 2004 IN 2004 IN 2004 REVERSALS JUNE 30, 2004
-------- -------------- ------- ------- --------- -------------
Severance and related......... $ 445,000 $ -- $ 445,000 $ 57,000 $ -- $ 388,000
Relocation and other.......... 83,000 -- 83,000 83,000 -- --
----------- ----------- ------------ ------------ ----------- -----------
$ 528,000 $ -- $ 528,000 $ 140,000 $ -- $ 388,000
=========== =========== ============ ============ =========== ===========
9. SEGMENT REPORTING
The Company is a creator, publisher and marketer of products for the education
and library publishing markets. The Company has five operating business segments
which are regularly reviewed by the chief operating decision-maker in making
decisions about allocating resources and assessing performance.
The information presented below includes certain expense allocations between the
corporate parent and the operating business segments and is therefore not
necessarily indicative of the results that would be achieved had these been
stand-alone businesses. Corporate general and administrative expense consists of
general corporate administrative expense not allocated to the operating business
segments. Corporate capital expenditures includes capital expenditures of
discontinued operations and businesses held for sale.
11
The results of operations and other data for the five operating segments and the
corporate parent for the three and six months ended June 30, 2004 and 2003
(unaudited) are as follows:
TOTAL TOTAL
EDUCATION LIBRARY
SUNDANCE/ TRIUMPH PUBLISHING RECORDED CHELSEA PUBLISHING CONSO-
NEWBRIDGE LEARNING OAKSTONE GROUP BOOKS HOUSE GROUP CORPORATE LIDATED
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
(in thousands)
THREE MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
Revenue $ 18,570 $ 7,454 $ 4,420 $ 30,444 $ 16,952 $ 3,496 $ 20,448 $ - $ 50,892
Cost of goods sold 4,736 1,686 1,224 7,646 7,131 2,985 10,116 - 17,762
Marketing and sales 3,695 1,550 1,409 6,654 2,941 621 3,562 - 10,216
Fulfillment and distribution 1,425 606 456 2,487 1,080 243 1,323 - 3,810
General and administrative 845 1,045 543 2,433 1,314 922 2,236 1,330 5,999
Amortization of
pre-publication costs 751 390 97 1,238 927 913 1,840 - 3,078
Depreciation and amortization
of property and equipment 168 67 125 360 169 35 204 52 616
Amortization of intangible
assets 3 324 - 327 9 - 9 - 336
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
Income (loss) from operations $ 6,947 $ 1,786 $ 566 $ 9,299 $ 3,381 $ (2,223) $ 1,158 $ (1,382) $ 9,075
========= ======== ======== ========== ======== ========== ========== ========= ========
Interest expense $ 1,129 $ 1,981 $ 881 $ 3,991 $ 2,266 $ 1,598 $ 3,864 $ 4,028 $ 11,883
Capital expenditures -
pre-publication costs 1,367 694 25 2,086 1,230 566 1,796 - 3,882
Capital expenditures -
property and equipment 121 (a) 397 23 541 187 67 254 12 807
(a) Includes $350,000 of assets purchased under a capital lease.
THREE MONTHS ENDED
JUNE 30, 2003
(UNAUDITED)
Revenue $ 16,162 $ 4,764 $ 4,350 $ 25,276 $ 15,184 $ 3,649 $ 18,833 $ - $ 44,109
Cost of goods sold 4,003 1,033 1,192 6,228 6,167 886 7,053 - 13,281
Marketing and sales 3,372 1,241 1,159 5,772 2,698 724 3,422 - 9,194
Fulfillment and distribution 990 550 380 1,920 1,003 291 1,294 - 3,214
General and administrative 1,215 1,277 537 3,029 1,266 773 2,039 1,124 6,192
Amortization of
pre-publication costs 505 360 91 956 646 463 1,109 - 2,065
Depreciation and amortization
of property and equipment 151 26 141 318 169 26 195 52 565
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
Income (loss) from operations $ 5,926 $ 277 $ 850 $ 7,053 $ 3,235 $ 486 $ 3,721 $ (1,176) $ 9,598
========= ======== ======== ========== ======== ========== ========== ========= ========
Interest expense $ 642 $ 939 $ 568 $ 2,149 $ 1,519 $ 894 $ 2,413 $ (220) $ 4,342
Capital expenditures -
pre-publication costs 1,049 597 41 1,687 764 834 1,598 - 3,285
Capital expenditures -
property and equipment 699 21 68 788 157 26 183 18 989
12
TOTAL TOTAL
EDUCATION LIBRARY
SUNDANCE/ TRIUMPH PUBLISHING RECORDED CHELSEA PUBLISHING CONSO-
NEWBRIDGE LEARNING OAKSTONE GROUP BOOKS HOUSE GROUP CORPORATE LIDATED
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
(in thousands)
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
Revenue $ 26,912 $ 15,371 $ 8,307 $ 50,590 $ 33,558 $ 6,307 $ 39,865 $ - $ 90,455
Cost of goods sold 6,816 3,279 2,326 12,421 13,572 3,741 17,313 - 29,734
Marketing and sales 6,372 3,257 2,693 12,322 5,828 1,151 6,979 - 19,301
Fulfillment and distribution 2,302 1,072 866 4,240 2,126 505 2,631 - 6,871
General and administrative 1,563 2,167 1,093 4,823 2,656 1,722 4,378 2,299 11,500
Amortization of
pre-publication costs 1,463 831 193 2,487 1,737 1,448 3,185 - 5,672
Depreciation and amortization
of property and equipment 345 89 249 683 340 65 405 109 1,197
Amortization of intangible
assets 3 324 - 327 9 - 9 - 336
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
Income (loss) from operations $ 8,048 $ 4,352 $ 887 $ 13,287 $ 7,290 $ (2,325) $ 4,965 $ (2,408) $ 15,844
========= ======== ======== ========== ======== ========== ========== ========= ========
Interest expense $ 1,542 $ 2,784 $ 1,361 $ 5,687 $ 3,422 $ 2,498 $ 5,920 $ 11,693 $ 23,300
Capital expenditures -
pre-publication costs 2,162 1,144 88 3,394 1,986 1,183 3,169 - 6,563
Capital expenditures -
property and equipment 357 (a) 435 55 847 452 150 602 30 1,479
Total assets 57,516 58,558 25,771 141,845 96,378 14,212 110,590 78,031 330,466
(a) Includes $350,000 of assets purchased under a capital lease.
SIX MONTHS ENDED
JUNE 30, 2003
(UNAUDITED)
Revenue $ 24,148 $ 11,714 $ 8,211 $ 44,073 $ 30,983 $ 7,180 $ 38,163 $ - $ 82,236
Cost of goods sold 6,022 2,683 2,269 10,974 12,497 1,726 14,223 - 25,197
Marketing and sales 5,737 2,782 2,319 10,838 5,208 1,376 6,584 - 17,422
Fulfillment and distribution 1,569 1,039 756 3,364 1,995 590 2,585 - 5,949
General and administrative 2,359 2,133 981 5,473 2,448 1,465 3,913 2,381 11,767
Amortization of
pre-publication costs 985 690 182 1,857 1,265 896 2,161 - 4,018
Depreciation and amortization
of property and equipment 253 53 244 550 319 50 369 122 1,041
--------- -------- -------- ---------- -------- ---------- ---------- --------- --------
Income (loss) from operations $ 7,223 $ 2,334 $ 1,460 $ 11,017 $ 7,251 $ 1,077 $ 8,328 $ (2,503) $ 16,842
========= ======== ======== ========== ======== ========== ========== ========= ========
Interest expense $ 1,283 $ 1,877 $ 1,136 $ 4,296 $ 3,038 $ 1,788 $ 4,826 $ (261) $ 8,861
Capital expenditures -
pre-publication costs 2,138 1,028 86 3,252 1,841 1,717 3,558 - 6,810
Capital expenditures -
property and equipment 1,209 24 121 1,354 401 66 467 26 1,847
Total assets 52,782 30,003 24,691 107,476 93,637 15,759 109,396 14,896 231,768
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT. This quarterly report contains "forward-looking
statements". Forward-looking statements include statements concerning our plans,
objectives, goals, strategies, future events, future sales or performance,
capital expenditures, financing needs, plans or intentions relating to
acquisitions, business trends and other information that is not historical
information. When used in this quarterly report, the words "estimates,"
"expects," "anticipates," "projects," "plans," "intends," "believes,"
"forecasts" and variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking statements, including,
without limitation, management's examination of historical operating trends, are
based upon our current expectations and various assumptions. Our expectations,
beliefs and projections are expressed in good faith and we believe there is a
reasonable basis for them. However, there can be no assurance that management's
expectations, beliefs and projections will result or be achieved.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
this quarterly report, including, among others, the following:
- market acceptance of new education and library products,
particularly reading, literature, language arts, mathematics,
science and social studies programs;
- the seasonal and cyclical nature of education and library
sales;
- changes in funding in school systems throughout the nation,
which may result in cancellation of planned purchases of
education and library products and shifts in timing of
purchases;
- changes in the competitive environment, including those which
could adversely affect our cost of sales;
- changes in the relative profitability of products sold;
- regulatory changes that could affect the purchase of education
and library products;
- changes in the strength of the retail market for audiobooks
and market acceptance of newly-published titles;
- delays and unanticipated expenses in developing new programs
and other products or in developing new technology products,
and market acceptance and use of online instruction and
assessment materials;
- the potential effect of a continued weak economy on sales of
education and library products;
- the risk that our well-known authors will depart and write for
our competitors; and
- the effect of changes in accounting, regulatory and/or tax
policies and practices.
There may be other factors not presently known to us or which we currently
consider to be immaterial that may cause our actual results to differ materially
from the forward-looking statements. The forward-looking statements in this
quarterly report are made as of the date of this quarterly report.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
OPERATING GROUPS
We have organized our businesses into two operating groups: the Education
Publishing Group and the Library Publishing Group.
EDUCATION PUBLISHING GROUP. Our Education Publishing Group publishes
supplemental reading materials for the kindergarten through 9th grade market,
state-specific test preparation materials for K-12 high stakes competency tests
and continuing medical education products for doctors. Our Education Publishing
Group also markets non-proprietary, supplemental reading products and literature
for the K-12 market. This group is comprised of three segments:
Sundance/Newbridge, Triumph Learning and Oakstone.
In April 2004, we announced a plan to divest the Oakstone Publishing business.
While there was strong interest from prospective purchasers through a sale
process conducted in the second quarter, valuations did not meet our
expectations. Accordingly, Oakstone Publishing will remain a continuing business
within our Educational Publishing Group.
On April 15, 2004 we acquired the assets and assumed certain liabilities of
Buckle Down Publishing which will be reported within our Triumph Learning
segment prospectively from the acquisition date.
LIBRARY PUBLISHING GROUP. Our Library Publishing Group publishes audiobooks for
adults and children as well as literary, biographical and topical books
published in series for public and school libraries. Our Library Publishing
Group also markets non-proprietary audiobooks to public and school libraries.
This group is comprised of two segments: Recorded Books and Chelsea House.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ from those estimates.
Changes in facts, circumstances and market conditions may result in revised
estimates.
The critical accounting policies described herein are those that are, in
management's opinion, most important to the presentation of our consolidated
financial condition and results of operations.
REVENUE AND EXPENSE RECOGNITION
In accordance with industry practice, we recognize revenue from books and other
non-subscription sales when the product is shipped to the customer. Product
shipment terms are FOB shipping point and collectability is reasonably assured
at the time of shipment. Subscription revenue is deferred and recognized as the
subscription is fulfilled. Revenue is recognized net of provisions for estimated
returns. These estimated return provisions are based upon historical experience
and other industry factors including management's expectations. Actual return
experience is monitored and any significant change from management's
expectations results in an adjustment in the reserve rates utilized to estimate
returns.
Cost of goods sold is recognized when the related revenue is recognized and
primarily consists of paper, audio tape, printing, binding and duplication and
author royalty expenses.
15
PRE-PUBLICATION COSTS
We capitalize the costs associated with the development of our new products.
These costs primarily include author fees under work-for-hire agreements
(excluding royalties), the costs associated with artwork, photography and master
tapes, other external creative costs, internal editorial staff costs and
pre-press costs that are directly attributable to the products. These costs are
tracked at the product title or product series level and are amortized beginning
in the month the product is introduced to market. These costs are amortized over
the estimated life cycle of the book or product, based upon the sales
performance of similarly existing products that are sold in the same business
segment, for periods ranging from two to five years. The amortization rate is
determined by the expected annual performance during the life cycle and,
accordingly, in many cases an accelerated amortization method is utilized. Costs
determined to be unrecoverable are written off. A write-off occurs most often
when sales of a product are lower than anticipated or when a later version of
the product is released. In addition, life cycles are constantly monitored for
changes in length or rate of sales during the life cycle. When changes are
significant the amortization rate and period are adjusted.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of net acquisition cost over the estimated fair
value of net assets acquired of purchased companies. On January 1, 2002, we
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, intangible assets considered to have
indefinite lives, such as goodwill, are no longer amortized to expense but are
periodically evaluated for impairment at the reporting unit level. Intangible
assets with finite lives continue to be amortized to expense over their useful
lives.
Under SFAS No. 142, goodwill is subject to an annual impairment test as well as
an interim test if an event occurs or circumstances change between annual tests
indicating that the asset might be impaired. The impairment test is a two-step
process. First, the fair value of the reporting unit is compared to its carrying
value. If the fair value is less than the carrying value, a second step is
performed. In the second step, an implied goodwill value is determined by
deducting the fair value of all tangible and intangible net assets of the
reporting unit from the fair value of the reporting unit. If implied fair value
of the goodwill, as calculated, is less than the carrying amount of the
goodwill, an impairment charge is taken for the difference. For purposes of
estimating the fair value of the reporting unit, we use a discounted cash flow
approach, since our common stock is not publicly traded and a quoted market
price is unavailable.
DIRECT RESPONSE ADVERTISING COSTS
Direct response advertising costs are incurred to solicit sales from potential
new customers who can be shown to have responded specifically to an advertising
campaign that results in probable future economic benefits. We have two types of
direct response advertising costs: direct mail and catalogs. We are able to
track the revenue, costs and profitability from these advertising efforts at the
campaign level. Both the direct mail and catalog campaign costs are capitalized
and the net recoverability is evaluated on a product-by-product basis at the
campaign level. The life and amortization rate are determined by historical
experience from similar products at the same business. Generally, greater than
90% of direct mail costs are amortized in the first year, with all costs being
amortized over lives ranging from 12-18 months. The sole exception to this
policy is the direct mail costs relating the Oakstone subscription business
which are amortized on an accelerated basis over the estimated life of the
subscriber for up to five years. For these subscription products, the life is
based on the original subscription period plus subsequent renewal periods. The
rate of amortization is based on the expiration and cancellation rate of
subscribers for similar subscription products.
Catalog costs are amortized on an accelerated basis over the estimated life of
the catalog, generally between one and eighteen months with greater than 90% of
catalog costs being amortized in the first year. The life and amortization rate
is based on the sales experience of similar catalogs at the same business
segment. Amortization of direct response advertising costs is included in
marketing and sales expense in the accompanying consolidated statements of
operations. If a direct mail solicitation or catalog is determined to be
unprofitable, all remaining capitalized costs are written-off at that time.
16
INVENTORY AND RELATED OBSOLESCENCE
Inventory consists primarily of books, which are valued at the lower of cost or
market, as determined by the first-in, first-out method. Obsolescence reserves
on slow-moving or excess merchandise are recorded, where applicable, based upon
regular reviews of inventories on-hand and estimated future demand. If a book is
taken out of print, superseded by a later version or ceases to sell, it is
considered obsolete and all related inventory amounts are written-off. If
quantities of a book exceed expected future demand based on historical sales of
that title, the excess inventory is also written off.
STOCK-BASED COMPENSATION
We have a stock option plan, pursuant to which stock options for a fixed number
of shares of common stock are granted to employees with an exercise price equal
to or greater than the fair value of the shares at the date of grant. The
exercise prices of options issued under the plan are determined by our board of
directors using commonly employed valuation methods. Awards under the plan
generally vest over three years, although vesting may also be based on the
achievement of performance goals.
We account for stock options by following the fair value method under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Under the fair value method, compensation expense for options is
measured at the grant date based on the value of the award as determined using
the minimum value option valuation model and is recognized over the vesting
period of the grant.
INCOME TAXES
We account for income taxes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are recorded to reflect the future tax
consequences attributable to the effects of differences between carrying amounts
of existing assets and liabilities for financial reporting and for income tax
purposes. A history of generating taxable income is required in order to
substantiate the recording of a net tax asset. Because we have not yet generated
taxable income, we have placed a 100% valuation allowance on our net tax
benefits. We will re-evaluate the deferred tax valuation allowance based on
future earnings.
LONG-TERM DEBT AND REDEEMABLE CAPITAL STOCK
We have had and continue to have significant obligations pursuant to which
interest and/or dividends are accrued and not paid in cash. These obligations
consist of the old senior subordinated notes (which have been redeemed in full)
and our Series A preferred stock, Series B Senior preferred stock and Series C
preferred stock.
We issued warrants to purchase shares of our common stock and Series A preferred
stock in connection with the issuance of our old senior subordinated notes due
2009 and our Series B Senior preferred stock. Accounting Principles Board
Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants", requires that the portion of the proceeds of the old senior
subordinated notes due 2009 and Series B Senior preferred stock that is
allocable to the warrants should be accounted for as paid-in capital. The
allocation is based on the relative fair values of the old senior subordinated
notes due 2009, Series B Senior preferred stock, common stock warrants and
Series A preferred stock warrants at the time of issuance. The resulting
discounts on the old senior subordinated notes due 2009 were recorded initially
as a reduction to the carrying amount of such notes and were amortized as a
component of interest expense over the life of such notes. In connection with
the August 20, 2003 refinancing transaction, all outstanding warrants to
purchase shares of Series A preferred stock and warrants to purchase shares of
common stock issued with such notes were canceled.
On December 10, 1999, DLJ Merchant Banking Partners II, L.P. and its affiliates
(the "DLJ Parties") acquired shares of our Series B Senior preferred stock and
warrants to purchase shares of our Series A preferred stock and common stock. In
addition, the DLJ Parties became parties to an investors agreement with us
pursuant to which DLJ Merchant Banking Partners II, L.P. had the right to
designate one member of our board of directors and such director had the right
to approve various transactions, including the incurrence, assumption or
guarantee by us of any
17
indebtedness for borrowed money. On January 22, 2004, the DLJ Parties sold
substantially all of their shares and warrants to third parties. In connection
with such sale, the investors agreement was amended to eliminate the DLJ
Parties' board designation right and the related director approval rights, and
the DLJ Parties' board designee resigned from our board of directors. In
addition, the DLJ Parties returned to us for cancellation 104,770 shares of
Series B Senior preferred stock having a liquidation value of $5.0 million,
warrants to purchase 778 shares of Series A preferred stock having a value of
$0.8 million, and warrants to purchase 743,148 shares of common stock. We
reversed $0.9 million of discount and fees associated with the return of the
Series B Senior preferred stock. The net gain resulting from this transaction
has been deferred and classified as a liability in the accompanying consolidated
balance sheet. The deferred gain will be amortized against interest expense
through December 10, 2011, the Series B Senior preferred stock mandatory
redemption date.
On February 2, 2004, we completed an offering of 12-1/2% senior discount notes
and received net proceeds of $73.7 million. We used a portion of the proceeds
from the sale to repurchase 295,000 outstanding shares of Series B Senior
preferred stock at a price equal to 99% of its carrying value of $14.1 million.
In connection with this repurchase, warrants to purchase 467 shares of Series A
preferred stock having a value of $0.5 million and warrants to purchase 451,666
shares of common stock were returned to us for cancellation. We reversed $0.5
million of discount and fees associated with the return of the Series B Senior
preferred stock. We have used a portion of these proceeds towards the
acquisition of Buckle Down Publishing and intend to use the remaining proceeds
to fund future acquisitions and for general corporate purposes.
On April 15, 2004, we issued 3,500 shares of Series C preferred stock. The
Series C preferred stock has a liquidation value of $1,000 per share plus any
accrued but unpaid dividends. The Series C preferred stock accrues quarterly
cumulative dividends at an annual rate of 5%. Beginning on April 15, 2012, any
holder of Series C preferred stock may require us to redeem the outstanding
shares of Series C preferred stock held by that holder, at a redemption price
equal to $1,000 per share plus any accrued but unpaid dividends. The holder of
shares of Series C preferred stock is not entitled to any voting rights. The
fair value of the Series C preferred stock at inception was $1,093,000 and we
will accrete to the aggregate liquidation value of $5,209,000 through April 15,
2012, the earliest date the shareholder can require redemption. We may, at our
option, at any time, redeem shares of Series C preferred stock, in whole or in
part at a price equal to 101% of the per share liquidation value.
We account for our Series B Senior preferred stock, which is mandatorily
redeemable, in accordance with Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." Our Series B Senior preferred stock is mandatorily
redeemable on December 10, 2011, at its liquidation value, plus any accrued but
unpaid dividends. Our Series A preferred stock and Series C preferred stock,
which are redeemable beginning on December 31, 2019 and April 15, 2012,
respectively, are redeemable at the option of the holder and are not mandatorily
redeemable. Accordingly, SFAS No. 150 is not applicable to our Series A
preferred stock or Series C preferred stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
REVENUE
Revenue increased $6.8 million, or 15.4%, to $50.9 million for the three months
ended June 30, 2004, from $44.1 million for the three months ended June 30,
2003.
EDUCATION PUBLISHING GROUP. Revenue from the Education Publishing Group
increased $5.2 million, or 20.4%, to $30.4 million for the three months ended
June 30, 2004, from $25.3 million for the three months ended June 30, 2003.
Sundance/Newbridge's revenue increased $2.4 million, or 14.9%, to $18.6 million
for the three months ended June 30, 2004, from $16.2 million for the three
months ended June 30, 2003. The increase was mostly due to two large district
level school sales which provided more than $2.5 million in revenue for June
2004. Revenue at Triumph Learning increased $2.7 million, or 56.5%, to $7.5
million for the three months ended June 30, 2004 from $4.8 million for the three
months ended June 30, 2003. This increase was primarily due to $1.8 million in
revenue from the newly acquired Buckle Down Publishing as well as continued
strong sales of state specific test-prep
18
products. Revenue at Oakstone for the three months ended June 30, 2004 increased
$0.1 million, or 1.6%, to $4.4 million from $4.3 million for the three months
ended June 30, 2003.
LIBRARY PUBLISHING GROUP. Revenue from the Library Publishing Group
increased $1.6 million, or 8.6%, to $20.4 million for the three months ended
June 30, 2004, from $18.8 million for the three months ended June 30, 2003.
Revenue at Recorded Books increased $1.8 million, or 11.6%, to $17.0 million for
the three months ended June 30, 2004 from $15.2 million for the three months
ended June 30, 2003 resulting from increases in the school, library and retail
channels. Revenue at Chelsea House decreased $0.2 million, or 4.2%, to $3.5
million for the three months ended June 30, 2004, from $3.6 million for the
three months ended June 30, 2003 due to continued softness in library spending
on traditional materials.
COST OF GOODS SOLD
Cost of goods sold increased $4.5 million, or 33.7%, to $17.8 million for the
three months ended June 30, 2004 from $13.3 million for the three months ended
June 30, 2003. The gross margin as a percentage of revenue for the three months
ended June 30, 2004 decreased to 65.1% from 69.9% for the three months ended
June 30, 2003. The decline in gross margin as a percentage of revenue is
primarily due to unfavorable variances in period over period inventory
obsolescence charges, most notably at Chelsea House which incurred a non-cash,
non-recurring charge of $2.1 million related to a change in estimate concerning
remaining unit sales from existing product lines.
EDUCATION PUBLISHING GROUP. Cost of goods sold for the Education
Publishing Group increased $1.4 million, or 22.8%, to $7.6 million for the three
months ended June 30, 2004 from $6.2 million for the three months ended June 30,
2003, while the gross margin decreased to 74.9% from 75.4% period over period.
At Sundance/Newbridge, the cost of goods sold increased $0.7 million, or 18.3%,
to $4.7 million from $4.0 million and the gross margin decreased to 74.5% from
75.2% quarter over quarter. The majority of this decrease was from lower margins
on the two large district level school sales described above, increased product
research costs and lower margins from distributed products. Cost of goods sold
for Triumph Learning increased $0.7 million, or 63.2% to $1.7 million from $1.0
million, and gross margin decreased to 77.4% from 78.3% quarter over quarter.
The majority of this drop was due to 2003 benefiting from a decrease in
inventory obsolescence reserve. Cost of goods sold at Oakstone was $1.2 million
for both periods, while the gross margin declined to 72.3% from 72.6% period
over period.
LIBRARY PUBLISHING GROUP. Cost of goods sold for the Library Publishing
Group increased $3.1 million, or 43.4%, to $10.1 million for the three months
ended June 30, 2004 from $7.1 million for the three months ended June 30, 2003
while gross margin declined to 50.5% from 62.6%. The cost of goods sold for
Recorded Books increased $1.0 million, or 15.6%, to $7.1 million from $6.2
million while the gross margin for Recorded Books decreased to 57.9% from 59.4%.
The decline in gross margin is primarily due to royalty advance and inventory
obsolescence provision adjustments both related to a new large print product
line. Cost of goods sold for Chelsea House increased $2.1 million to $3.0
million from $0.9 million quarter over quarter due to the non-cash,
non-recurring $2.1 million inventory obsolescence charge related to a change in
estimate concerning remaining unit sales from existing product lines.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE
Selling, general and administrative expense is comprised of marketing and sales,
fulfillment and distribution, general and administrative and restructuring
charges on the accompanying consolidated statements of operations. Selling,
general and administrative expense increased $1.4 million, or 7.7%, to $20.0
million for the three months ended June 30, 2004 from $18.6 million for the
three months ended June 30, 2003, primarily due to additional sales commission
and fulfillment costs resulting from our revenue growth for the period and
investments in additional in-house sales reps in several businesses. Selling,
general and administrative expense as a percentage of revenue decreased to 39.3%
for the three months ended June 30, 2004 from 42.2% for the three months ended
June 30, 2003.
EDUCATION PUBLISHING GROUP. Selling, general and administrative expense
for the Education Publishing Group increased $0.9 million, or 7.9%, to $11.6
million for the three months ended June 30, 2004 from $10.7 million for the
three months ended June 30, 2003. Selling, general and administrative expense
for Sundance/Newbridge and
19
Triumph Learning increased $0.4 million and $0.1 million, respectively, due to
revenue driven increases in selling and fulfillment and distribution expenses
and investments in our in-house sales reps offset partially by lower
restructuring and restructuring related expenses. Selling, general and
administrative expense for Oakstone Publishing increased $0.3 million as a
result of additional fulfillment and distribution expenses related to higher
Oakstone Health and Wellness newsletter sales and greater marketing expenses due
to increased marketing efforts, including additional direct mail.
LIBRARY PUBLISHING GROUP. Selling, general and administrative expense for
the Library Publishing Group increased $0.4 million, or 5.4%, to $7.1 million
for the three months ended June 30, 2004 from $6.8 million for the three months
ended June 30, 2003. Selling, general and administrative expense for Recorded
Books increased $0.4 million, primarily due to the higher revenue. Selling,
general and administrative expense at Chelsea House remained unchanged at $1.8
million.
CORPORATE. Our corporate level general and administrative expense
increased $0.2 million, or 18.2%, to $1.3 million for the three months ended
June 30, 2004 from $1.1 million for the three months ended June 30, 2003.
INTEREST EXPENSE
Interest expense increased $7.5 million to $11.9 million for the three months
ended June 30, 2004 from $4.3 million for the three months ended June 30, 2003.
This increase was primarily related to the adoption of SFAS No. 150 as of
January 1, 2004 which required our Series B Senior preferred stock dividends and
accretion to be included in interest expense, and the issuance of our 12-1/2%
senior discount notes on February 2, 2004. Our total outstanding debt increased
from $199.5 million as of June 30, 2003 to $416.8 million as of June 30, 2004.
This is primarily related to the adoption of SFAS No. 150 which required our
Series B Senior preferred stock to be included in total debt as of January 1,
2004, and the issuance of our 12-1/2% senior discount notes.
Cash interest expense increased $3.7 million to $5.8 million for the three
months ended June 30, 2004 from $2.1 million for the three months ended June 30,
2003. The increase in cash interest was the result of the August 20, 2003
refinancing transaction where our old paid-in-kind interest bearing senior
subordinated notes were retired, and were replaced with a floating rate senior
secured term loan and 11-3/4% senior notes bearing cash interest. Our cash
interest bearing outstanding debt was $239.3 million as of June 30, 2004
compared to $136.8 million as of June 30, 2003.
Interest expense consists of the following:
THREE MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
----------- -----------
(UNAUDITED)
Interest expense:
Senior secured term loan $ 1,633,000 $ --
11-3/4% senior notes 4,112,000 --
12-1/2% senior discount notes - non-cash 2,311,000 --
Series B Senior preferred stock - non-cash 3,751,000 --
Secured bank loan -- 2,140,000
Subordinated notes - non-cash -- 2,202,000
Other 76,000 --
----------- -----------
Interest expense $11,883,000 $ 4,342,000
=========== ===========
DISCONTINUED OPERATIONS
In November 2002, we initiated a plan to sell our Andrews Communications, LLC
subsidiary, which included our Andrews Publishing and Oakstone Legal & Business
Publishing divisions. The results of operations of Andrews Communications have
been classified as a discontinued operation in our consolidated statements of
operations. For the three months ended June 30, 2003, Andrews Communications had
revenue of $0.5 million and net loss of $0.1
20
million. On March 31, 2003 and May 30, 2003, in two separate transactions, we
sold the assets of Andrews Communications for gross proceeds of $8.0 million and
net proceeds of $7.6 million. On May 30, 2003, in conjunction with the second
transaction, we recorded a loss on sale of $0.9 million. The net proceeds of the
sales were used to pay down debt under our old senior secured credit facility.
NET INCOME (LOSS)
Net loss for the three months ended June 30, 2004, was $3.2 million compared to
net income of $3.6 million for the three months ended June 30, 2003. A large
portion of this decrease was due to the adoption of SFAS No. 150 in which our
Series B Senior preferred stock dividends and accretion of $3.8 million for the
three months ended June 30, 2004 are now charged to interest expense. In
addition, cash interest expense increased $3.7 million as a result of the August
2003 financing transaction and amortization of pre-publication costs increased
$1.0 million due to the increased investment in pre-publication costs in the
preceding years and a non-cash non-recurring charge of $0.4 million due to a
change in estimate concerning remaining unit sales from existing product lines.
In addition, amortization of intangibles increased $0.3 million for amortization
of other intangibles related to the acquisition of Buckle Down Publishing on
April, 15, 2004. For the quarter ended June 2003, net income was reduced by $1.0
million due to the loss from sale of Andrews Communications.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
REVENUE
Revenue increased $8.2 million, or 10.0%, to $90.5 million for the six months
ended June 30, 2004, from $82.2 million for the six months ended June 30, 2003.
EDUCATION PUBLISHING GROUP. Revenue from the Education Publishing Group
increased $6.5 million, or 14.8%, to $50.6 million for the six months ended June
30, 2004, from $44.1 million for the six months ended June 30, 2003.
Sundance/Newbridge's revenue increased $2.8 million, or 11.4%, to $26.9 million
for the six months ended June 30, 2004, from $24.1 million for the six months
ended June 30, 2003. The two large district level school sales accounted for
more than $2.5 million of this increase. Revenue at Triumph Learning increased
$3.7 million, or 31.2%, to $15.4 million for the six months ended June 30, 2004
from $11.7 million for the six months ended June 30, 2003. This increase was due
to the additional $1.8 million of revenue from the newly acquired Buckle Down
Publishing and strong year over year sales of state specific test-prep products.
Oakstone's revenue increased slightly by $0.1 million, or 1.2% to $8.3 million
for the six months ended June 30, 2004 from $8.2 million for the six months
ended June 30, 2003.
LIBRARY PUBLISHING GROUP. Revenue from the Library Publishing Group
increased $1.7 million, or 4.5%, to $39.9 million for the six months ended June
30, 2004, from $38.2 million for the six months ended June 30, 2003. Revenue at
Recorded Books increased $2.6 million, or 8.3%, to $33.6 million for the six
months ended June 30, 2004 from $31.0 million for the six months ended June 30,
2003. The increase over the prior year is attributable to the retail, schools
and library revenue channels. Revenue at Chelsea House decreased $0.9 million,
or 12.2%, to $6.3 million for the six months ended June 30, 2004, from $7.2
million for the six months ended June 30, 2003 due to continued softness in
library spending on traditional materials.
COST OF GOODS SOLD
Cost of goods sold increased $4.5 million, or 18.0%, to $29.7 million for the
six months ended June 30, 2004 from $25.2 million for the six months ended June
30, 2003. The gross margin as a percentage of revenue for the six months ended
June 30, 2004 decreased to 67.1% from 69.4% for the six months ended June 30,
2003 primarily due to the inventory obsolescence charge at Chelsea House
described below.
EDUCATION PUBLISHING GROUP. Cost of goods sold for the Education
Publishing Group increased $1.4 million, or 13.2%, to $12.4 million for the six
months ended June 30, 2004 from $11.0 million for the six months ended June 30,
2003, while the gross margin increased to 75.4% from 75.1% period over period.
At Sundance/Newbridge cost of goods sold increased $0.8 million, or 13.2%, to
$6.8 million from $6.0 million primarily due to the revenue
21
increase. However, gross margin decreased to 74.7% from 75.1% as a result of
higher product costs, period over period. Cost of goods sold for Triumph
Learning increased $0.6 million, or 22.2%, to $3.3 million from $2.7 million due
to the increased revenue while the gross margin increased to 78.7% from 77.1%
period over period. Cost of goods sold at Oakstone was $2.3 million for both
periods and gross margin declined to 72.0% from 72.4% period over period.
LIBRARY PUBLISHING GROUP. Cost of goods sold for the Library Publishing
Group increased $3.1 million, or 21.7%, to $17.3 million from $14.2 million and
gross margin declined to 56.6% from 62.7% period over period. The cost of goods
sold for Recorded Books increased $1.1 million, or 8.6%, to $13.6 million from
$12.5 million while the gross margin declined slightly to 59.6% from 59.7%
period over period. Cost of goods sold for Chelsea House increased $2.0 million
to $3.7 million from $1.7 million and gross margin declined to 40.7% from 76.0%
due to the non-cash, non-recurring $2.1 million inventory obsolescence charge
related to a change in estimate concerning remaining unit sales from existing
product lines, recorded in June 2004.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE
Selling, general and administrative expense is comprised of marketing and sales,
fulfillment and distribution, general and administrative and restructuring
charges on the accompanying consolidated statements of operations. Selling,
general and administrative expense increased $2.5 million, or 7.2%, to $37.7
million for the six months ended June 30, 2004 from $35.1 million for the six
months ended June 30, 2003. This increase is attributable to additional sales
commission and fulfillment costs resulting from the revenue growth, the addition
of new in-house sales reps in several businesses and increased marketing efforts
offset partially by lower restructuring expenses in 2004. Selling, general and
administrative expense as a percentage of revenue decreased to 41.6% for the six
months ended June 30, 2004 from 42.7% for the six months ended June 30, 2003.
EDUCATION PUBLISHING GROUP. Selling, general and administrative expense
for the Education Publishing Group increased $1.7 million, or 8.7%, to $21.4
million for the six months ended June 30, 2004 from $19.7 million for the six
months ended June 30, 2003. Selling, general and administrative expense for
Sundance/Newbridge increased $0.6 million due to revenue driven increases in
selling related expenses, including commissions and investments in in-house
sales reps, along with a corresponding increase in fulfillment and distribution
costs. The period over period increase in expense was partially offset by a
decline in restructuring and restructuring related expenses. Selling, general
and administrative expenses at Triumph Learning increased $0.5 million due to
revenue driven increases in commissions partially offset by lower restructuring
and restructuring related expenses in 2004. Selling, general and administrative
expense at Oakstone increased $0.6 million due to increased marketing in 2004
and fulfillment costs on increased ancillary and newsletter sales.
LIBRARY PUBLISHING GROUP. Selling, general and administrative expense for
the Library Publishing Group increased $0.9 million, or 6.9%, to $14.0 million
for the six months ended June 30, 2004 from $13.1 million for the six months
ended June 30, 2003. Selling, general and administrative expense for Recorded
Books increased $1.0 million, due to the addition of in-house sales reps and
revenue driven increases in commissions and fulfillment costs. Selling, general
and administrative expense at Chelsea House remained unchanged at $3.4 million.
CORPORATE. Corporate level general and administrative expense decreased
$0.1 million, or 3.5%, to $2.3 million for the six months ended June 30, 2004
from $2.4 million for the six months ended June 30, 2003.
INTEREST EXPENSE
Interest expense increased $14.4 million to $23.3 million for the six months
ended June 30, 2004 from $8.9 million for the six months ended June 30, 2003.
This increase was primarily related to the adoption of SFAS No. 150 as of
January 1, 2004 which required our Series B Senior preferred stock dividends and
accretion to be included in interest expense, and the issuance of our 12-1/2%
senior discount notes on February 2, 2004. Our total outstanding debt increased
from $199.5 million as of June 30, 2003 to $416.8 million as of June 30, 2004.
This is primarily related to the adoption of SFAS No. 150 which required our
Series B Senior preferred stock to be included in total debt as of January 1,
2004, and the issuance of our 12-1/2% senior discount notes.
22
Cash interest expense increased $7.2 million to $11.7 million for the six months
ended June 30, 2004 from $4.5 million for the six months ended June 30, 2003.
The increase in cash interest was the result of the August 20, 2003 refinancing
transaction where our old paid-in-kind interest bearing senior subordinated
notes were retired, and were replaced with a floating rate senior secured term
loan and 11-3/4% senior notes bearing cash interest. Our cash interest bearing
outstanding debt was $239.3 million as of June 30, 2004 compared to $136.8
million as of June 30, 2003.
Interest expense consists of the following:
SIX MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
----------- -----------
(UNAUDITED)
Interest expense:
Senior secured term loan $ 3,342,000 $ --
11-3/4% senior notes 8,179,000 --
12-1/2% senior discount notes - non-cash 3,765,000 --
Series B Senior preferred stock - non-cash 7,862,000 --
Secured bank loan -- 4,482,000
Subordinated notes - non-cash -- 4,379,000
Other 152,000 --
----------- -----------
Interest expense $23,300,000 $ 8,861,000
=========== ===========
DISCONTINUED OPERATIONS
In November 2002, we initiated a plan to sell our Andrews Communications, LLC
subsidiary, which included our Andrews Publishing and Oakstone Legal & Business
Publishing divisions. The results of operations of Andrews Communications have
been classified as a discontinued operation in our consolidated statements of
operations. For the six months ended June 30, 2003, Andrews Communications had
revenue of $2.0 million and net loss of $0.3 million. On March 31, 2003 and May
30, 2003, in two separate transactions, we sold the assets of Andrews
Communications for gross proceeds of $8.0 million and net proceeds of $7.6
million. On May 30, 2003, in conjunction with the second transaction, we
recorded a loss on sale of $0.9 million. The net proceeds of the sales were used
to pay down debt under our old senior secured credit facility.
NET INCOME (LOSS)
Net loss for the six months ended June 30, 2004, was $8.5 million compared to
net income of $5.8 million for the six months ended June 30, 2003. A large
portion of this decrease was due to the adoption of SFAS No. 150 pursuant to
which our Series B Senior preferred stock dividends and accretion of $7.9
million for the six months ended June 30, 2004 are now charged to interest
expense. In addition, cash interest expense and amortization of deferred
financing costs increased $7.2 million and $0.5 million, respectively, primarily
due to the August 2003 refinancing transaction and amortization of
pre-publication costs increased $1.6 million due to the increased investment in
pre-publication costs in the preceding years and a non-cash non-recurring charge
of $0.4 million at our Chelsea House segment due to a change in estimate
concerning remaining unit sales from existing product lines. In addition,
amortization of intangibles increased $0.3 million for amortization of other
intangibles related to the acquisition of Buckle Down Publishing on April, 15,
2004. Net income for the six months ended June 2003 was reduced by $1.2 million
due to the loss from sale of Andrews Communications.
LIQUIDITY AND CAPITAL RESOURCES
For the past several years, we have relied primarily on borrowings under our old
senior secured credit facility and the benefits of the paid-in-kind interest on
our old senior subordinated notes due 2009 and our preferred stock for our
working capital, capital expenditures, acquisition needs and debt service
requirements. On August 20, 2003, we entered into a $30.0 million four-year and
nine-month senior secured revolving credit facility and a $100.0 million
five-year senior secured term loan, and we issued $140.0 million in aggregate
principal amount of our 11-3/4% senior
23
notes. The proceeds from the 2003 refinancing transaction were used to repay the
old senior secured credit facility and old senior subordinated notes due 2009
and to pay fees associated with the transaction. On February 2, 2004, we
completed an offering of 12-1/2% senior discount notes and received net proceeds
of $73.7 million. A portion of the proceeds from the issuance were used to
repurchase 295,000 outstanding shares of Series B Senior preferred stock. On
April 15th 2004, we used $25.0 million in cash and issued a new Preferred C
stock with a face value of $3.5 million in order to purchase Buckle Down
Publishing. We used a portion of the proceeds to purchase Buckle Down Publishing
and intend on using the remaining proceeds to fund future acquisitions and for
general corporate purposes. As of June 30, 2004, our available borrowing
capacity under the senior secured revolving credit facility, limited by certain
restrictive covenants and financial ratio requirements, was approximately $28.1
million.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
During 2004, we completed an offering of 12-1/2% senior discount notes. As of
June 30, 2004, this issuance created an increase in our contractual obligations
and commitments of $77.4 million which is due after 5 years. Also, in connection
with the adoption of SFAS No. 150 which required that our Series B Senior
preferred stock be classified as debt, as of June 30, 2004 our contractual
obligations and committments increased by $100.1 million which is due after
five years.
Cash and cash equivalents increased by $28.2 million for the six months ended
June 30, 2004, to $60.5 million, from $32.3 million as of December 31, 2003
due primarily to the receipt of the net process from our 12-1/2% senior
discount notes on February 2, 2004.
While we cannot assure you that our business will generate sufficient cash flow
from operations, that any revenue growth or operating improvements will be
realized or that future borrowings will be available under the senior secured
revolving credit facility in an amount sufficient to enable us to service our
indebtedness, including the 11-3/4% senior notes and 12-1/2% senior discount
notes, or to fund our other liquidity needs, based on our current level of
operations, we believe that cash flow from operations and available cash,
together with available borrowings under the senior secured revolving credit
facility, will be adequate to meet our future liquidity needs for the next five
years.
CASH FLOWS
Net cash provided by operating activities was $4.8 million for the six months
ended June 30, 2004 in comparison to net cash provided of $12.9 million for the
six months ended June 30, 2003. The decrease was primarily due to the increase
in cash interest relating to our August 20, 2003 refinancing transaction and an
increase in cash used in current assets and liabilities.
Net cash used in investing activities was $32.8 million for the six months ended
June 30, 2004 in comparison to net cash used of $1.1 million for the six months
ended June 30, 2003. The increase was primarily due to $25.1 million of cash
used towards the purchase of Buckle Down Publishing in April, 2004 offset by the
sale of our Oakstone Legal & Business division on March 31, 2003.
Net cash provided by financing activities was $56.0 million for the six months
ended June 30, 2004 in comparison to net cash used of $6.3 million for the six
months ended June 30, 2003. The increase was due to $73.7 million of cash
provided from the completion of the 12-1/2% senior discount notes offering on
February 2, 2004, offset by $3.2 million of additions to deferred financing
costs associated with this offering. We also used $14.0 million of the proceeds
from the 12-1/2% senior discount note offering in the repurchase of 295,000
outstanding shares of Series B Senior preferred stock, at a price equal to 99%
of its liquidation value of $14.1 million.
CAPITAL EXPENDITURES
Capital expenditures - pre-publication costs relate to the costs incurred in the
development of new products. For the three and six months ended June 30, 2004,
we had $3.9 million and $6.6 million of pre-publication expenditures compared to
$3.2 million and $6.8 million during the three and six months ended June 30,
2003, respectively. We plan expenditures of approximately $16.5 million for
pre-publication costs in 2004. This level of spending is intended to support our
core successful products and allow for the development of new products.
Capital expenditures - property and equipment relate to the purchase of tangible
fixed assets such as computers, software and leasehold improvements. For the
three and six months ended June 30, 2004, we had $0.8 million and $1.1 million
of property, building and equipment expenditures compared to $1.0 million and
$1.8 million during the three and six months ended June 30, 2003, respectively.
We plan expenditures of approximately $3.2 million for property and equipment in
2004. This level of spending allows for our planned implementation of an ERP
system at our Recorded Books business, a software conversion at out shared
services facility in Northborough, Massachusetts,
24
a full office move for our Triumph Learning business and general additions to
furniture, fixtures and equipment for both our newly acquired Buckle Down
Publishing and our existing businesses.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
Our business is subject to modest seasonal fluctuations. Our revenue and income
from operations have historically been higher during the second and third
calendar quarters. In addition, our quarterly results of operations have
fluctuated in the past and can be expected to continue to fluctuate in the
future, as a result of many factors, including general economic trends; the
traditional cyclical nature of educational material sales; school, library and
consumer purchasing decisions; the unpredictable funding of schools and
libraries by federal, state, and local governments; consumer preferences and
spending trends; the need to increase inventories in advance of our primary
selling season; and timing of introductions of new products.
The unaudited quarterly information includes all normal recurring adjustments
that management considers necessary for a fair presentation of the information
shown. Because of the seasonality of our business and other factors, results for
any interim period are not necessarily indicative of the results that may be
achieved for the full fiscal year.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We utilize cash from operations and short-term borrowings to fund our working
capital and investment needs. Cash balances are normally invested in high-grade
securities with terms shorter than three months. Because of the short-term
nature of these investments, changes in interest rates would not materially
affect the fair value of these instruments.
Inflation has not had a significant impact on our operations in the past two
years. We do not expect inflation to have a significant impact on our
consolidated results of operations or financial condition in the foreseeable
future.
Market risks relating to our operations result primarily from changes in
interest rates. However, we do not consider the impact of interest rate
fluctuations to represent a significant risk during 2004.
To reduce the impact of increases in interest rates, we may, in the normal
course of business, enter into certain derivative instruments to hedge such
changes.
We have minimal exposure to foreign currency rate fluctuations on our foreign
sales, as currently we have minimal transactions denominated in foreign
currency. As a result, we do not hedge the exposure to these changes, and the
impact on our results of operations from the currency fluctuations for the three
and six months ended June 30, 2004 and 2003 has been de minimus.
We have available a $30.0 million senior secured revolving credit facility as a
source of financing for our working capital requirements subject to certain
restrictive covenants that can reduce the available aggregate borrowings under
the facility. As of June 30, 2004, our available borrowing capacity under the
senior secured revolving credit facility, limited by such restrictive covenants,
was approximately $28.1 million. Borrowings under this revolving credit
agreement bear interest at variable rates based on LIBOR plus an applicable
spread. As of June 30, 2004, we had no borrowings outstanding under this credit
facility.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of June 30, 2004 we evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures. In designing and evaluating our disclosure
controls and procedures, we and our management recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation,
25
our Chief Executive Officer and Chief Financial Officer have concluded that they
believe that, as of the date of completion of the evaluation, our disclosure
controls and procedures were reasonably effective to ensure that information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. We will continue to review and document our
disclosure controls and procedures on an ongoing basis, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.
(b) Changes in internal controls over financial reporting.
There was no change in our internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we are involved in litigation that we consider to
be in the normal course of business. We are not presently involved in any legal
proceedings that we expect individually or in the aggregate to have a material
adverse effect on our financial condition, results of operations or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
As part of our acquisition of Buckle Down Publishing on April 15,
2004, we issued 3,500 shares of our newly authorized Series C preferred stock,
par value $.001 per share. We acquired substantially all of the assets of Buckle
Down Publishing on April 15, 2004 for total consideration of $24.0 million in
cash and 3,500 shares of Series C preferred stock with a face amount of $3.5
million. The shares of Series C preferred stock were issued under an exemption
from the registration requirements of the Securities Act provided by Section
4(2) thereof, insofar as the shares were issued to a single recipient in a
transaction not involving a public offering.
The shares of Series C preferred stock are convertible into common
stock automatically upon an initial public offering by us. If such public
offering occurs on or prior to April 15, 2008, the number of shares issuable
upon such conversion with respect to each share of Series C preferred stock will
be equal to the original issue price per share divided by the initial public
offering price per share of our common stock. If such public offering occurs
after April 15, 2008, the number of shares issuable upon such conversion with
respect to each share of Series C preferred stock will be equal to (i) the
original issue price per share plus all accrued and unpaid dividends, divided by
(ii) the initial public offering price per share of our common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Peter J.
Quandt
31.2 Rule 13a-14(a)/15d-14(a) Certification of Paul J. Crecca
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes Oxley Act of 2002
(b) REPORTS ON FORM 8-K
26
A form 8-K (Item 12) was filed on April 2, 2004 regarding the
Company's annual report.
A form 8-K was filed on April 20, 2004 regarding the Company's
acquisition of substantially all of the assets of Buckle Down Publishing
Company.
A form 8-K (Item 12) was filed on May 10, 2004 regarding a press
release announcing that the Company had reported its financial results for the
first quarter ended March 31, 2004.
A form 8-K/A was filed on May 10, 2004, amending the Form 8-K filed
on April 20, 2004 regarding the Buckle Down acquisition to include Item 7(a)
Financial Statements of Business Acquired and Item 7(b) Pro Forma Financial
Information.
27
SIGNATURES
The Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HAIGHTS CROSS COMMUNICATIONS, INC.
By:
Dated: August 16, 2004 /s/ Peter J. Quandt
-----------------------------------------------
Peter J. Quandt
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Dated: August 16, 2004 /s/ Paul J. Crecca
-----------------------------------------------
Paul J. Crecca
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
Dated: August 16, 2004 /s/ Mark Kurtz
-----------------------------------------------
Mark Kurtz
Vice President of Finance and Accounting and
Chief Accounting Officer
EXHIBIT NO. EXHIBIT DESCRIPTION
31.1* Rule 13a-14(a)/15d-14(a) Certification of Peter J. Quandt
31.2* Rule 13a-14(a)/15d-14(a) Certification of Paul J. Crecca
32.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
- ----------
* filed herewith
** furnished herewith
29