SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999Commission file number: 1-10434
The Reader's Digest Association, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer
Identificati
on No.)
Pleasantville, New York 10570
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (914) 238-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange
on which
registered
Class A Nonvoting Common Stock New York Stock
par value $.01 per share Exchange
Class B Voting Common Stock New York Stock
par value $.01 per share Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of registrant, at August 31, 1999, was
approximately $161,235,000 based on the closing price of
registrant's Class B Voting Stock on the New York Stock Exchange-
- -Composite Transactions on such date.
As of August 31, 1999, 85,975,940 shares of the registrant's
Class A Nonvoting Common Stock and 21,716,057 shares of the
registrant's Class B Voting Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders of The Reader's Digest Association,
Inc. for the fiscal year ended June 30, 1999. Certain
information therein is incorporated by reference into Part I and
Part II hereof.
Proxy Statement for the Annual Meeting of Stockholders of The
Reader's Digest Association, Inc. to be held on November 12,
1999. Certain information therein is incorporated by reference
into Part III hereof.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
Strategic Initiatives 1
Recent Developments 3
Operating Segments 4
Global Books and Home Entertainment 4
Select Editions 4
Series Books 4
General Books 5
Music 5
Video 5
Merchandise Catalogs 6
Production and Fulfillment 6
U.S. Magazines 6
Circulation and Advertising 7
Editorial 8
Production and Fulfillment 8
International Magazines 9
Circulation and Advertising 9
Editorial 9
Production and Fulfillment 9
Direct Marketing Operations 10
Information Technology and Customer List Enhancement 11
Competition and Trademarks 11
Employees 11
Executive Officers 12
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 17
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 18
SIGNATURES 22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 23
Unless the context otherwise requires, references in this Annual
Report on Form 10-K to "Reader's Digest," "we" and "our" are to
The Reader's Digest Association, Inc. and its subsidiaries.
"Reader's Digest" and the Pegasus logo are registered trademarks
of
The Reader's Digest Association, Inc.
<PAGE>
PART I
ITEM 1.BUSINESS
We are a preeminent global leader in publishing and direct
marketing, and we create and deliver products that inform,
enrich, entertain and inspire, including magazines, books,
recorded music collections, home videos.
We are a Delaware corporation, originally incorporated in
New York in 1926 and then reincorporated in Delaware in 1951.
The mailing address of our principal executive offices is
Pleasantville, New York 10570 and our telephone number is (914)
238-1000.
We are best known for publishing our flagship Reader's
Digest magazine. Reader's Digest is a monthly, general interest
magazine consisting of original articles, previously published
articles in condensed form, and a condensed version of a
previously published or soon-to-be published full-length book.
Reader's Digest also contains monthly humor columns such as
"Laughter, The Best Medicine," "Life's Like That," "Humor In
Uniform," and "All In A Day's Work," and other regular
features, including "Heroes For Today," "It Pays To Enrich Your
Word Power," "News From The World Of Medicine," "Tales Out of
School," "Virtual Hilarity," "Personal Glimpses," and "Campus
Comedy." The international editions of Reader's Digest include
similar features.
DeWitt and Lila Acheson Wallace founded Reader's Digest
magazine in 1922. Today, Reader's Digest has a worldwide
circulation of about 25 million and over 100 million readers each
month. Reader's Digest is published in 49 editions and 19
languages.
Currently, our largest business unit is our global books and
home entertainment operations, which publish and market Reader's
Digest Select Editions, series books, general books, recorded
music collections and series, and home video products and series.
Strategic Initiatives
We are undertaking a three-phase strategy to build on our
fundamental strengths and create growth opportunities. In July
1998, we announced Phase I of our strategy, which involved:
- - reorganizing our business groups on a global basis;
- - restructuring our editorial organization;
- - establishing new reporting relationships; and
- - reassigning some of our executives.
We made further refinements to our organizational structure in
late fiscal 1999 to finalize the global operating segments
discussed below.
We announced Phase II of our strategy in September 1998,
which targets:
- - reducing costs and streamlining processes;
- - raising capital by selling some underproductive assets; and
- - restructuring some underproductive businesses.
Actions that we have taken as part of the ongoing Phase II
include:
- - reducing the number of individual promotional mailings
globally, including eliminating related product development and
overhead costs. The purpose of this action is to increase
response rates on continuing mailings;
- - reducing the circulation rate base for Reader's Digest in
the United States and in most international markets. The purpose
of this action is to improve the efficiency of our promotional
spending;
- - eliminating or redirecting some product lines, including
adult and children's retail book publishing, the Today's Best
Nonfictionr book series, and video or music businesses in
selected international markets;
- - selling our publishing operations in South Africa and
closing our operations in Chile, Colombia and Peru;
- - consolidating our operations in Benelux, the Nordic
countries, Germany and Switzerland, and those in the Czech
Republic and Hungary;
- - selling important works from our fine art collection;
- - outsourcing support functions where it is cost-effective;
- - consolidating suppliers and combining purchasing efforts for
greater negotiating leverage;
- - selling international real estate holdings, including those
in the United Kingdom, Canada and Italy; and
- - reducing our quarterly dividend from $0.225 per share to
$0.05 per share.
- - We announced Phase III of our strategy in February 1999.
Phase III targets long-term growth. The key elements of Phase
III include:
- - expanding our presence in five areas of intense consumer
interest-health, home, family, finance and faith;
- - selling non-publishing products and services in those areas;
- - continuing our geographic expansion;
- - developing new marketing channels;
- - broadening our customer base to include more younger
customers and more products for older customers; and
- - integrating the Internet into all of our businesses.
To implement Phase III, we expect to invest in internal growth
opportunities in our core businesses. We also expect to target
acquisitions and form alliances that leverage our core strengths.
Recent Developments
WebMD Internet Healthcare Web Site Alliance and Investment
In June 1999, we announced that we formed an alliance with
WebMD, Inc. as the first step in our strategy to expand our
business into providing health information and to integrate
Internet marketing into our businesses. WebMD is a leading
healthcare Web site for physicians and consumers. As part of our
business alliance, we also made a $13 million strategic equity
investment in WebMD, Inc. WebMD has reported that it has also
forged strategic partnerships with other investors, including
Microsoft Corporation, E.I. duPont de Nemours and Company, Excite
Inc., Intel Corporation, Covad Communications Group Inc.,
Softbank America Inc. and Dell Computer Corporation. WebMD has
announced that it plans to merge with Healtheon Corporation to
create one of the largest Internet companies in the health
information arena.
Our alliance contemplates that WebMD will help develop a new
Reader's Digest health information Web site for consumers in the
U.S. We expect to launch the Web site in the fall of 1999. The
Reader's Digest Web site will draw content from our health-
related editorial products and from the WebMD Web site. Our
health-related content will also be featured on the WebMD
consumer Web site.
The alliance also contemplates that WebMD will provide
Reader's Digest magazine to its physician service subscribers,
purchasing a minimum of 3,000,000 copies over five years. WebMD
will also purchase advertising in our magazines to promote the
WebMD Web site. Each issue of the U.S. edition of Reader's
Digest will include WebMD advertorial pages, including an "Ask
WebMD" column and a calendar of online events that will occur on
both the WebMD and the Reader's Digest health Web sites.
Books Are Fun Display Marketing Company Acquisition
On August 25, 1999, we agreed to purchase 100% of the stock
of Books Are Fun, Ltd. for approximately $380 million in cash.
Books Are Fun sells premium-quality books and gift items at
discount prices by display marketing those products on-site at
schools and businesses in all 50 states of the United States and
across Canada.
The acquisition is part of our strategy to diversify
distribution channels for our current product lines, while also
using our brand strength to create new opportunities.
The acquisition is subject to customary closing conditions,
including regulatory approvals. We expect the acquisition to
close around October 1, 1999. We expect to finance the
acquisition through a combination of internal funds and bank
borrowings under our principal revolving credit facility.
Torchmark and AIG Insurance Products and Services Marketing Alliances
On September 13, 1999, we announced that we have formed an
exclusive alliance with Torchmark Corporation, which will market
life and health insurance products to our customers in the United
States and Canada. The products will be marketed and sold by
Torchmark Corporation through direct mail, telemarketing, and
advertising in our magazines. There will also be a significant
Internet marketing component. Torchmark Corporation will
underwrite policies and provide customer and claims services.
We also announced that we have agreed in principle with
American International Group, Inc. to develop a program under
which it will market a range of life, accident and health and
general insurance products and services to our customers in 26
other countries outside the United States. American
International Group, Inc. member companies will manage the
products and provide customer and claims services and will
provide marketing support for all products.
gifts.com Online Gift Shopping Service
On September 15, 1999, we announced that, together with our
Good Catalog Company subsidiary and StarTek, Inc., we have agreed
to create gifts.com, an online shopping service for gifts. The
gifts.com Web site will initially feature 400 different products,
including leading brands and non-branded specialty items. We
expect the site to be operational in the fall of 1999, in time
for the 1999 holiday shopping season. The site will be supported
by a $20 million consumer marketing campaign.
We and Good Catalog Company will contribute property and
financing in exchange for an 80.1% interest in the venture.
StarTek, Inc., a leading provider of outsourced services for e-
commerce and high-tech companies, will contribute property,
including the "gifts.com" domain name, and financing for a 19.9%
interest in the venture. StarTek will also provide fulfillment
services for the venture.
Operating Segments
We have three operating segments: Global Books and Home
Entertainment, U.S. Magazines, and International Magazines.
Financial information about each of our operating segments is
included in Note 12 to our consolidated financial statements,
which are incorporated by reference into this report.
Global Books and Home Entertainment
Our Global Books and Home Entertainment operations publish
Reader's Digest Select Editions, series books, general books,
recorded music collections and series and home video products and
series. We market these products principally by direct mail.
Global Books and Home Entertainment also includes the operations
of our subsidiary, Good Catalog Company. For more information
about how we market our products, please refer to the section of
this report captioned "Direct Marketing Operations."
Select Editions
Reader's Digest Select Editions, which were formerly called
"Condensed Books" in many markets, are a continuing series of
condensed versions of current popular fiction. A condensed work
reduces the length of an existing text, while retaining the
author's style, integrity and purpose. Today, we publish Select
Editions in 16 languages, and market them in 27 countries.
Select Editions generated worldwide revenues of $254.1 million in
fiscal 1999, $260.4 million in fiscal 1998 and $307.0 million in
fiscal 1997.
International editions of Select Editions generally include
some material from the U.S. edition or from other international
editions, translated and edited as appropriate. International
editions also include some condensed versions of locally
published works. Each local editorial staff determines whether
existing Select Editions selections are appropriate for their
local market.
We publish six volumes of Select Editions a year in the
United States. Some of our international subsidiaries also
publish six volumes a year, while others publish four or five.
Series Books
We market two types of series books: reading series and
illustrated series. These book series may be either open-ended
continuing series or closed-ended series, which consist of a
limited number of volumes. We publish series books in six
languages and market them in 11 countries. Series books
generated worldwide revenues of $142.8 million in fiscal 1999,
$162.1 million in fiscal 1998 and $209.5 million in fiscal 1997.
Our reading series include The World's Best Reading, which
consists of full-length editions of classic works of literature.
We publish six volumes of The World's Best Reading each year in
four countries in two languages.
We publish illustrated series, which are generally closed-
ended, in 10 languages and market them in 16 countries.
General Books
Our general books consist primarily of reference books,
cookbooks, "how-to" and "do-it-yourself" books and children's
books. We also publish books on subjects such as history,
travel, religion, health, nature and the home. We publish some
of our general books in series. We publish general books in 17
languages and market them in 39 countries. General books
generated worldwide revenues of $540.4 million in fiscal 1999,
$606.0 million in fiscal 1998 and $679.9 million in fiscal 1997.
New general books are usually original Reader's Digest
books, but may also be books acquired from other publishers.
During the development period for an original Reader's Digest
book, we conduct extensive research and prepare an appropriate
marketing strategy for the book.
We sell most copies of a general book through initial bulk
promotional mailings. We also sell substantial additional copies
through subsequent promotions, through catalog sales and through
the use of sales inserts in mailings for other Reader's Digest
products. We also distribute our general books for retail sale
in stores through independent distributors.
Music
We publish recorded music packages on cassettes and compact
discs. The music packages are generally collections of
previously recorded and newly commissioned material by a variety
of artists, although they may include selections from our almost
18,000-selection library. The collections span a broad range of
musical styles. Our marketing strategy for music packages is
similar to our marketing strategy for general books. In some
markets, we also sell music series, which we market in the same
manner as series books.
We market music products in 33 countries. We offer
different music products in the various international markets
because of diverse tastes. Music products generated worldwide
revenues of $345.5 million in fiscal 1999, $377.5 million in
fiscal 1998 and $404.2 million in fiscal 1997.
We are a member of the Recording Industry Association of
America in the United States, and we have been recognized with 49
gold, platinum and multi-platinum certificates.
Video
Our home video products and series are in genres similar to
our general books. We continue to expand our video operations in
the United States and in international markets. We presently
market video products in the United States and 26 other
countries. We also sell our home video products through retail
establishments. Home video products generated worldwide revenues
of $200.5 in fiscal 1999, $215.8 million in fiscal 1998 and
$243.5 million in fiscal 1997.
Most of our original programs have been licensed to cable
television networks. Several original programs have won awards of
excellence, including five Emmy awards. In May 1999, we entered
into a multi-year agreement with CBS Productions to develop
television movies and mini-series based on the personal dramas
chronicled in Reader's Digest.
Merchandise Catalogs
In October 1998, we acquired Good Catalog Company, a catalog
marketer of home, garden and gift-related products. In July
1999, Good Catalog Company launched the www.goodcatalog.com Web
site, which is currently conducting e-commerce business.
Production and Fulfillment
We hire independent contractors to print and bind the
various editions of Select Editions. We have an exclusive
agreement with a printing company for printing English-language
Select Editions distributed in the United States and Canada.
That agreement expires in 2002. We solicit bids for printing and
binding each general book or book series. We usually hire
independent contractors to produce and manufacture our music and
video products.
Paper is the principal raw material necessary for production
of our Select Editions, series books and general books. We have
an exclusive agreement with a major supplier to supply paper for
Select Editions. The agreement expires in 2002. We purchase
paper for series books and general books for each printing. We
believe that our existing contractual arrangements and other
available sources of paper provide us with an adequate supply of
paper at competitive prices. We use independent contractors to
arrange for us to acquire some of the necessary raw materials to
manufacture music and video products.
We usually hire independent contractors to handle our
fulfillment, warehousing, customer service and payment
processing. The printers or suppliers of our products generally
package and deliver those products directly to the postal
service. For information about postal rates and postal services,
please refer to the section of this report captioned "Direct
Marketing Operations."
It is our direct marketing policy that a customer may return
any book or home entertainment product to us for a refund, either
before or after payment. We believe that our returned goods
policy is essential to our reputation and that it elicits a
greater number of orders. Many of those orders are not returned
because a high number of consumers are satisfied with our
products. Nevertheless, this policy and our "first book free"
policy for Select Editions and series books result in a
significant amount of returned goods.
We sell more books and home entertainment products in some
seasons than others. In the direct marketing industry as a
whole, more consumers respond in the winter months than during
the rest of the year. Sales are also higher during the pre-
Christmas season than in spring and summer.
U.S. Magazines
Our U.S. Magazines operations publish Reader's Digest and
several special interest magazines in the United States. These
magazines and other products are sold through direct and retail
marketing, including the activities of our QSP, Inc. subsidiary.
U.S. Magazines publishes Reader's Digest in several
editions, including an English-language edition, a Spanish
language edition and the Reader's Digest Large Edition for Easier
Reading. We license independent contractors to publish a braille
edition and a recorded edition in the United States.
We publish several special interest magazines that we
believe are consistent with our image, editorial philosophy and
market expertise. The Family Handymanr magazine provides
instructions and guidance for "do-it-yourself" home improvement
projects. New Choices: Living Even Better After 50r magazine is
aimed at active, mature readers and provides information on
entertainment, travel, health and leisure time activities.
Walkingr magazine provides information on health and fitness for
walking enthusiasts. American Woodworkerr magazine and its
consumer trade show operations provide information, instruction
and guidance for professional and serious amateur woodworkers.
Prior to August 1999, we also published American Health for
Womenr magazine, which provided helpful information on medicine,
nutrition, psychology and fitness as those issues relate to
women. In August 1999, we sold the American Health magazine
trademark, subscriber list and other circulation assets.
We promote our U.S. special interest magazines to our U.S.
Reader's Digest customer list. We also promote our other
products to each magazine's customer list, as appropriate. This
strategy helps us to expand the customer base for all of our
products.
We also publish other limited-edition special interest
publications in the United States, such as Reader's Digest
Christmas, which we have published annually since 1997 and
Reader's Digest Your Family, which debuted as a special edition
in May 1999.
Circulation and Advertising
The following table shows circulation and advertising
information for U.S. Magazines operations for fiscal 1999.
June 30,1999 Adver-
Issues Circulation tising
Magazine Title Per Rate Base Pages
Year Carried
Reader's Digest-U.S. -English 12 12,500,000 1,137
edition
Reader's Digest Large Edition for 12 425,000 159
Easier Reading
The Family Handyman 10 1,100,000 638
American Health for Women 10 1,000,000 571
New Choices: Living Even Better 10 600,000 412
After 50
Walking 6 650,000 366
American Woodworker 7 324,000 187
Approximately 70% of total U.S. fiscal 1999 revenues for
Reader's Digest was generated by circulation revenues and 30% by
advertising revenues. Approximately 58% of total U.S. fiscal
1999 revenues for the special interest magazines was generated by
circulation revenues and 42% by advertising revenues.
We have determined that the U.S.-English edition of Reader's
Digest has the largest paid circulation of any U.S. magazine,
other than those automatically distributed to all members of the
American Association of Retired Persons. Our determination is
based on the most recent audit report issued by the Audit Bureau
of Circulation, Inc., a not-for-profit organization that monitors
circulation in the United States and Canada. Approximately 95%
of the U.S. paid circulation of Reader's Digest consists of
subscriptions. The balance consists of single copy sales at
newsstands and in supermarkets and similar retail establishments.
We sell our special interest magazines by subscription and at
newsstands.
We maintain the circulation rate base for Reader's Digest
through annual subscription renewals and new subscriptions. The
circulation rate base for the U.S.-English edition of Reader's
Digest was reduced from 15 million to 13.3 million copies per
issue for the January-June 1999 issues and to 12.5 million with
the July 1999 issue. We sell approximately 3.4 million new
subscriptions in the United States to maintain the current
circulation rate base. We sell new subscriptions primarily by
direct mail, with extensive use of sweepstakes entries. We sell
the largest percentage of subscriptions between July and December
of each year. Subscribers to Reader's Digest may cancel their
subscriptions at any time and we will refund the unused
subscription price. For additional information regarding direct
marketing of subscriptions, please refer to the section of this
report captioned "Direct Marketing Operations."
We also market and sell subscriptions to Reader's Digest and
the special interest magazines in the United States through QSP,
Inc., one of our wholly owned subsidiaries. QSP helps schools
and youth groups prepare fundraising campaigns in which
participants sell magazine subscriptions, music and video
products, books, food and gifts. QSP derives its revenues from
the sale of products to fundraising organizations. A substantial
majority of QSP's sales occur during the first half of our fiscal
year, which includes the fall school semester.
The U.S. editions of Reader's Digest offer advertisers
different regional editions, major market editions and
demographic editions. These editions, which usually contain the
same editorial material, permit advertisers to concentrate their
advertising in specific markets or to target specific audiences.
Reader's Digest sells advertising in the United States
principally through an internal advertising sales force. We sell
advertisements in multiple Reader's Digest editions worldwide,
and offer discounts for placing advertisements in more than one
edition.
Like most other magazines, our special interest magazines
are highly dependent on advertising revenues.
Editorial
Reader's Digest is a reader-driven, family magazine. Its
editorial content is, therefore, crucial to the loyal subscriber
base that constitutes the cornerstone of our operations. The
editorial mission of Reader's Digest is to inform, enrich,
entertain and inspire. The articles, book section and features
included in Reader's Digest cover a broad range of contemporary
issues and reflect an awareness of traditional values.
A substantial portion of the selections in Reader's Digest
are original articles written by staff writers or free-lance
writers. The balance is selected from existing published
sources. All material is condensed by Reader's Digest editors.
We employ a professional staff to research and fact-check all
published pieces.
Production and Fulfillment
We hire independent contractors to print all U.S. editions
of Reader's Digest and our special interest magazines. We have
an exclusive contract with a U.S. printer to print the U.S.
editions of Reader's Digest. The contract will expire in 2007.
We believe that generally there is an adequate supply of
alternative printing services available to us at competitive
prices, should the need arise. Nevertheless, significant short-
term disruption could occur. We have developed plans to minimize
recovery time in the event of a disaster with current contract
printers.
Lightweight coated and uncoated paper are the principal raw
materials used in the production of Reader's Digest. We have
supply contracts with a number of global and regional suppliers
of paper. We believe those supply contracts provide an adequate
supply of paper for our needs and that, in any event, alternative
sources are available at competitive prices. A variety of
factors affect paper prices, including demand, capacity, pulp
supply, and general economic conditions.
We deliver subscription copies of the U.S. edition of
Reader's Digest and the special interest magazines through the
United States Postal Service as "periodicals" class mail. For
additional information about postal rates and service, please
refer to the section of this report captioned "Direct Marketing
Operations."
A distribution network handles newsstand and other retail
distribution.
Several hundred other publishers make magazine subscriptions
available to QSP at competitive, discounted prices. QSP also
obtains discounted music products from a large music publisher.
QSP engages an independent contractor to handle processing of
magazine and music orders. A subsidiary of QSP handles
processing of video, book, gift and food orders.
International Magazines
Our International Magazines operations publish Reader's
Digest in 48 editions and 19 languages outside the United States.
We license independent contractors to publish Reader's Digest in
Korea, India and South Africa. These operations also publish
Moneywise, a magazine devoted to helping families manage their
finances, in the United Kingdom. In August 1999, we acquired
Benchmark, Ltd., the publisher of four investment guides
distributed in Hong Kong, Taiwan and Singapore.
Circulation and Advertising
Reader's Digest is truly a global magazine. Many of its
international editions have the largest paid circulation for
monthly magazines both in the individual countries and in the
regions in which they are published. For most international
editions of Reader's Digest, subscriptions comprise almost 98% of
circulation. The balance is attributable to newsstand and other
retail sales. Approximately 83% of total international fiscal
1999 revenues for Reader's Digest was generated by circulation
revenues and 17% by advertising revenues.
The following table shows circulation and advertising
information for International Magazines operations for fiscal
1999.
Issues June 30,1999 Advertising
Magazine Title Per Circulation Pages
Year Rate Base Carried
Reader's Digest 12 12,278,585 11,729
Moneywise 12 108,075 660
We maintain the circulation rate base for Reader's Digest
through annual subscription renewals and new subscriptions. Each
year, we sell approximately three million new international
Reader's Digest subscriptions to maintain the international
circulation rate base. We sell new subscriptions primarily by
direct mail, with extensive use of sweepstakes entries. We sell
the largest percentage of subscriptions between July and December
of each year. Subscribers to Reader's Digest may cancel their
subscriptions at any time and we will refund the unused
subscription price.
The larger international editions of Reader's Digest offer
advertisers different regional editions, major market editions
and demographic editions. These editions, which usually contain
the same editorial material, permit advertisers to concentrate
their advertising in specific markets or to target specific
audiences. Reader's Digest sells international advertising
principally through an internal advertising sales force. We sell
advertisements in multiple Reader's Digest editions worldwide,
and offer discounts for placing advertisements in more than one
edition.
Editorial
The international editions of Reader's Digest contain
content and follow editorial procedures similar to the U.S.
editions. Each international edition has a local editorial staff
responsible for the editorial content of the edition. The mix of
locally generated editorial material, material taken from the
U.S. edition and material taken from other international editions
varies greatly among editions. In general, our larger
international editions, for example, those in Canada, France,
Germany and the United Kingdom, carry more original or locally
adapted material than do smaller editions.
Production and Fulfillment
We hire independent contractors to print all international
editions of Reader's Digest. Issues relating to available
printing capacity and paper supplies are similar to those in the
United States.
Subscription copies of international editions of Reader's
Digest are delivered through the postal service in each country
of publication. We have also contracted in each country with a
newsstand magazine distributor for the distribution of Reader's
Digest. For additional information about postal rates and
service, please refer to the section of this report captioned
"Direct Marketing Operations."
Direct Marketing Operations
We sell magazine subscriptions, Select Editions, series
books, general books, music and video products, as well as
certain other products, principally through direct mail
solicitations to households on our customer lists. Our products
and product offers are usually accompanied by sweepstakes entries
and, in some cases, premium merchandise offers. For many years,
we have been acknowledged as a pioneer and innovator in the
direct mail industry.
As part of our growth strategy and our strategy to decrease
our reliance on sweepstakes marketing, we have begun to pursue
increased distribution of our products through direct response
channels other than direct mail. These other distribution
channels include direct response television, telemarketing, the
Internet, catalogs and clubs. We are also continuing to conduct
tests of non-sweepstakes promotional mailing packages in the
United States. The initial results of these tests have been
encouraging.
We are adapting the editorial content and the marketing
methods of our magazines and books and home entertainment
products to new technologies. In 1997, we launched Reader's
Digest World, a Web site (www.readersdigest.com) that links our
24 local and international Web sites, for shopping and
information about our products. In 1999, Reader's Digest World
had over 3.5 million visitors from around the world.
To promote the sale of our products in the United States, we
usually offer a sweepstakes in our promotional mailings. Prizes
totaled about $9 million for the 1999 edition of the sweepstakes.
Generally, each of our international subsidiaries sponsors its
own sweepstakes. The mechanics of the sweepstakes vary from
jurisdiction to jurisdiction, depending upon local law.
From time to time, we are involved in legal, regulatory and
investigative proceedings concerning our sweepstakes and other
direct marketing practices. Also from time to time,
jurisdictions in which we do business consider more restrictive
laws or regulations governing sweepstakes or direct marketing.
Although some of these proceedings may have negatively affected
our direct marketing business, we do not believe that these
proceedings and proposed laws and regulations will have a
material adverse effect on our direct marketing business.
We are subject to postal rate increases, which affect our
product deliveries, promotional mailings and billings. Postage
is one of the largest expenses in our promotional and billing
activities. In the past, we have had sufficient advance notice
of most increases in postal rates so that we could factor the
higher rates into our pricing strategies and operating plans.
Higher postal rates or other delivery charges usually increase
the total cost to the customer, which may have a negative effect
on sales. As a result, we may strategically determine the
extent, if any, to which we will pass these cost increases on to
our customers.
We rely on postal delivery service for timely delivery of
our products and promotional mailings. In the United States and
most international markets, delivery service is generally
satisfactory. Some international jurisdictions, however,
experience periodic work stoppages in postal delivery service or
less than adequate postal efficiency.
In some states in the United States and in some
international jurisdictions, some or all of our products are
subject to sales tax or value added tax. Taxes, like delivery
costs, are generally stated separately on bills, where permitted
by applicable law. Higher taxes increase the total cost to the
customer, which may have a negative effect on sales. In
jurisdictions where applicable tax must be included in the
purchase price, we may be unable to fully recover from customers
the amount of any tax increase or new tax.
Information Technology and Customer List Enhancement
The size and quality of our computerized customer list of
current and prospective customers in each country where we
operate contributes significantly to our business. We are
constantly striving to improve our customer lists. We believe
that our U.S. list of over 57 million households--over half the
total number of households in the country--is one of the largest
direct response lists in the United States. Our international
lists include a total of approximately 49 million households.
We continue to make significant investments in our database
list management and related information technology to improve our
operating efficiencies, to increase the level of service we
provide to our customer base and to facilitate globalization of
our operations.
Some international jurisdictions, particularly in Europe,
have data protection laws or regulations prohibiting or limiting
the exchange of information of the type that we maintain. Some
jurisdictions also prohibit the retention of information, other
than certain basic facts, about noncurrent customers. Although
these regulations may hinder our ability to collect, retain and
use customer information, we believe that current laws and
regulations do not prevent us from engaging in activities
necessary to operate our current businesses.
Competition and Trademarks
Although Reader's Digest is a unique and well-established
institution in the magazine publishing industry, it competes with
other magazines for subscribers and with magazines and all other
media, including television, radio and the Internet, for
advertising. We believe that the extensive and longstanding
international operations of Reader's Digest provide us with a
significant advantage over competitors seeking to establish a
global publication.
We own numerous trademarks that we use in our business
worldwide. Our two most important trademarks are "Reader's
Digest" and the "Pegasus" logo. We believe that the name
recognition, reputation and image that we have developed in each
of our markets significantly enhance customer response to our
direct marketing sales promotions. For these reasons, trademarks
are important to our business and we aggressively defend our
trademarks.
We believe that our company name, image and reputation, as
well as the quality of our customer lists, provide a significant
competitive advantage over many other direct marketers. However,
our books and home entertainment business competes with companies
selling similar products at retail as well as by direct marketing
through various channels, including the Internet. Because tests
show that consumers' responses to direct marketing promotions can
be adversely affected by the overall volume of direct marketing
promotions, we also compete with all other direct marketers,
regardless of whether their products are similar to our products.
Each of our special interest magazines competes with other
magazines of the same genre for readers and advertising. Nearly
all of our products compete with other products and services that
utilize leisure activity time or disposable income.
Employees
As of June 30, 1999, we employed about 4,800 people
worldwide. We employed about 1,900 in the United States and
about 2,900 in our international subsidiaries. Our relationship
with our employees is generally satisfactory.
Executive Officers
The following is some information about our executive
officers.
Name and Age Positions With Reader's Digest and Recent
Business Experience
Thomas O. Ryder (55) Mr. Ryder has been Chairman of the Board and
Chief Executive Officer of Reader's Digest
since April 1998. Mr. Ryder was President,
American Express Travel Related Services
International, a division of American Express
Company (travel, financial and network
services), from October 1995 to April 1998.
Before October 1995, he served as President,
Establishment Services - Worldwide of
American Express Travel Related Services.
M. John Bohane (63) Mr. Bohane has been a Senior Vice President
of Reader's Digest and President, Global
Books and Home Entertainment since July
1998. Before July 1998, he was Senior Vice
President of Reader's Digest and President
International Operations, a position he held
since rejoining Reader's Digest in September
1997. He first joined Reader's Digest in
1964 and served in a number of executive
capacities, including President, Direct
Marketing, until leaving Reader's Digest in
July 1991. Mr. Bohane served as President
and Chief Executive Officer of Newfield
Publications from April 1994 to July 1995 and
as Vice President of Corporate Database
Marketing of Time-Warner, Inc. from April
1992 to December 1993.
Michael A. Brizel (42) Mr. Brizel has been Vice President and
General Counsel of Reader's Digest since July
1998. Before July 1998, he was Vice
President, Legal U.S. and Associate General
Counsel, a position he held since September
1996. Before September 1996, he was
Associate General Counsel of Reader's Digest.
Mr. Brizel joined Reader's Digest in July
1989.
Elizabeth G. Chambers (36) Ms. Chambers has been Vice President,
Business Redesign of Reader's Digest since
August 1998. She was a partner at the
management consulting firm of McKinsey &
Company from June 1995 to August 1998, and
was an associate there from October 1989 to
June 1995.
Gregory G. Coleman (45) Mr. Coleman has been a Senior Vice President
and President, U.S. Magazine Publishing of
Reader's Digest since July 1998. Before July
1998, he was Senior Vice President, Worldwide
Publisher, Reader's Digest Magazine, a
position he held since October 1997. Mr.
Coleman also served as Vice President and
General Manager, U.S. Magazines and
Publisher, U.S. Reader's Digest from December
1995 until October 1997, and Vice President,
Publisher, U.S. Reader's Digest from November
1991 until December 1995.
Clifford H.R. DuPree (49) Mr. DuPree has been Vice President, Corporate
Secretary and Associate General Counsel of
Reader's Digest since July 1998. He joined
Reader's Digest in May 1992 as Associate
General Counsel, became Assistant Secretary
in March 1995 and Vice President in September
1996.
Thomas D. Gardner (41) Mr. Gardner has been Senior Vice President,
Business Planning and Development of Reader'
s Digest since July 1998. He was Vice
President, Marketing, Reader's Digest U.S.A.
from November 1995 to July 1998, Vice
President, Business Development from April
1995 to November 1995, and a Director of
Marketing before April 1995. Mr. Gardner
joined Reader's Digest in February 1992.
Robert J. Krefting (55) Mr. Krefting has been Senior Vice President
and President, International Magazine
Publishing of Reader's Digest since July
1998. Before joining Reader's Digest, Mr.
Krefting was sole proprietor of Holly Hill
Publishing, a management services corporation
serving the publishing and venture capital
industries.
Robert E. Raymond (43) Mr. Raymond was appointed Vice President,
Strategic Acquisitions & Alliances of Reader's
Digest on June 7, 1999. Before June 1999, he
was Vice President and General Manager, Music,
Video, Special Channels, a position he held
since April 1998. Mr. Raymond also served as
Vice President Marketing, Video/New Business
from December 1997 until April 1998, Director
of Marketing, Video/New Business from July
1995 until December 1997, Marketing Director,
New Business from August 1994 until July 1995.
Mr. Raymond joined Reader's Digest in 1993.
Gary S. Rich (38) Mr. Rich has been Senior Vice President,
Human Resources of Reader's Digest since
August 1998. Before joining Reader's Digest,
he was Senior Vice President, Global Human
Resources for A.C. Nielsen Corporation
(provider of market research, information and
analysis to the consumer products and
services industries), a position he held from
June 1996 to July 1998. Before June 1996,
Mr. Rich was Vice President, Human Resources-
-Europe, Middle East and Africa, at American
Express Company (travel, financial and
network services).
George S. Scimone (52) Mr. Scimone has been Senior Vice President
and Chief Financial Officer of Reader's
Digest since July 1998. Mr. Scimone served
as Vice President and Chief Financial Officer
from September 1997 to July 1998, as Vice
President and President, Reader's Digest
U.S.A. from November 1996 to September 1997
and as Vice President and Corporate
Controller from September 1995 to November
1996. Prior to joining Reader's Digest, Mr.
Scimone was Business Chief Financial Officer,
Electrical Distribution and Control of
General Electric Company (appliances,
aircraft engines, and other electrical
products and services).
Christopher P. Willcox (52) Mr. Willcox has been Senior Vice President
and Editor-in-Chief, Reader's Digest Magazine
since March 1996. Before March 1996, he
served as Worldwide Executive Editor of
Reader's Digest. He joined Reader's Digest
in 1988.
Our By-Laws state that officers serve at the pleasure of our
board of directors. We elect our officers annually and they serve
until their successors are elected and qualified.
ITEM 2.PROPERTIES
Our headquarters and principal operating facilities are
situated on approximately 120 acres in Westchester County, New
York. We acquired much of this property in 1940. The table
below shows our headquarters and other properties that we own or
lease.
Location Area (sq. ft.) Principal uses
Westchester County, 703,000 owned Executive, administrative,
NY editorial and operational
offices; data processing; other
facilities
New York, NY 153,180 leased Books and home entertainment
products editorial offices;
Reader's Digest magazine
advertising sales offices;
special interest magazines
offices
Various U.S. cities 130,706 leased Editorial offices, advertising
sales offices; other facilities
Conyers, GA 163,375 leased QSP fulfillment facilities
International 693,724 owned Headquarters, administrative and
527,914 leased editorial offices; warehouse
facilities
We believe that our current facilities, together with
expansions and upgrades of facilities presently underway or
planned, are adequate to meet our present and reasonably
foreseeable needs. We also believe that adequate space will be
available to replace any leased facilities whose leases expire in
the near future.
ITEM 3.LEGAL PROCEEDINGS
We and our subsidiaries are defendants in various lawsuits
and claims arising in the regular course of business. Based on
the opinions of management and counsel for these matters, we
believe that recoveries, if any, by plaintiffs and claimants
would not materially affect our financial position or results of
operations.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders
during the fourth quarter of the fiscal year ended June 30, 1999.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information contained under the caption "Selected
Quarterly Financial Data and Dividend and Market Information" in
our 1999 Annual Report to Stockholders is incorporated into this
Item by reference.
ITEM 6.SELECTED FINANCIAL DATA
The information contained under the caption "Selected
Quarterly Financial Data and Dividend and Market Information" and
"Selected Financial Data" in our 1999 Annual Report to
Stockholders is incorporated into this Item by reference.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The information contained under the caption "Management's
Discussion and Analysis" in our 1999 Annual Report to
Stockholders is incorporated into this Item by reference.
This report contains or incorporates by reference "forward-
looking statements" within the meaning of the U.S. federal
securities laws. Forward-looking statements include any
statements that address future results or occurrences. These
forward-looking statements inherently involve risks and
uncertainties that could cause actual future results and
occurrences to differ materially from the forward-looking
statements. Some of these risks and uncertainties include
factors relating to:
- - the effect of potentially more restrictive privacy and other
governmental regulation relating to our marketing methods;
- - the effect of modified and varied promotions;
- - our ability to identify customer trends;
- - our ability to continue to create a broadly appealing mix of
new products;
- - our ability to attract and retain new and younger magazine
subscribers and product customers in view of the maturing of an
important portion of our U.S. customer base;
- - our ability to attract and retain subscribers and customers
in an economically efficient manner;
- - the effect of selective adjustments in pricing;
- - our ability to expand and more effectively utilize our
customer database;
- - our ability to expand into new international markets and to
introduce new product lines into new and existing markets;
- - our ability to expand into new channels of distribution;
- - our ability to negotiate and implement productive
acquisitions, strategic alliances and joint ventures;
- - our ability to integrate newly acquired and newly formed
businesses successfully;
- - the strength of relationships of newly acquired and newly
formed businesses with their employees, suppliers and customers;
- - the accuracy of the basis of forecasts relating to newly
acquired and newly formed businesses;
- - our ability to contain and reduce costs, especially through
global efficiencies;
- - the cost and effectiveness of our re-engineering of business
processes and operations;
- - the accuracy of our management's assessment of the current
status of our business;
- - the evolution of our organizational and structural
capabilities;
- - our ability to respond to competitive pressures within and
outside the direct marketing industry, including the Internet;
- - the effect of worldwide paper and postage costs;
- - the effect of postal disruptions on deliveries;
- - the effect of foreign currency fluctuations;
- - the effect of the Year 2000 issue;
- - the effect of the transition to the euro; and
- - general economic conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption "Management's
Discussion and Analysis" in the section entitled "Currency Risk
Management" in our 1999 Annual Report to Stockholders is
incorporated into this Item by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements appearing on pages 51
through 93 of our 1999 Annual Report to Stockholders, together
with the report of KPMG LLP appearing on page 94, are
incorporated into this Item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to our directors under the caption
"Proposal 1: Election of Directors" in the Proxy Statement for
our Annual Meeting of Stockholders to be held on November 12,
1999 is incorporated into this Item by reference. Information
with respect to our executive officers appears under the caption
"Executive Officers" in Item 1 of Part I of this report and is
incorporated into this Item by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation under the
captions "Executive Compensation," "Report of the Compensation
and Nominating Committee" and "Performance Graph" in the Proxy
Statement for our Annual Meeting of Stockholders to be held on
November 12, 1999 is incorporated into this Item by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain
beneficial owners and management under the caption "Equity
Security Ownership" in the Proxy Statement for our Annual Meeting
of Stockholders to be held on November 12, 1999 is incorporated
into this Item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1 Financial Statements
An index of our Consolidated Financial Statements appears
on page 24 of this report.
2 Financial Statement Schedules
All schedules have been omitted since the information
required to be submitted has been included in the
Consolidated Financial Statements or Notes thereto or has
been omitted as not applicable or not required.
3 Exhibits
3.1.1 Restated Certificate of Incorporation of The Reader's
Digest Association, Inc. filed with the State of
Delaware on February 7, 1990 filed as Exhibit 3.1.1 to
our Annual Report on Form 10-K for the year ended June
30, 1993, is incorporated herein by reference.
3.1.2 Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
filed with the State of Delaware on February 22, 1991
filed as Exhibit 3.1.2 to our Annual Report on Form 10-
K for the year ended June 30, 1993, is incorporated
herein by reference.
3.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 filed as
Exhibit 3.2 to our Annual Report on Form 10-K for the
year ended June 30, 1993, is incorporated herein by
reference.
10.1 The Reader's Digest Association, Inc. Management
Incentive Compensation Plan (Amendment and Restatement
as of July 1, 1994) filed as Exhibit 10.1 to our Annual
Report on Form 10-K for the year ended June 30, 1994,
is incorporated herein by reference.*
10.2 The Reader's Digest Association, Inc. 1989 Key Employee
Long Term Incentive Plan filed as Exhibit 10.2 to our
Registration Statement on Form S-1 (Registration No. 33-
32566) filed on December 19, 1989, is incorporated
herein by reference.*
10.3 The Reader's Digest Association, Inc. Deferred
Compensation Plan (Amendment and Restatement as of July
8, 1994) filed as Exhibit 10.4 to our Annual Report on
Form 10-K for the year ended June 30, 1994, is
incorporated herein by reference.*
10.4 The Reader's Digest Association, Inc. Severance Plan
for Senior Management (Amendment and Restatement as of
July 8, 1994) filed as Exhibit 10.5 to our Annual
Report on Form 10-K for the year ended June 30, 1994,
is incorporated herein by reference.*
10.5 The Reader's Digest Association, Inc. Income
Continuation Plan for Senior Management (amended and
restated) filed as Exhibit 10.5 to our Annual Report on
Form 10-K for the year ended June 30, 1993, is
incorporated herein by reference.*
10.6 Excess Benefit Retirement Plan of The Reader's Digest
Association, Inc. (Amendment and Restatement as of July
1, 1994) filed as Exhibit 10.7 to our Annual Report on
Form 10-K for the year ended June 30, 1994, is
incorporated herein by reference.*
10.7 The Reader's Digest 1992 Executive Retirement Plan
(Amendment and Restatement as of October 10, 1996),
filed as Exhibit 10.12 to our Annual Report on Form 10-
K for the year ended June 30, 1997, is incorporated
herein by reference.*
10.8 The Reader's Digest Association, Inc. Executive
Financial Counseling Plan, amended and restated as of
July 1, 1998 filed as Exhibit 10.10 to our Annual
Report on Form 10-K for the year ended June 30, 1998,
is incorporated herein by reference.*
10.9 Amendment No. 1 to The Reader's Digest Association,
Inc. Management Incentive Compensation Plan (effective
as of April 11, 1996) filed as Exhibit 10.1.1 to our
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by reference.*
10.10 Competitive Advance and Revolving Credit Facility
Agreement dated as of November 12, 1996 between the
registrant, the Borrowing Subsidiaries, The Chase
Manhattan Bank and J.P. Morgan Securities Inc., filed
as Exhibit 10.23 to our Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, is
incorporated herein by reference.
10.11 Agreement dated as of August 11, 1997 between The
Reader's Digest Association, Inc. and George V. Grune,
filed as Exhibit 10.28 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, is
incorporated herein by reference.*
10.12 First Amendment dated as of September 17, 1997 to the
Competitive Advance and Revolving Credit Facility
Agreement dated as of November 12, 1996 among The
Reader's Digest Association, Inc., the Borrowing
Subsidiaries, The Chase Manhattan Bank and J.P. Morgan
Securities Inc., filed as Exhibit 10.29 to our
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, is incorporated herein by
reference.
10.13 The Reader's Digest Association, Inc. Director
Compensation Program, filed as Exhibit 10.31 to our
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, is incorporated herein by reference.*
10.14 The Reader's Digest Association, Inc. Deferred
Compensation Plan for Directors, amended and restated
as of March 13, 1998, filed as Exhibit 10.31 to our
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, is incorporated herein by reference.*
10.15 Employment Agreement dated as of April 28, 1998 between
The Reader's Digest Association, Inc. and Thomas O.
Ryder, filed as Exhibit 10.33 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, is
incorporated herein by reference.*
10.16 First Amendment Agreement dated as of April 28, 1998
between The Reader's Digest Association, Inc. and
George V. Grune, filed as Exhibit 10.34 to our
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, is incorporated herein by reference.*
10.17 The Reader's Digest Association, Inc. 1994 Key Employee
Long Term Incentive Plan, as amended and restated
effective as of August 13, 1999.*
10.18 Second Amendment dated as of June 2, 1998 to the
Competitive Advance and Revolving Credit Facility
Agreement dated as of November 12, 1996 among The
Reader's Digest Association, Inc., the Borrowing
Subsidiaries, The Chase Manhattan Bank and J.P. Morgan
Securities Inc., filed as Exhibit 10.27 to our Annual
Report on Form 10-K for the year ended June 30, 1998,
is incorporated herein by reference.
10.19 Third Amendment dated as of September 2, 1999 to the
Competitive Advance and Revolving Credit Facility
Agreement dated as of November 12, 1996 among The
Reader's Digest Association, Inc., the Borrowing
Subsidiaries, The Chase Manhattan Bank and J.P. Morgan
Securities Inc.
10.20 Termination Agreement dated as of April 10, 1997
between The Reader's Digest Association, Inc. and
George S. Scimone, filed as Exhibit 10.28 to our Annual
Report on Form 10-K for the year ended June 30, 1998,
is incorporated herein by reference.*
10.21 Termination Agreement dated as of April 10, 1998
between The Reader's Digest Association, Inc. and
Gregory G. Coleman, filed as Exhibit 10.29 to our
Annual Report on Form 10-K for the year ended June 30,
1998, is incorporated herein by reference.*
10.22 Termination Agreement dated as of September 8, 1997
between The Reader's Digest Association, Inc. and M.
John Bohane, filed as Exhibit 10.30 to our Annual
Report on Form 10-K for the year ended June 30, 1998,
is incorporated herein by reference.*
10.23 Supplemental Retirement Benefit Agreement dated as of
November 15, 1991 between The Reader's Digest
Association, Inc. and Gregory G. Coleman, filed as
Exhibit 10.32 to our Annual Report on Form 10-K for the
year ended June 30, 1998, is incorporated herein by
reference.*
10.24 Supplemental Retirement Benefit Agreement dated as of
August 22, 1988 between The Reader's Digest
Association, Inc. and George V. Grune filed as Exhibit
10.7 to our Registration Statement on Form S-1
(Registration No. 33-32566) filed on December 19, 1989,
is incorporated herein by reference.*
10.25 Supplemental Retirement Benefit Agreement dated as of
August 25, 1988 between The Reader's Digest
Association, Inc. and M. John Bohane filed as Exhibit
10.11 to our Registration Statement on Form S-1
(Registration No. 33-32566) filed on December 19, 1989,
is incorporated herein by reference.*
10.26 Supplemental Retirement Agreement dated as of May 15,
1985 between The Reader's Digest Association, Inc. and
George V. Grune filed as Exhibit 10.12 to our
Registration Statement on Form S-1 (Registration No. 33-
32566) filed on December 19, 1989, is incorporated
herein by reference.*
10.27 The Reader's Digest Association, Inc. Senior Management
Incentive Plan.*
10.28 Stock Purchase Agreement dated August 25, 1999 by and
among The Reader's Digest Association, Inc., Books Are
Fun, Ltd. and the other parties listed therein.
*Denotes a management contract or compensatory plan.
13 Financial information appearing at pages 51 through 93 of
our 1999 Annual Report to Stockholders, together with the
report thereon of KPMG LLP appearing on page 94 (furnished
for the information of the Securities and Exchange
Commission only and not to be deemed filed as part of this
Annual Report on Form 10-K, except for the portions thereof
that are specifically incorporated herein by reference).
21 Subsidiaries of The Reader's Digest Association, Inc.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the three months ended June 30, 1999, we did not file
any Current Reports on Form 8-K. Subsequent to June 30,
1999, we filed the following Current Reports on Form 8-K:
Current Report on Form 8-K dated August 30, 1999, which
included a copy of a press release relating to the
acquisition of Books Are Fun, Ltd.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ Thomas O. Ryder
(Thomas O. Ryder)
Chairman and Chief Executive Officer
Date: September 16, 1999
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/Thomas O. Ryder Chairman and Chief September 16, 1999
(Thomas O. Ryder) Executive Officer
and a Director
/s/George S. Scimone Senior Vice September 16, 1999
(George S. Scimone) President and Chief
Financial Officer
/s/Dorvin D. Lively Vice President and September 16, 1999
(Dorvin D. Lively) Corporate
Controller (chief
accounting officer)
/s/Lynne V. Cheney Director September 16, 1999
(Lynne V. Cheney)
/s/M. Christine DeVita Director September 16, 1999
(M. Christine DeVita)
/s/George V. Grune Director September 16, 1999
(George V. Grune)
/s/James E. Preston Director September 16, 1999
(James E. Preston)
/s/Lawrence R. Ricciardi Director September 16, 1999
(Lawrence R. Ricciardi)
/s/C.J. Silas Director September 16, 1999
(C.J. Silas)
/s/William J. White Director September 16, 1999
(William J. White)
/s/Ed Zschau Director September 16, 1999
(Ed Zschau)
THE READER'S DIGEST ASSOCIATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management's Discussion and Analysis *
Financial Statements:
Consolidated Statements of Income--For the Years Ended June
30, 1999, 1998 and 1997 *
Consolidated Balance Sheets--June 30, 1999 and 1998
*
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1999, 1998 and 1997 *
Consolidated Statements of Changes in Stockholders' Equity--
For the Years Ended June 30, 1999, 1998 and 1997 *
Notes to Consolidated Financial Statements *
Independent Auditors' Report *
Report of Management *
Selected Financial Data *
Selected Quarterly Financial Data and Dividend and Market
Information (Unaudited) *
*This financial information is incorporated by reference to
our 1999 Annual Report to Stockholders. For additional
information, please refer to Item 8 of this report.
EXHIBIT 21
SUBSIDIARIES OF
THE READER'S DIGEST ASSOCIATION, INC.
Argentina
Reader's Digest Argentina S.A.
Australia
The Reader's Digest Association Pty. Limited
Reader's Digest (Australia) Pty. Ltd.
Austria
Verlag Das Beste GmbH
Belgium
N.V. Reader's Digest S.A.
Reader's Digest World Services, S.A.
Brazil
Reader's Digest Brasil Ltda.
Canada
The Reader's Digest Association (Canada) Ltd.
Quality Service Plan, Inc. Canada
Chile
Reader's Digest Chile Limitada
Colombia
Reader's Digest Colombia S.A.
Czech Republic
Reader's Digest Vyber s.r.o.
Denmark
Forlaget Det Beste A/S
England
The Reader's Digest Association Limited
RD Publications Ltd.
Money Magazine Limited
Reader's Digest (Family Insurance Services) Limited
The Reader's Digest Association (Ireland) Limited
Reader's Digest Children's Publishing Limited (formerly
Victoria House Publishing, Ltd.)
Reader's Digest European Systems Ltd.
Reader's Digest Central & Eastern Europe Limited
Finland
Oy Valitut Palat - Reader's Digest Ab
France
Selection du Reader's Digest S.A.
Germany
Verlag Das Beste GmbH
Optimail/Direcktwerbeservice GmbH
Pegasus Buch-und Zeitschriften -
Vertriebsgesellschaft.mbH
Hong Kong
Reader's Digest Association Far East Limited
Asian Qualiproducts Services, Limited
Reader's Digest Asia, Ltd.
Reader's Digest (East Asia) Limited
Reader's Digest Global Advertising Ltd.
Reader's Digest (Malaysia) Sdn. Bhd
R.D. Properties, Ltd.
Hungary
Reader's Digest Kiado KFT
Italy
Selezione dal Reader's Digest S.p.A.
Japan
The Reader's Digest Ltd.
Mexico
Caribe Condor S.A. de C.V.
Reader's Digest Mexico, S.A. de C.V.
Netherlands
Uitgeversmaatschappij The Reader's Digest N.V.
Distrimedia Services B.V.
New Zealand
The Reader's Digest Association (New Zealand) Limited
Norway
Det Beste A/S
Peru
Reader's Digest Peru, S.A.
Philippines
Reader's Digest (Philippines) Inc.
Poland
Reader's Digest Przeglad Sp.z o.o.
Portugal
Seleccoes do Reader's Digest (Portugal) S.A.
Euroseleccoes - Publicacoes E Artigos Promocionais, Lda.
Russia
Joint Stock Company "Publishing House Reader's Digest"
Spain
Reader's Digest Selecciones S.A.
Sweden
Reader's Digest Aktiebolag
Switzerland
Das Beste aus Reader's Digest AG
Thailand
Reader's Digest (Thailand) Limited
United States*
Ardee Music Publishing, Inc.
Books Are Fun, Ltd.
Good Catalog Company
Pegasus Investment, Inc.
Pegasus Sales, Inc.
Pleasantville Music Publishing, Inc.
QSP, Inc.
Reader's Digest Sub Eight, Inc.
VideOvation, Inc.
QSP Distribution Services, Inc.
Family Reading Program Corp.
R.D. Manufacturing Corporation
Pegasus Asia Investment Inc.
RD Publications, Inc.
RD Large Edition, Inc.
RD Walking, Inc.
Travel Publications, Inc.
RD Member Services Inc.
Home Service Publications, Inc.
Retirement Living Publishing Company, Inc.
RD Trade Shows, Inc.
Reader's Digest Children's Publishing, Inc.
Reader's Digest Entertainment, Inc.
Reader's Digest Latinoamerica, S.A.
Reader's Digest Sales and Services, Inc.
Reader's Digest Sub Nine, Inc.
Reader's Digest Sub Ten, Inc.
Reader's Digest Young Families, Inc.
SMDDMS, Inc.
The Reader's Digest Association (Russia) Incorporated
W.A. Publications, Inc.
* All are Delaware corporations except W.A. Publications,
Inc., a New York corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors of The Reader's Digest Association, Inc.:
We consent to incorporation by reference in the registration
statements (Registration Nos. 33-37434, 33-56883 and 333-57789)
on Form S-8 of The Reader's Digest Association, Inc. and
subsidiaries of our report dated August 17, 1999, relating to the
consolidated balance sheets of The Reader's Digest Association,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the
three-year period ended June 30, 1999, which report is
incorporated by reference in the Annual Report on Form 10-K of
The Reader's Digest Association, Inc. for the period ended June
30, 1999.
/s/ KPMG LLP
KPMG LLP
New York, New York
September 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Registrant's Consolidated Statement of Income and Consolidated
Balance Sheet for the twelve-month period ended June 30, 1999, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 413,400
<SECURITIES> 2,800
<RECEIVABLES> 473,700
<ALLOWANCES> 153,800
<INVENTORY> 94,900
<CURRENT-ASSETS> 1,146,500
<PP&E> 447,700
<DEPRECIATION> 299,300
<TOTAL-ASSETS> 1,710,500
<CURRENT-LIABILITIES> 986,300
<BONDS> 0
<COMMON> (4,000)
0
28,800
<OTHER-SE> 356,700
<TOTAL-LIABILITY-AND-EQUITY> 1,710,500
<SALES> 2,532,200
<TOTAL-REVENUES> 2,532,200
<CGS> 2,403,100
<TOTAL-COSTS> 2,403,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 509,100
<INTEREST-EXPENSE> 5,700
<INCOME-PRETAX> 211,700
<INCOME-TAX> 85,100
<INCOME-CONTINUING> 126,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 25,300
<NET-INCOME> 151,900
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.39
</TABLE>
Exhibit 10.17
The Reader's Digest Association, Inc.
1994 Key Employee Long Term
Incentive Plan
(Amended and Restated as of August 13, 1999)
As amended by Amendment No. 1, effective as of July 1, 1997
As amended by Amendment No. 2, effective as of April 28, 1998
As amended by Amendment No. 3, effective as of April 28, 1998
As amended by Amendment No. 4, effective as of August 13, 1999
THE READER'S DIGEST ASSOCIATION, INC.
1994 KEY EMPLOYEE LONG TERM INCENTIVE PLAN
ARTICLE I
Purpose
The purpose of this 1994 Key Employee Long Term
Incentive Plan (the "Plan") is to enable The Reader's Digest
Association, Inc. (the "Company") to offer key employees of
the Company and Designated Subsidiaries (defined below)
performance-based stock incentives and other equity
interests in the Company and other incentive awards, thereby
attracting, retaining and rewarding such key employees, and
strengthening the mutuality of interests between key
employees and the Company's shareholders.
ARTICLE II
Definitions
For purposes of this Plan, the following terms shall
have the following meanings:
2.1 "Award" shall mean any award under this Plan of
any Stock Option, Stock Appreciation Right, Restricted
Stock, Performance Shares, Performance Units or Other Stock-
Based Award. All Awards shall be granted by, confirmed by,
and subject to the terms of, a written agreement executed by
the Company and the Participant.
2.2 "Board" shall mean the Board of Directors of the
Company.
2.3 "Change in Control" shall have the meaning set
forth in Article 12.
2.4 "Code" shall mean the Internal Revenue Code of
1986, as amended.
2.5 "Committee" shall mean a committee of the Board
appointed from time to time by the Board consisting of three
or more Directors, none of whom shall be eligible to receive
any Award pursuant to this Plan.
2.6 "Common Stock" means the Class A non-voting Common
Stock, $.01 par value per share, of the Company.
2.7 "Designated Subsidiary" shall mean one of such
subsidiaries of the Company, 80 percent or more of the
voting capital stock of which is owned, directly or indi
rectly, by the Company, which are designated from time to
time by the Board.
2.8 "Disability" shall mean Total Disability as
defined in the Company's Long Term Disability Plan.
2.9 "Eligible employees" shall mean the employees of
the Company and the Designated Subsidiaries who are eligible
pursuant to Article 5 to be granted Awards under this Plan.
2.10 "Fair Market Value" for purposes of this Plan,
unless otherwise required by any applicable provision of the
Code or any regulations issued thereunder, shall mean, as of
any date, the mean between the high and low sales prices on
the applicable date, or if no sales price is available for
such date, the mean between the closing bid and asked prices
for such date, of a share of Common Stock (i) as reported by
the principal national securities exchange in the United
States on which it is then traded, or (ii) if not traded on
any such national securities exchange, as quoted on an
automated quotation system sponsored by the National
Association of Securities Dealers, or if the Common Stock
shall not have been reported or quoted on such date, on the
first day prior thereto on which the Common Stock was
reported or quoted. If the Common Stock is not readily
tradeable on a national securities exchange or any system
sponsored by the National Association of Securities Dealers,
its Fair Market Value shall be set by the Board on the
advice of an investment advisor in good faith.
2.11 "Incentive Stock Option" shall mean any Stock
Option awarded under this Plan intended to be and designated
as an "Incentive Stock Option" within the meaning of Section
422A of the Code.
2.12 "Non-Qualified Stock Option" shall mean any Stock
Option awarded under this Plan that is not an Incentive
Stock Option.
2.13 "Other Stock-Based Award" shall mean an Award
under Article 11 of this Plan that is valued in whole or in
part by reference to, or is payable in or otherwise based
on, Common Stock.
2.14 "Participant" shall mean an employee to whom an
Award has been made pursuant to this Plan.
2.15 "Performance Cycle" shall have the meaning set
forth in Section 10.1.
2.16 "Performance Period" shall have the meaning set
forth in Section 9.1.
2.17 "Performance Share" shall mean an Award made
pursuant to Article 9 of this Plan of the right to receive
Common Stock or cash of an equivalent value at the end of a
specified Performance Period.
2.18 "Performance Unit" shall mean an Award made
pursuant to Article 10 of this Plan of the right to receive
a fixed dollar amount, payable in cash or Common Stock or a
combination of both.
2.19 "Reference Stock Option" shall have the meaning
set forth in Section 7.1.
2.20 "Restricted Stock" shall mean an Award of shares
of Common Stock under this Plan that is subject to
restrictions under Article 8.
2.21 "Restriction Period" shall have the meaning set
forth in Subsection 8.3(a).
2.22 "Retirement" shall mean termination of employment
by an employee who is at least 55 years of age after at
least 5 years of employment by the Company and/or a
Designated Subsidiary.
2.23 "Stock Appreciation Right" shall mean the right
pursuant to an Award granted under Article 7. A Tandem
Stock Appreciation Right shall mean the right to surrender
to the Company all (or a portion) of a Stock Option in
exchange for an amount equal to the difference between (i)
the Fair Market Value, as of the date such Stock Option (or
such portion thereof) is surrendered, of the shares of
Common Stock covered by such Stock Option (or such portion
thereof), and (ii) the aggregate exercise price of such
Stock Option (or such portion thereof). A Non-Tandem Stock
Appreciation Right shall mean the right to receive an amount
equal to the difference between (x) the Fair Market Value of
a share of Common Stock as of the date such Right is
exercised, and (y) the Fair Market Value of a share of
Common Stock as of the date such Right is awarded, otherwise
than on surrender of a Stock Option.
2.24 "Stock Option" or "Option" shall mean any option
to purchase shares of Common Stock (including Restricted
Stock and Performance Shares, if the Committee so
determines) granted pursuant to Article 6.
2.25 "Termination of employment" shall mean a
termination of service for reasons other than military or
personal leave of absence granted by the Company or a
transfer of a Participant from the Company or a Designated
Subsidiary to another Designated Subsidiary or to the
Company or to any affiliate as defined in Section 414 of the
Code.
2.26 "Transfer" shall mean anticipate, alienate,
attach, sell, assign, pledge, encumber, charge or otherwise
transfer.
2.27 "Withholding Election" shall have the meaning set
forth in Section 15.4.
ARTICLE III
Administration
3.1 The Committee. The Plan shall be administered and
interpreted by the Committee.
3.2 Awards. The Committee shall have full authority
to grant, pursuant to the terms of this Plan, to eligible
employees: (i) Stock Options, (ii) Stock Appreciation
Rights, (iii) Restricted Stock, (iv) Performance Shares, (v)
Performance Units, and (vi) Other Stock-Based Awards. In
particular, the Committee shall have the authority:
(a) to select the eligible employees to whom Stock
Options, Stock Appreciation Rights, Restricted Stock,
Performance Shares, Performance Units and Other Stock-Based
Awards may from time to time be granted hereunder;
(b) to determine whether and to what extent Incentive
Stock Options, Non-Qualified Stock Options, Stock
Appreciation Rights, Restricted Stock, Performance Shares,
Performance Units and Other Stock-Based Awards, or any
combination thereof, are to be granted hereunder to one or
more eligible employees;
(c) to determine the number of shares of Common Stock
to be covered by each such Award granted hereunder;
(d) to determine the terms and conditions, not
inconsistent with the terms of this Plan, of any Award
granted hereunder (including, but not limited to, the share
price, any restriction or limitation, any vesting schedule
or acceleration thereof, or any forfeiture restrictions or
waiver thereof, regarding any Stock Option or other Award
and the shares of Common Stock relating thereto, based on
such factors, if any, as the Committee shall determine, in
its sole discretion);
(e) to determine whether, to what extent and under
what circumstances grants of Options and other Awards under
this Plan are to operate on a tandem basis and/or in
conjunction with or apart from other awards made by the
Company outside of this Plan;
(f) to determine whether and under what circumstances
a Stock Option may be settled in cash, Common Stock,
Performance Shares and/or Restricted Stock under Subsection
6.4(k); and
(g) to determine whether, to what extent and under
what circumstances Common Stock and other amounts payable
with respect to an Award under this Plan shall be deferred
either automatically or at the election of the Participant.
3.3 Guidelines. Subject to Article 13 hereof, the
Committee shall have the authority to adopt, alter and
repeal such administrative rules, guidelines and practices
governing this Plan and perform all acts, including the
delegation of its administrative responsibilities, as it
shall, from time to time, deem advisable; to construe and
interpret the terms and provisions of this Plan and any
Award issued under this Plan (and any agreements relating
thereto); and to otherwise supervise the administration of
this Plan. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in this Plan or in
any agreement relating thereto in the manner and to the
extent it shall deem necessary to carry this Plan into
effect. Notwithstanding the foregoing, no action of the
Committee under this Section 3.3 shall impair the rights of
any Participant without the Participant's consent.
3.4 Decisions Final. Any decision, interpretation or
other action made or taken in good faith by or at the
direction of the Company, the Board, or the Committee (or
any of its members) arising out of or in connection with the
Plan shall be within the absolute discretion of all and each
of them, as the case may be, and shall be final, binding and
conclusive on the Company and all employees and Participants
and their respective heirs, executors, administrators,
successors and assigns.
3.5 Reliance on Counsel. The Company or the Committee
may consult with legal counsel, who may be counsel for the
Company or other counsel, with respect to its obligations or
duties hereunder, or with respect to any action or
proceeding or any question of law, and shall not be liable
with respect to any action taken or omitted by it in good
faith pursuant to the advice of such counsel.
ARTICLE IV
Share Limitation
4.1 Shares. The maximum aggregate number of shares of
Common Stock which may be issued under this Plan or with
respect to which Non-Tandem Stock Appreciation Rights may be
granted shall not exceed 17,300,000 shares (subject to any
increase or decrease pursuant to Section 4.2) which may be
either authorized and unissued Common Stock or outstanding
Common Stock reacquired by the Company. No more than 10% of
such maximum shall be issued under this Plan as Restricted
Stock. If any Option granted under this Plan shall expire,
terminate or be cancelled for any reason without having been
exercised in full, or payment shall have been made in other
than Common Stock, the number of unpurchased shares shall
again be available for the purposes of the Plan; provided,
however, that if such expired, terminated or cancelled
Option shall have been issued in tandem with a Stock
Appreciation Right or other Award, none of such unpurchased
shares shall again become available for purposes of this
Plan to the extent that the related Right or Award granted
under this Plan is exercised. Further, if any shares of
Common Stock granted hereunder are forfeited or such Award
otherwise terminates without the delivery of such shares
upon the lapse of restrictions, the shares subject to such
grant, to the extent of such forfeiture or termination,
shall again be available under this Plan.
4.2 Changes. In the event of any change in the
capital stock of the Company by reason of any stock dividend
or distribution, stock split or reverse stock split, recapi
talization, reorganization, merger, consolidation, split-up,
combination or exchange of shares, distribution with respect
to its outstanding Common Stock of capital stock other than
Common Stock, reclassification of its capital stock,
issuance of warrants or options to purchase any Common Stock
or securities convertible into Common Stock, or rights
offering to purchase capital stock at a price below fair
market value, or any similar change affecting the capital
stock of the Company; then the aggregate number and kind of
shares which thereafter may be issued under this Plan, the
number and kind of shares subject to outstanding Options
granted under this Plan and the purchase price thereof, and
the number and kind of shares subject to other outstanding
Awards (including but not limited to Awards of Restricted
Stock, Performance Shares and Other Stock-Based Awards)
granted under this Plan, shall be appropriately adjusted
consistent with such change in such manner as the Committee
may deem equitable to prevent substantial dilution or
enlargement of the rights granted to, or available for,
Participants under this Plan, and any such adjustment
determined by the Committee in good faith shall be binding
and conclusive on the Company and all Participants and
employees and their respective heirs, executors, administra
tors, successors and assigns. Any such adjusted Option
price shall also be used to determine the amount payable by
the Company upon the exercise of any Stock Appreciation
Right associated with any Stock Option.
4.3 Purchase Price. Notwithstanding any provision of
this Plan to the contrary, if authorized but previously
unissued shares of Common Stock are issued under this Plan,
such shares shall be issued for a consideration which shall
not be less than par value.
ARTICLE V
Eligibility
5.1 Senior officers, senior management and key
employees of the Company and its Designated Subsidiaries and
members of the Executive Committee of the Company's Board of
Directors are eligible to be granted Options and other
Awards under this Plan. Eligibility under this Plan shall
be determined by the Committee.
ARTICLE VI
Stock Options
6.1 Options. Stock Options may be granted alone or in
addition to other Awards granted under this Plan. Each
Stock Option granted under this Plan shall be one of two
types: (i) an Incentive Stock Option or (ii) a Non-
Qualified Stock Option.
6.2 Grants. The Committee shall have the authority to
grant to any Participant one or more Incentive Stock
Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation
Rights); provided, however, that no Participant shall be
granted Stock Options or Non-Tandem Stock Appreciation
Rights, or both, with respect to a total of more than
1,200,000 shares of Common Stock during any fiscal year of
the Company. To the extent that any Stock Option does not
qualify as an Incentive Stock Option (whether because of its
provisions or the time or manner of its exercise or
otherwise), such Stock Option or the portion thereof which
does not qualify shall constitute a separate Non-Qualified
Stock Option.
6.3 Incentive Stock Options. Anything in the Plan to
the contrary notwithstanding, no term of this Plan relating
to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under
the Plan be so exercised, so as to disqualify the Plan under
Section 422A of the Code, or, without the consent of the
Participants affected, to disqualify any Incentive Stock
Option under such Section 422A.
6.4 Terms of Options. Options granted under this Plan
shall be subject to the following terms and conditions and
shall be in such form and contain such additional terms and
conditions, not inconsistent with the terms of this Plans,
as the Committee shall deem desirable:
(a) Option Price. The option price per share of
Common Stock purchasable under a Stock Option shall be
determined by the Committee at the time of grant but shall
be not less than 100% of the Fair Market Value of the Common
Stock at grant if the Stock Option is intended to be an
Incentive Stock Option and shall not be less than 85% of the
Fair Market Value of the Common Stock at grant if the Stock
Option is intended to be a Non-Qualified Stock Option.
(b) Option Term. The term of each Stock Option shall
be fixed by the Committee, but no Incentive Stock Option
shall be exercisable more than ten years after the date the
Option is granted, and no Non-Qualified Stock Option shall
be exercisable more than ten years and one day after the
date the Option is granted.
(c) Exercisability. Stock Options shall be
exercisable at such time or times and subject to such terms
and conditions as shall be determined by the Committee at
grant; provided, however, that, except as provided in
subsections (f), (g) and (h) below and Article 3, unless
otherwise determined by the Committee at grant, no Stock
Option shall be exercisable prior to the first anniversary
date of the granting of the Option. If the Committee
provides, in its discretion, that any Stock Option is
exercisable only in installments, the Committee may waive
such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors, if any, as
the Committee shall determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever
installment exercise and waiting period provisions apply
under subsection (c) above, Stock Options may be exercised
in whole or in part at any time during the option term, by
giving written notice of exercise to the Company specifying
the number of shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price in such
form as the Committee may accept. If and to the extent
determined by the Committee in its sole discretion at or
after grant, payment in full or in part may also be made in
the form of Common Stock (other than Restricted Stock) owned
by the Participant (and for which the Participant has good
title free and clear of any liens and encumbrances) or
Restricted Stock, or by reduction in the number of shares
issuable upon such exercise based, in each case, on the Fair
Market Value of the Stock on the payment date as determined
by the Committee (without regard to any forfeiture
restrictions applicable to Restricted Stock). No shares of
Stock shall be issued until payment, as provided herein,
therefor has been made. A Participant shall generally have
the rights to dividends or other rights of a shareholder
with respect to shares subject to the Option when the
optionee has given written notice of exercise, has paid for
such shares as provided herein, and, if requested, has given
the representation described in Section 15.1.
Notwithstanding the foregoing, if payment in full or in part
has been made in the form of Restricted Stock, an equivalent
number of shares of Common Stock issued on exercise of the
Option shall be subject to the same restrictions and
conditions, and during the remainder of the Restriction
Period, applicable to the shares of Restricted Stock
surrendered therefor.
(e) Transferability of Options.
(1) No Stock Option shall be Transferable by the
Participant otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be
exercisable, during the Participant's lifetime, only by the
Participant. Notwithstanding the foregoing, the Committee
may provide in the terms and conditions governing any Stock
Option other than an Incentive Stock Option, at the time of
grant or thereafter, that the Stock Option may be
Transferred, to the extent vested, to members of the
Participant's immediate family, to trusts solely for the
benefit of such immediate family members, and to
partnerships in which such immediate family members and/or
trusts are the only partners. For this purpose "immediate
family members" means the Participant's spouse, parents,
children, stepchildren, grandchildren and other issue and
legal dependents. Any Transfer of Stock Options made under
this provision will not be effective until notice of such
Transfer is received by the Company.
(2) Notwithstanding any thing to the contrary
herein, if a Stock Option has been Transferred in accordance
with this Section 6.4, the Stock Option shall be exercisable
solely by the Transferee. The Stock Option shall remain
subject to the provisions of the Plan, including that it
shall be exercisable only to the extent that the Participant
or Participant's estate would have been entitled to exercise
it if the Participant had not Transferred the Stock Option.
In the event of the death of the Participant prior to the
expiration of the right to exercise the Transferred Stock
Option, the period during which the Stock Option shall be
exercisable shall terminate on the date one year following
the date of the Participant's death. In the event of the
death of the Transferee prior to the expiration of the right
to exercise the Stock Option, the period during which the
Stock Option shall be exercisable by the executors,
administrators, legatees and distributees of the
Transferee's estate, as the case may be, shall terminate on
the date one year following the date of the Transferee's
death. In no event, however, shall the Stock Option be
exercisable after the expiration of the Stock Option period
set forth in the terms and conditions of the Stock Option.
The Stock Option shall be subject to such other rules as the
Committee shall determine.
(f) Termination by Death. Subject to subsection (j)
below, if a Participant's employment by the Company or a
Designated Subsidiary terminates by reason of death, any
Stock Option held by such Participant, unless otherwise
determined by the Committee at grant, shall be fully vested
and may thereafter be exercised by the legal representative
of the estate, for a period of one year (or such other
period as the Committee may specify at grant) from the date
of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter.
(g) Termination by Reason of Disability. Subject to
subsection (j) below, if a Participant's employment by the
Company or a Designated Subsidiary terminates by reason of
Disability, any Stock Option held by such Participant,
unless otherwise determined by the Committee at grant, shall
be fully vested and may thereafter be exercised by the
Participant for a period of three years (or such other
period as the Committee may specify at grant) from the date
of such termination of employment or until the expiration of
the stated term of such Stock Option, whichever period is
the shorter; provided, however, that, if the Participant
dies within such three-year period (or such other period as
the Committee shall specify at grant), any unexercised Stock
Option held by such Participant shall thereafter be exer
cisable to the extent to which it was exercisable at the
time of death for a period of twelve months from the date of
such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the
event of termination of employment by reason of Disability,
if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes
of Section 422A of the Code, such Stock Option will
thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. Subject to
subsection (j), if a Participant's employment by the Company
or a Designated Subsidiary terminates by reason of
Retirement, any Stock Option held by such Participant,
unless otherwise determined by the Committee at grant, shall
be fully vested and may thereafter be exercised by the
Participant for a period of three years (or such other
period as the Committee may specify at grant) from the date
of such termination of employment or the expiration of the
stated term of such Stock Option, whichever period is the
shorter; provided, however, that, if the Participant dies
within such three-year period, any unexercised Stock Option
held by such Participant shall thereafter be exercisable, to
the extent to which it was exercisable at the time of death,
for a period of twelve months from the date of such death or
until the expiration of the stated term of such Stock
Option, whichever period is the shorter. In the event of
termination of employment by reason of Retirement, if an
Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422A
of the Code, such Stock Option will thereafter be treated as
a Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by
the Committee at or after grant, if a Participant's
employment by the Company or a Designated Subsidiary
terminates for any reason other than death, Disability or
Retirement, the Stock Option shall thereupon terminate,
except that such Stock Option may be exercised, to the
extent it was exercisable immediately preceding such
termination, for the lesser of three months or the balance
of such Stock Option's term if the Participant is
involuntarily terminated by the Company or the Designated
Subsidiary without cause.
(j) Incentive Stock Option Limitations. To the extent
that the aggregate Fair Market Value (determined as of the
time of grant) of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time
by the Participant during any calendar year under the Plan
and/or any other stock option plan of the Company or any
subsidiary or parent corporation (within the meaning of
Section 425 of the Code) exceeds $100,000, such Options
shall be treated as Options which are not Incentive Stock
Options.
To the extent (if any) permitted under Section
422A of the Code, or the applicable regulations thereunder
or any applicable Internal Revenue Service pronouncement, if
(i) a Participant's employment with the Company or a
Designated Subsidiary is terminated by reason of death,
Disability or Retirement and (ii) the portion of any
Incentive Stock Option that is otherwise exercisable during
the post-termination period specified under subsections (f),
(g) or (h) above, computed without regard to the $100,000
limitation currently contained in Section 422A(d) of the
Code, is greater than the portion of such Stock Option that
is immediately exercisable as an "incentive stock option"
during such post-termination period under Section 422A, such
excess shall be treated as a Non-Qualified Stock Option. If
the exercise of an Incentive Stock Option is accelerated by
reason of a Change in Control, any portion of such Option
that is not exercisable as an Incentive Stock Option by
reason of the $100,000 limitation contained in Section
422A(d) of the Code shall be treated as a Non-Qualified
Stock Option.
Should any of the foregoing provisions not be
necessary in order for the Stock Options to qualify as
Incentive Stock Options, or should any additional provisions
be required, the Committee may amend the Plan accordingly,
without the necessity of obtaining the approval of the
shareholders of the Company.
(k) Buyout and Settlement Provisions. The Committee
may at any time offer to buy out an Option previously
granted, based on such terms and conditions as the Committee
shall establish and communicate to the Participant at the
time that such offer is made.
In addition, if the Option agreement so provides
at grant or is amended (with the Participant's consent)
after grant and prior to exercise to so provide, the
Committee may require that all or part of the shares to be
issued with respect to the spread value of an exercised
Option take the form of Performance Shares or Restricted
Stock, which shall be valued on the date of exercise on the
basis of the Fair Market Value of such Performance Shares or
Restricted Stock determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
ARTICLE VII
Stock Appreciation Rights
7.1 Tandem Stock Appreciation Rights. Stock
Appreciation Rights may be granted in conjunction with all
or part of any Stock Option (a "Reference Stock Option")
granted under this Plan ("Tandem Stock Appreciation
Rights"). In the case of a Non-Qualified Stock Option, such
rights may be granted either at or after the time of the
grant of such Reference Stock Option. In the case of an
Incentive Stock Option, such rights may be granted only at
the time of the grant of such Reference Stock Option.
7.2 Terms and Conditions of Tandem Stock Appreciation
Rights. Tandem Stock Appreciation Rights shall be subject
to such terms and conditions, not inconsistent with the
provisions of this Plan, as shall be determined from time to
time by the Committee, including the following:
(a) Term. A Tandem Stock Appreciation Right or applicable
portion thereof granted with respect to a Reference Stock
Option shall terminate and no longer be exercisable upon the
termination or exercise of the Reference Stock Option,
except that, unless otherwise determined by the Committee,
in its sole discretion, at the time of grant, a Tandem Stock
Appreciation Right granted with respect to less than the
full number of shares covered by the Reference Stock Option
shall not be reduced until and then only to the extent the
exercise or termination of the Reference Stock Option causes
the number of shares covered by the Tandem Stock
Appreciation Right to exceed the number of shares remaining
available and unexercised under the Reference Stock Option.
(b) Exercisability. Tandem Stock Appreciation Rights shall
be exercisable only at such time or times and to the extent
that the Reference Stock Options to which they relate shall
be exercisable in accordance with the provisions of Article
6 and this Article 7; provided, however, that any Tandem
Stock Appreciation Right granted subsequent to the grant of
the Reference Stock Option shall not be exercisable during
the first six months of its term, except that this special
limitation shall not apply in the event of death or
Disability of the Participant prior to the expiration of the
six-month period.
(c) Method of Exercise. A Tandem Stock Appreciation Right
may be exercised by an optionee by surrendering the
applicable portion of the Reference Stock Option. Upon such
exercise and surrender, the Participant shall be entitled to
receive an amount determined in the manner prescribed in
this Section 7.2. Stock Options which have been so
surrendered, in whole or in part, shall no longer be
exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised.
(d) Payment. Upon the exercise of a Tandem Stock
Appreciation Right a Participant shall be entitled to
receive up to, but no more than, an amount in cash and/or
shares of Common Stock equal in value to the excess of the
Fair Market Value of one share of Common Stock over the
option price per share specified in the Reference Stock
Option multiplied by the number of shares in respect of
which the Tandem Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine
the form of payment.
(e) Non-Transferability. Tandem Stock Appreciation Rights
shall be Transferable only when and to the extent that the
underlying Stock Option would be Transferable under
Subsection 6.4(e) of the Plan.
(f) Deemed Exercise of Reference Stock Option. Upon the
exercise of a Tandem Stock Appreciation Right, the Reference
Stock Option or part thereof to which such Stock
Appreciation Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in
Article 4 of the Plan on the number of shares of Common
Stock to be issued under the Plan.
7.3 Non-Tandem Stock Appreciation Rights. Non-Tandem
Stock Appreciation Rights may also be granted without
reference to any Stock Options granted under this Plan;
provided, however, that no Participant shall be granted
Stock Options or Non-Tandem Stock Appreciation Rights, or
both, with respect to a total of more than 500,000 shares of
Common Stock during any fiscal year of the Company.
7.4 Terms and Conditions of Non-Tandem Stock
Appreciation Rights. Non-Tandem Stock Appreciation Rights
shall be subject to such terms and conditions, not
inconsistent with the provisions of this Plan, as shall be
determined from time to time by the Committee, including the
following:
(a) Term. The term of each Non-Tandem Stock Appreciation
Right shall be fixed by the Committee, but shall not be
greater than ten years and one day after the date the Right
is granted.
(b) Exercisability. Non-Tandem Stock Appreciation Rights
shall be exercisable at such time or times and subject to
such terms and conditions as shall be determined by the
Committee at grant; provided, however, that any Right shall
not be exercisable during the first six months of its term,
except that this special limitation shall not apply in the
event of death or Disability of the Participant prior to
expiration of this six-month period. If the Committee
provides, in its discretion, that any such Right is
exercisable only in installments, the Committee may waive
such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors, if any, as
the Committee shall determine, in its sole discretion.
(c) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under
subsection (b) above, Non-Tandem Stock Appreciation Rights
may be exercised in whole or in part at any time during the
option term, by giving written notice of exercise to the
Company specifying the number of Rights to be exercised.
(d) Payment. Upon the exercise of a Non-Tandem Stock
Appreciation Right a Participant shall be entitled to
receive, for each Right exercised, up to, but no more than,
an amount in cash and/or shares of Common Stock equal in
value to the excess of the Fair Market Value of one share of
Common Stock on the date the Right is exercised over the
Fair Market Value of one share of Common Stock on the date
the Right was awarded to the Participant, with the Committee
having the right to determine the form of payment.
(e) Non-Transferability. No Non-Tandem Stock Appreciation
Right shall be Transferable by the Participant otherwise
than by will or by the laws of descent and distribution, and
all such Rights shall be exercisable, during the
Participant's lifetime, only by the Participant.
(f) Termination by Death. If a Participant's employment by
the Company or a Designated Subsidiary terminates by reason
of death, any Non-Tandem Stock Appreciation Right held by
such Participant, unless otherwise determined by the
Committee at grant, shall be fully vested and may thereafter
be exercised by the legal representative of the estate, for
a period of one year (or such other period as the Committee
may specify at grant) from the date of such death or until
the expiration of the stated term of such Right, whichever
period is the shorter.
(g) Termination by Reason of Disability or Retirement. If
a Participant's employment by the Company or a Designated
Subsidiary terminates by reason of Disability or Retirement,
any Non-Tandem Stock Appreciation Right held by such
Participant, unless otherwise determined by the Committee at
grant, shall be fully vested and may thereafter be exercised
by the Participant for a period of three years (or such
other period as the Committee may specify at grant) from the
date of such termination of employment or until the
expiration of the stated term of such Right, whichever
period is the shorter; provided, however, that, if the
Participant dies within such three-year period (or such
other period as the Committee shall specify at grant), any
unexercised Non-Tandem Stock Appreciation Right held by such
Participant shall thereafter be exercisable to the extent to
which it was exercisable at the time of death for a period
of twelve months from the date of such death or until the
expiration of the stated term of such Right, whichever
period is the shorter.
(h) Other Termination. Unless otherwise determined by the
Committee at or after grant, if a Participant's employment
by the Company or a Designated Subsidiary terminates for any
reason other than death, Disability or Retirement, the Non-
Tandem Stock Appreciation Right shall thereupon terminate,
except that such Right may be exercised, to the extent it
was exercisable immediately preceding such termination, for
the lesser of three months or the balance of the stated term
of such Right if the Participant is involuntarily terminated
by the Company or the Designated Subsidiary without cause.
7.5 Cash Settlements of Tandem and Non-Tandem Stock
Appreciation Rights. A Participant required to file reports
under Section 16(a) of the Securities Exchange Act of 1934
with respect to securities of the Company may receive cash
in complete or partial settlement of a Tandem or Non-Tandem
Stock Appreciation Right only if any election by such
Participant to receive cash in full or partial settlement of
the Stock Appreciation Right, as well as any exercise by him
of his Stock Appreciation Right for such cash, is made (i)
during the period beginning on the third business day
following the date of release for publication of the
quarterly or annual summary statements of sales and earnings
of the Company and ending on the twelfth business day
following such date, or (ii) during any other period in
which such election or exercise may be made under the
provisions of Rule 16b-3 promulgated pursuant to the Act.
ARTICLE VIII
Restricted Stock
8.1 Awards of Restricted Stock. Shares of Restricted
Stock may be issued either alone or in addition to other
Awards granted under the Plan. The Committee shall
determine the eligible persons to whom, and the time or
times at which, grants of Restricted Stock will be made, the
number of shares to be awarded, the price (if any) to be
paid by the recipient (subject to Section 8.2), the time or
times within which such Awards may be subject to forfeiture,
the vesting schedule and rights to acceleration thereof, and
all other terms and conditions of the Awards.
The Committee may condition the grant of Restricted
Stock upon the attainment of specified performance goals or
such other factors as the Committee may determine, in its
sole discretion.
8.2 Awards and Certificates. The prospective
Participant selected to receive a Restricted Stock Award
shall not have any rights with respect to such Award, unless
and until such Participant has delivered a fully executed
copy of the agreement evidencing the Award to the Company
and has otherwise complied with the applicable terms and
conditions of such Award. Further, such Award shall be
subject to the following conditions:
(a) Purchase Price. Subject to Section 4.3, the purchase
price for shares of Restricted Stock may be less than their
par value and may be zero.
(b) Acceptance. Awards of Restricted Stock must be
accepted within a period of 60 days (or such shorter period
as the Committee may specify at grant) after the Award date,
by executing a Restricted Stock Award agreement and by
paying whatever price (if any) the Committee has designated
thereunder.
(c) Legend. Each Participant receiving a Restricted Stock
Award shall be issued a stock certificate in respect of such
shares of Restricted Stock. Such certificate shall be
registered in the name of such Participant, and shall bear
an appropriate legend referring to the terms, conditions,
and restrictions applicable to such Award, substantially in
the following form:
"The anticipation, alienation, attachment, sale,
transfer, assignment, pledge, encumbrance or charge of the
shares of stock represented hereby are subject to the terms
and conditions (including forfeiture) of The Reader's Digest
Association, Inc. (the "Company") 1994 Key Employee Long
Term Incentive Plan and an Agreement entered into between
the registered owner and the Company dated .
Copies of such Plan and Agreement are on file at the
principal office of the Company."
(d) Custody. The Committee shall require that the stock
certificates evidencing such shares be held in custody by
the Company until the restrictions thereon shall have
lapsed, and that, as a condition of any Restricted Stock
Award, the Participant shall have delivered a duly signed
stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
8.3 Restrictions and Conditions. The shares of
Restricted Stock awarded pursuant to this Plan shall be
subject to the following restrictions and conditions:
(a) Restriction Period. Subject to the provisions of
this Plan and the Award agreement, during a period set by
the Committee commencing with the date of such Award (the
"Restriction Period"), the Participant shall not be
permitted to Transfer shares of Restricted Stock awarded
under this Plan. Within these limits, the Committee, in its
sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service,
performance and/or such other factors or criteria as the
Committee may determine in its sole discretion.
(b) Rights as Shareholder. Except as provided in this
subsection (b) and subsection (a) above, the Participant
shall have, with respect to the shares of Restricted Stock,
all of the rights of a holder of shares of Common Stock of
the Company including the right to receive any dividends.
The Committee, in its sole discretion, as determined at the
time of Award, may permit or require the payment of
dividends to be deferred.
(c) Termination of Employment. Subject to the
applicable provisions of the Award agreement and this Plan,
upon termination of a Participant's employment with the
Company or a Designated Subsidiary for any reason during the
Restriction Period, all Restricted Shares still subject to
restriction will vest or be forfeited in accordance with the
terms and conditions established by the Committee at grant.
(d) Hardship. In the event of hardship or other
special circumstances of a Participant whose employment with
the Company or a Designated Subsidiary is involuntarily
terminated (other than for cause), the Committee may, in its
sole discretion, waive in whole or in part any or all
remaining restrictions with respect to such Participant's
shares of Restricted Stock, based on such factors as the
Committee may deem appropriate.
(e) Lapse of Restrictions. If and when the
Restriction Period expires without a prior forfeiture of the
Restricted Stock subject to such Restriction Period, the
certificates for such shares shall be delivered to the
Participant. All legends shall be removed from said
certificates at the time of delivery to the Participant.
ARTICLE IX
Performance Shares
9.1 Award of Performance Shares. Performance Shares
may be awarded either alone or in addition to other Awards
granted under this Plan. The Committee shall determine the
eligible persons to whom and the time or times at which
Performance Shares shall be awarded, the number of
Performance Shares to be awarded to any person, the duration
of the period (the "Performance Period") during which, and
the conditions under which, receipt of the Shares will be
deferred, and the other terms and conditions of the Award in
addition to those set forth in Section 9.2.
The Committee may condition the grant of
Performance Shares upon the attainment of specified
performance goals or such other factors or criteria as the
Committee shall determine, in its sole discretion.
9.2 Terms and Conditions. Performance Shares awarded
pursuant to this Article 9 shall be subject to the following
terms and conditions:
(a) Non-Transferability. Subject to the applicable
provisions of the Award agreement and this Plan, Performance
Share Awards may not be Transferred during the Performance
Period.
(b) Dividends. Unless otherwise determined by the
Committee at the time of Award, amounts equal to any
dividends declared during the Performance Period with
respect to the number of shares of Common Stock covered by a
Performance Share Award will not be paid to the Participant.
(c) Payment. Subject to the provisions of the Award
agreement and this Plan, at the expiration of the
Performance Period, share certificates and/or cash of an
equivalent value (as the Committee may determine in its sole
discretion) shall be delivered to the Participant, or his
legal representative, in a number equal to the vested shares
covered by the Performance Share Award.
(d) Termination of Employment. Subject to the applicable
provisions of the Award agreement and this Plan, upon
termination of a Participant's employment with the Company
or a Designated Subsidiary for any reason during the
Performance Period for a given Award, the Performance Shares
in question will vest or be forfeited in accordance with the
terms and conditions established by the Committee at grant.
(e) Accelerated Vesting. Based on service, performance
and/or such other factors or criteria, if any, as the
Committee may determine, the Committee may, at or after
grant, accelerate the vesting of all or any part of any Per
formance Share Award and/or waive the deferral limitations
for all or any part of such Award.
(f) Hardship. In the event of hardship or other special
circumstances of a Participant whose employment with the
Company or a Designated Subsidiary is involuntarily
terminated (other than for cause), the Committee may, in its
sole discretion, based on such factors as the Committee may
deem appropriate, waive in whole or in part any or all of
the remaining deferral limitations imposed hereunder with
respect to any or all of the Participant's Performance
Shares.
ARTICLE X
Performance Units
10.1 Award of Performance Units. Performance Units may
be awarded either alone or in addition to other Awards
granted under this Plan. The Committee shall determine the
eligible persons to whom and the time or times at which
Performance Units shall be awarded, the number of
Performance Units to be awarded to any person, the duration
of the period (the "Performance Cycle") during which, and
the conditions under which, a Participant's right to
Performance Units will be vested, the ability of
Participants to defer the receipt of payment of such Units,
and the other terms and conditions of the Award in addition
to those set forth in Section 10.2.
A Performance Unit shall have a fixed dollar value.
The Committee may condition the vesting of Performance
Units upon the attainment of specified performance goals or
such other factors or criteria as the Committee shall
determine, in its sole discretion.
10.2 Terms and Conditions. The Performance Units
awarded pursuant to this Article 10 shall be subject to the
following terms and conditions:
(a) Non-Transferability. Subject to the applicable
provisions of the Award agreement and this Plan, Performance
Unit Awards may not be Transferred.
(b) Vesting. At the expiration of the Performance Cycle,
the Committee shall determine the extent to which the
performance goals have been achieved, and the percentage of
the Performance Units of each Participant that have vested.
(c) Payment. Subject to the applicable provisions of the
Award agreement and this Plan, at the expiration of the
Performance Cycle, cash and/or share certificates of an
equivalent value (as the Committee may determine in its sole
discretion) shall be delivered to the Participant, or his
legal representative, in payment of the vested Performance
Units covered by the Performance Unit Award.
(d) Termination of Employment. Subject to the applicable
provisions of the Award agreement and this Plan, upon
termination of a Participant's employment with the Company
or a Designated Subsidiary for any reason during the
Performance Cycle for a given Award, the Performance Units
in question will vest or be forfeited in accordance with the
terms and conditions established by the Committee at grant.
(e) Accelerated Vesting. Based on service, performance
and/or such other factors or criteria, if any, as the
Committee may determine, the Committee may, at or after
grant, accelerate the vesting of all or any part of any Per
formance Unit Award and/or waive the deferral limitations
for all or any part of such Award.
(f) Hardship. In the event of hardship or other special
circumstances of a Participant whose employment with the
Company or a Designated Subsidiary is involuntarily
terminated (other than for cause), the Committee may, in its
sole discretion, based on such factors as the Committee may
deem appropriate, waive in whole or in part any or all of
the remaining deferral limitations imposed hereunder with
respect to any or all of the Participant's Performance
Units.
ARTICLE XI
Other Stock-Based Awards
11.1 Other Awards. Other Awards of Common Stock and
other Awards that are valued in whole or in part by
reference to, or are payable in or otherwise based on,
Common Stock ("Other Stock-Based Awards"), including,
without limitation, Awards valued by reference to subsidiary
performance, may be granted either alone or in addition to
or in tandem with Stock Options, Stock Appreciation Rights,
Restricted Stock, Performance Shares or Performance Units.
Subject to the provisions of this Plan, the
Committee shall have authority to determine the persons to
whom and the time or times at which such Awards shall be
made, the number of shares of Common Stock to be awarded
pursuant to such Awards, and all other conditions of the
Awards. The Committee may also provide for the grant of
Common Stock under such Awards upon the completion of a
specified performance period.
11.2 Terms and Conditions. Other Stock-Based Awards
made pursuant to this Article 11 shall be subject to the
following terms and conditions:
(a) Non-Transferability. Subject to the applicable
provisions of the Award agreement and this Plan, shares of
Common Stock subject to Awards made under this Article 11
may not be Transferred prior to the date on which the shares
are issued, or, if later, the date on which any applicable
restriction, performance or deferral period lapses.
(b) Dividends. Unless otherwise determined by the
Committee at the time of Award, subject to the provisions of
the Award agreement and this Plan, the recipient of an Award
under this Article 11 shall be entitled to receive, cur
rently or on a deferred basis, dividends or dividend
equivalents with respect to the number of shares of Common
Stock covered by the Award, as determined at the time of the
Award by the Committee, in its sole discretion.
(c) Vesting. Any Award under this Article 11 and any
Common Stock covered by any such Award shall vest or be
forfeited to the extent so provided in the Award agreement,
as determined by the Committee, in its sole discretion.
(d) Waiver of Limitation. In the event of the
Participant's Retirement, Disability or death, or in cases
of special circumstances, the Committee may, in it sole
discretion, waive in whole or in part any or all of the
limitations imposed hereunder (if any) with respect to any
or all of an Award under this Article 11.
(e) Price. Common Stock issued on a bonus basis under this
Article 11 may be issued for no cash consideration; Common
Stock purchased pursuant to a purchase right awarded under
this Article 11 shall be priced as determined by the
Committee.
ARTICLE XII
Change in Control Provisions
12.1 Benefits. In the event of a Change in Control of
the Company (as defined below), and except as otherwise
provided by the committee upon the grant of an Award, the
Participant shall be entitled to the following benefits:
(a) All outstanding Stock Options and Non-Tandem Stock
Appreciation Rights of such Participant granted prior to the
Change in Control shall be fully vested and immediately
exercisable in their entirety. In its sole discretion, the
Committee may provide for the purchase of any such Stock
Options by the Company or Designated Subsidiary for an
amount of cash equal to the excess of the Change in Control
price (as defined below) of the shares of Common Stock
covered by such Stock Options, over the aggregate exercise
price of such Stock Options. For purposes of this Section
12.1, Change in Control price shall mean the higher of (i)
the highest price per share of Common Stock paid in any
transaction related to a Change in Control of the Company,
or (ii) the highest Fair Market Value per share of Common
Stock at any time during the 60-day period preceding a
Change in Control.
(b) All Performance Share Awards and Performance Unit
Awards of such Participant granted prior to the Change in
Control shall vest, at a minimum, as if the applicable
Performance Period or Performance Cycle had ended upon such
Change in Control and the determination of the extent to
which any specified performance goals or targets had been
achieved had been made at such time.
(c) The restrictions to which any shares of Restricted
Stock of such Participant granted prior to the Change in
Control are subject shall lapse as if the applicable
Restriction Period had ended upon such Change in Control.
Any determination by the Committee made pursuant to
paragraph (a) of this Section 12.1 may be made as to all
outstanding Awards or only as to certain outstanding Awards
specified by the Committee and any such determination may be
made prior to or after a Change in Control.
12.2 Change in Control. A "Change in Control" shall be
deemed to occur if (1) there shall be consummated any
consolidation or merger of the Company with or into any
other corporation, any corporate reorganization involving
the Company, any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company, or any
sale or other disposition of shares of capital stock of the
Company, and (2) as a result of such consolidation, merger,
reorganization, sale, lease, exchange or other disposition,
(A) any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), shall have become
the beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act) of a majority of the Company's outstanding
voting stock, or (B) any person other than the Company shall
be the beneficial owner of the assets of the Company as
described above; provided, however, that the non-employee
members of the Board immediately prior to such transaction
may determine that a Change in Control for purposes of the
Plan has not occurred where control is to be acquired by:
(i) an employee stock ownership plan of the Company; (ii) a
group of persons who immediately prior to the transaction
were officers and senior employees of the Company; (iii) an
entity organized directly or indirectly by persons who
immediately prior to the transaction were officers and
senior employees of the Company and who upon consummation of
the transaction will be officers and employees of the
Company and of the acquiring entity, will have
representation on the Board of Directors of the acquiring
entity and will own at least 10% of the voting shares of the
acquiring entity; (iv) an entity or entities that acquire
shares of the Company in a corporate reorganization or
restructuring that involves no substantial change in the
effective beneficial ownership or control of the Company;
(v) any one or more non-profit organizations designated by
the Board of Directors pursuant to this Section 12.2(v) at
least 12 months prior to the Change in Control; (vi) a
person or persons who at the time of or prior to the
transaction announce their intention to make no substantial
change in the composition of the Board; provided, however,
that if during the 24 months after a transaction referred to
in this clause (vi) of Section 12.2, individuals who at the
beginning of such period constituted the entire Board shall
cease for any reason to constitute a majority thereof unless
the election of each new director who was not a director at
the beginning of such period was approved by a vote of at
least two-thirds of the directors then still in office who
were directors at the beginning of the period, a Change in
Control shall be deemed to have occurred as of the date the
composition of the Board is so changed.
12.3 Limitation. In the event that any benefits to a
Participant under this Plan, either alone or together with
any other payments or benefits otherwise owed to the Par
ticipant by the Company or a Designated Subsidiary on or
after a Change in Control would, in the Company's good faith
opinion, be deemed under Section 280G of the Code, or any
successor provision, to be parachute payments, the benefits
under this Plan shall be reduced to the extent necessary in
the Company's good faith opinion so that no portion of the
benefits provided herein shall be considered excess
parachute payments under Section 280G of the Code or any
successor provision. The Company's good faith opinion shall
be conclusive and binding upon the Participants.
ARTICLE XIII
Termination or Amendment of the Plan
13.1 Termination or Amendment. Notwithstanding any
other provision of this Plan, the Board may at any time, and
from time to time, amend, in whole or in part, any or all of
the provisions of the Plan (including any amendment deemed
necessary to ensure that the Company may comply with any
regulatory requirement referred to in Article 15), or
suspend or terminate it entirely, retroactively or
otherwise; provided, however, that, unless otherwise
required by law, the rights of a Participant with respect to
Options or other Awards granted prior to such amendment,
suspension or termination, may not be impaired without the
consent of such Participant and, provided further, without
the approval of the holders of the Company's stock entitled
to vote, no amendment may be made which would (i) increase
the aggregate number of shares of Common Stock that may be
issued under this Plan (except by operation of Section 4.2);
(ii) change the definition of employees eligible to receive
Stock Awards under this Plan; (iii) decrease the option
price of any Stock Option to less than 100% of the Fair
Market Value on the date of grant for a Stock Option
intended to be an Incentive Stock Option or to less than 85%
of the Fair Market Value on the date of grant for a Stock
Option intended to be a Non-Qualified Stock Option; or (iv)
extend the maximum option period under Section 6.4 of the
Plan.
The Committee may amend the terms of any Stock
Option or other Award theretofore granted, prospectively or
retroactively, but, subject to Article IV above, no such
amendment or other action by the Committee shall impair the
rights of any holder without the holder's consent.
Notwithstanding the foregoing, if a Stock Option has been
Transferred in accordance with the Plan, written consent of
the Transferee (and not the Participant) shall be necessary
to impair the rights of the holder under the Stock Option.
The Committee may also substitute new Stock Options for
previously granted Stock Options having higher option
exercise prices than the new Stock Options being substituted
therefor.
ARTICLE XIV
Unfunded Plan
14.1 Unfunded Status of Plan. This Plan is intended to
constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments as to which a
Participant has a fixed and vested interest but which are
not yet made to a Participant by the Company, nothing
contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the
Company.
ARTICLE XV
General Provisions
15.1 Legend. The Committee may require each person
purchasing shares pursuant to a Stock Option or other Award
under the Plan to represent to and agree with the Company in
writing that the Participant is acquiring the shares without
a view to distribution thereof. In addition to any legend
required by this Plan, the certificates for such shares may
include any legend which the Committee deems appropriate to
reflect any restrictions on Transfer.
All certificates for shares of Common Stock
delivered under the Plan shall be subject to such stock
transfer orders and other restrictions as the Committee may
deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any
stock exchange upon which the Stock is then listed or any
national securities exchange system upon whose system the
Stock is then quoted, any applicable Federal or state
securities law, and any applicable corporate law, and the
Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such
restrictions.
15.2 Other Plans. Nothing contained in this Plan shall
prevent the Board from adopting other or additional
compensation arrangements, subject to shareholder approval
if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific
cases.
15.3 No Right to Employment. Neither this Plan nor the
grant of any Option or other Award hereunder shall give any
Participant or other employee any right with respect to
continuance of employment by the Company or any subsidiary,
nor shall they be a limitation in any way on the right of
the Company or any subsidiary by which an employee is
employed to terminate his employment at any time.
15.4 Withholding of Taxes. The Company shall have the
right to deduct from any payment to be made pursuant to this
Plan, or to otherwise require, prior to the issuance or
delivery of any shares of Common Stock or the payment of any
cash hereunder, payment by the Participant of, any Federal,
state or local taxes required by law to be withheld.
The Committee may permit any such withholding
obligation to be satisfied by reducing the number of shares
of Common Stock otherwise deliverable. A person required to
file reports under Section 16(a) of the Securities Exchange
Act of 1934 with respect to securities of the Company may
elect to have a sufficient number of shares of Common Stock
withheld to fulfill such tax obligations (hereinafter a
"Withholding Election") only if the election complies with
such conditions as are necessary to prevent the withholding
of such shares from being subject to Section 16(b) of the
Securities Exchange Act of 1934. To the extent necessary
under then current law, such conditions shall include the
following: (x) the Withholding Election shall be subject to
the disapproval of the Committee and (y) the Withholding
Election is made (i) during the period beginning on the
third business day following the date of release for
publication of the quarterly or annual summary statements of
sales and earnings of the Company and ending on the twelfth
business day following such date, (ii) six months before the
Stock Award becomes taxable, or (iii) during any other
period in which a Withholding Election may be made under the
provisions of Rule 16b-3 promulgated pursuant to the Act.
Any fraction of a share of Common Stock required to satisfy
such tax obligations shall be disregarded and the amount due
shall be paid instead in cash by the Participant.
Notwithstanding the foregoing, if Stock Options
have been Transferred, the Participant shall provide the
Company with funds sufficient to pay such tax withholding
when such withholding is due. Furthermore, if such
Participant does not satisfy the applicable tax withholding
obligation, the Transferee may provide the funds sufficient
to enable the Company to pay the tax withholding. However,
if Stock Options have been Transferred, the Company shall
have no right to retain or sell without notice, or to demand
surrender from the Transferee of, shares of Common Stock in
order to pay such tax withholding.
15.5 No Assignment of Benefits. No Option, Award or
other benefit payable under this Plan shall, except as
otherwise specifically provided by law or by the Plan, be
Transferable in any manner, and any attempt to Transfer any
such benefit shall be void, and any such benefit shall not
in any manner be liable for or subject to the debts,
contracts, liabilities, engagements or torts of any person
who shall be entitled to such benefit, nor shall it be
subject to attachment or legal process for or against such
person.
15.6 Listing and Other Conditions.
(a) As long as the Common Stock is listed on a national
securities exchange or system sponsored by a national
securities association, the issue of any shares of Common
Stock pursuant to an Option or other Award shall be
conditioned upon such shares being listed on such exchange
or system. The Company shall have no obligation to issue
such shares unless and until such shares are so listed, and
the right to exercise any Option or other Award with respect
to such shares shall be suspended until such listing has
been effected.
(b) If at any time counsel to the Company shall be of the
opinion that any sale or delivery of shares of Common Stock
pursuant to an Option or other Award is or may in the
circumstances be unlawful or result in the imposition of
excise taxes under the statutes, rules or regulations of any
applicable jurisdiction, the Company shall have no
obligation to make such sale or delivery, or to make any
application or to effect or to maintain any qualification or
registration under the Securities Act of 1933, as amended,
or otherwise with respect to shares of Common Stock or
Awards, and the right to exercise any Option or other Award
shall be suspended until, in the opinion of said counsel,
such sale or delivery shall be lawful or will not result in
the imposition of excise taxes.
(c) Upon termination of any period of suspension under this
Section 15.6, any Award affected by such suspension which
shall not then have expired or terminated shall be
reinstated as to all shares available before such suspension
and as to shares which would otherwise have become available
during the period of such suspension, but no such suspension
shall extend the term of any Option.
15.7 Governing Law. This Plan and actions taken in
connection herewith shall be governed and construed in
accordance with the laws of the State of New York
(regardless of the law that might otherwise govern under
applicable New York principles of conflict of laws).
15.8 Construction. Wherever any words are used in this
Plan in the masculine gender they shall be construed as
though they were also used in the feminine gender in all
cases where they would so apply, and wherever any words are
used herein in the singular form they shall be construed as
though they were also used in the plural form in all cases
where they would so apply.
15.9 Liability. No member of the Board, no employee of
the Company and no member of the Committee (nor the
Committee itself) shall be liable for any act or action
hereunder, whether of omission or commission, by any other
member or employee or by any agent to whom duties in
connection with the administration of the Plan have been
delegated or, except in circumstances involving his bad
faith, gross negligence or fraud, for anything done or
omitted to be done by himself.
15.10 Other Benefits. No Award payment under this
Plan shall be deemed compensation for purposes of computing
benefits under any retirement plan of the Company or its
subsidiaries nor affect any benefits under any other benefit
plan now or subsequently in effect under which the
availability or amount of benefits is related to the level
of compensation.
15.11 Costs. The Company shall bear all expenses
incurred in administering this Plan, including expenses of
issuing Common Stock pursuant to any Awards hereunder.
15.12 No Right to Same Benefits. The provisions of
Awards need not be the same with respect to each
Participant, and such Awards to individual Participants need
not be the same in subsequent years.
ARTICLE XVI
Effective Date of Plan
The Plan shall become effective upon the date specified
by the Board in its resolution adopting the Plan, subject to
the approval of the Plan by the holders of a majority of the
capital stock of the Company entitled to vote thereon within
one year after the Plan is adopted. Any grants of Awards
hereunder prior to such approval shall be effective when
made (unless otherwise specified by the Committee at the
time of grant), but shall be conditioned on, and subject to,
such approval of the Plan by shareholders.
ARTICLE XVII
Term of Plan
No Stock Option, Stock Appreciation Right, Restricted
Stock, Performance Shares, Performance Unit or Other Stock-
Based Award shall be granted pursuant to the Plan on or
after the tenth anniversary of the earlier of the date the
Plan is adopted or the date of shareholder approval but
Awards granted prior to such tenth anniversary may extend
beyond that date.
ARTICLE XVIII
Name of Plan
This Plan shall be known as "The Reader's Digest
Association, Inc. 1994 Key Employee Long Term Incentive
Plan."
ARTICLE XIX
Election to Receive Awards in Lieu of Other Compensation
The Committee, in its sole discretion, may permit a
Participant to elect pursuant to this Plan, on such terms
and conditions as shall be approved by the Committee, to
receive an Award under this Plan in lieu of receiving
payment of other compensation, under this Plan or otherwise,
from the Company or any Designated Subsidiary. The
Committee shall have sole discretion to consent to or
disapprove any such election by any Participant. The grant
of Awards pursuant to such election shall be subject to the
provisions and limitations of this Plan and applicable law.
Exhibit 10.19
CONFORMED COPY
THIRD AMENDMENT dated as of September 2, 1999 (this
"Amendment"), among THE READER'S DIGEST ASSOCIATION, INC., a
Delaware corporation (the "Company"), the BORROWING
SUBSIDIARIES party to the Credit Agreement referred to below
("Borrowing Subsidiaries"), the undersigned financial
institutions party to the Credit Agreement (the "Lenders"),
THE CHASE MANHATTAN BANK, as administrative agent for the
Lenders (in such capacity, the "Administrative Agent") and
J.P. Morgan Securities Inc., as syndication agent (in such
capacity, the "Syndication Agent").
A. Reference is made to the Credit Agreement
dated as of November 12, 1996, as amended on September 17,
1997 and June 2, 1998 (the "Credit Agreement") among the
Company, the Borrowing Subsidiaries, the Lenders, the
Administrative Agent and the Syndication Agent. Capitalized
terms used but not otherwise defined herein have the
meanings assigned to them in the Credit Agreement.
B. The Company has requested that the Lenders
amend certain provisions of the Credit Agreement. The
Lenders are willing to do so, subject to the terms and
conditions of this Amendment.
Accordingly, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1.01. Amendment to Section 1.01.
Section 1.01 of the Credit Agreement is hereby amended by:
(a) amending the definition of "Material Subsidiary" to read
as follows:
"'Material Subsidiary' means each Borrowing Subsidiary and
each other Subsidiary other than Subsidiaries that, (a)
individually do not account for more than (i) 3% of the
assets or (ii) 3% of the revenues and (b) in the aggregate
do not account for more than (i) 10% of the assets or (ii)
10% of the revenues, in each case, at the end of or for the
four fiscal quarters most recently ended, of the Company and
its Subsidiaries on a consolidated basis.";
(b) deleting the definition of "Consolidated Tangible Net
Worth" in its entirety;
(c) inserting in appropriate alphabetical order the
following definitions (which shall apply as of the Effective
Date (as defined in Section 3 herein)):
(i) "'Consolidated Assets' means, at any time, all assets of
the Company and its consolidated Subsidiaries at such date,
as determined on a consolidated basis in accordance with
GAAP."
(ii) "'Consolidated Net Worth' means, at any time, the
consolidated stockholders' equity of the Borrower and its
consolidated Subsidiaries, as determined on a consolidated
basis in accordance with GAAP consistently applied."
(iii) "'Total Debt' means, at any date, all Debt of the
Company and its consolidated Subsidiaries at such date to
the extent such Debt should be reflected on a consolidated
balance sheet of the Company at such date in accordance with
GAAP."
SECTION 1.02. Amendment to Section 5.01(c).
Section 5.01(c) of the Credit Agreement is hereby amended by
(i) deleting the "and" immediately before the "(iii)"
therein and replacing it with a "," and (ii) adding the
following immediately prior to the ";" at the end of such
section:
"and (iv) setting forth the amounts, if any, expended to
repurchase shares of the Company's capital stock in such
quarter or year, as applicable".
SECTION 1.03. Amendment to Section 6.01(m).
Section 6.01(m) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"(m) any Liens securing Debt or any other monetary
obligation if, immediately after the incurrence thereof, all
amounts of Debt and other monetary obligations secured by
Liens which would not be permitted but for this clause (m),
when aggregated with the aggregate book value or sale price
of the assets sold in sale and leaseback transactions
permitted pursuant to Section 6.02 and the amount of
Subsidiary Debt permitted pursuant to Section 6.06(e), do
not, in the aggregate, exceed 7.5% of Consolidated Assets at
the last fiscal quarter end for which financial statements
have been delivered."
SECTION 1.04. Amendments to Section 6.02 Section
6.02 of the Credit Agreement is hereby amended by replacing
the following language found therein:
"does not exceed 15% of Consolidated Tangible Net Worth as
shown on the most recent audited consolidated balance sheet
of the Company and its Subsidiaries delivered pursuant to
Section 5.01(a) or (b)."
with the following language:
"does not exceed 7.5% of Consolidated Assets at the last
fiscal quarter end for which financial statements have been
delivered."
SECTION 1.05. Amendment to Section 6.06(e).
Section 6.06(e) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"(e) other Debt and preferred stock, which would not be
permitted but for this clause (e), in an aggregate principal
amount outstanding at any time for all Subsidiaries that,
when aggregated with the amount of debt secured by Liens
permitted pursuant to Section 6.01(m) and the aggregate book
value or sale price of the assets sold in sale and leaseback
transactions permitted pursuant to Section 6.02 (but not
including the sale and leaseback transaction described in
the last sentence of Section 6.02) does not exceed 7.5% of
Consolidated Assets at the last fiscal quarter end for which
financial statements have been delivered."
SECTION 1.06. Amendment to Section 6.07. Section
6.07 is hereby amended in its entirety to read as follows:
"Section 6.07. Consolidated Net Worth. The Company will
not permit Consolidated Net Worth at any time to be less
than (a) $300,000,000 plus (b) 50% of net income accrued for
each fiscal quarter ended after June 30, 1999, excluding any
quarter for which net income is negative, provided however,
that to the extent the Company repurchases its capital
stock, the $300,000,000 referred to above will be reduced by
the lower of (i) the amount of consideration paid to effect
such repurchases and (ii) $50,000,000."
SECTION 1.07. Amendment to Article 6. Article 6
of the Credit Agreement is hereby amended by adding Section
6.08, which shall read as follows:
"Section 6.08. Leverage Ratio. The Company will not permit
the ratio at any time of (a) Total Debt at such time to (b)
EBITDA for the most recent period of four consecutive fiscal
quarters of the Company ended at or prior to such time to
exceed 2.5 to 1.0."
SECTION 2. Representations, Warranties and
Agreements. The Company, as to itself and each of its
Subsidiaries, and each Borrowing Subsidiary, as to itself,
hereby represents and warrants to and agrees with each
Lender, the Administrative Agent and the Syndication Agent
that:
(a) The representations and warranties set forth in
Article IV of the Credit Agreement, as amended hereby, are
true and correct in all material respects on and as of the
date hereof with the same effect as if made on and as of
such date, except to the extent such representations and
warranties expressly relate to an earlier date.
(b) The execution and delivery of this Amendment and
the performance by the Company and each Borrowing Subsidiary
of the Credit Agreement, as amended by this Amendment,
(i) have been duly authorized by all requisite action and
(ii) will not (I) violate (x) any provision of law, statute,
rule or regulation, or of the certificate of incorporation,
by-laws or other constitutive documents of the Company or
any of its Subsidiaries, (y) any order of any Governmental
Authority or (z) any provision of any indenture, any
agreement for borrowed money, or any other material
agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them or any of
their property is or may be bound, (II) be in conflict with,
result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any such indenture,
agreement for borrowed money or other material agreement or
instrument or (III) result in the creation or imposition of
any Lien upon or with respect to any property or assets now
owned or hereafter acquired by the Company or any of its
Subsidiaries.
(c) This Amendment has been duly executed and
delivered by the Company. Each of this Amendment and the
Credit Agreement as amended hereby constitutes a legal,
valid and binding obligation of the Company and each
Borrowing Subsidiary, enforceable against the Company and
each Borrowing Subsidiary in accordance with its terms,
except as enforceability may be limited by (i) any
applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) general principles of
equity.
(d) As of the Effective Date, after giving effect to
this Amendment, no Event of Default or Default has occurred
and is continuing.
SECTION 3. Conditions to Effectiveness. This
Amendment shall become effective as of the date first above
written (the "Effective Date") upon satisfaction of the
following conditions:
(a) The Administrative Agent shall have received duly
executed counterparts hereof which, when taken together,
bear the authorized signatures of the Company and the
Required Lenders.
(b) The Administrative Agent shall have received such
other documents, instruments, certificates and opinions as
it or its counsel shall have reasonably requested.
SECTION 4. Credit Agreement. Except as
specifically stated herein, the Credit Agreement shall
continue in full force and effect in accordance with the
provisions thereof. As used therein, the terms "Agreement",
"herein", "hereunder", "hereto", "hereof" and words similar
import shall, unless the context otherwise requires, refer
to the Credit Agreement as modified hereby.
SECTION 5. Applicable Law. THIS AMENDMENT SHALL
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK.
SECTION 6. Counterparts. This Amendment may be
executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an
original but all of which, when taken together, shall
constitute a single instrument. Delivery of an executed
counterpart of a signature page of this Amendment by
telecopy shall be effective as delivery of a manually
executed counterpart of this Amendment.
SECTION 7. Expenses. The Company agrees to (a)
pay all fees separately agreed to between the Company and
the Administrative Agent relating to this Amendment and (b)
reimburse the Administrative Agent for its reasonable and
customary out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the
Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be duly
executed by their respective
authorized officers as of the
date first above written.
THE READER'S DIGEST ASSOCIATION, INC.,
by
/S/ Bonnie Mark Monahan
Name: Bonnie Mark Monahan
Title: Vice President and Treasurer
THE CHASE MANHATTAN BANK, individually and as Administrative
Agent,
by
/s/ Carol A. Ulmer
Name: Carol A. Ulmer
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
by
/s/ Sovonna L. Day
Name: Sovonna L. Day
Title: Vice President
BARCLAYS BANK PLC,
by
/s/ Terance Bullock
Name: Terance Bullock
Title: Vice PresidentK, N.A
by
/s/ Stuart G. Miller
Name: Stuart G. Miller
Title: Vice President
COMMERZBANK AG, New York and/or Grand Cayman Branches,
by
/s/ Sean M. Harrigan
Name: Sean M. Harrigan
Title: Senior Vice President
by
/s/ Andrew Lusk
Name: Andrew Lusk
Title: Assistant Treasurer
MELLON BANK, N.A.,
by
/s/ Alexander M. Gordon
Name: Alexander M. Gordon
Title: Lending Officer
SANPAOLO IMI S.p.A.,
by
/s/ C. Persico
Name: C. Persico
Title: D.G.M.
by
/s/ Robert R. Gaynor
Name: Robert R. Gaynor
Title: Vice President
NATIONAL WESTMINSTER BANK PLC, NEW YORK BRANCH
by
/s/ Maria Amaral-LeBlanc
Name: Maria Amaral-LeBlanc
Title: Vice President
NATIONAL WESTMINSTER BANK PLC, NASSAU BRANCH,
by
/s/ Maria Amaral-LeBlanc
Name: Maria Amaral-LeBlanc
Title: Vice President
THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH,
by
/s/ John C. Kissinger
Name: John C. Kissinger
Title: General Manager
SVENSKA HANDELSBANKEN,
by
/s/ H.N. Bacon
Name: H.N. Bacon
Title: Vice President
by
/s/ Geoffrey Walker
Name: Geoffrey Walker
Title: Senior VicePresident
BANQUE NATIONALE DE PARIS,
by
Name:
Title:
BANQUE NATIONALE DE PARIS,
by
Name:
Title:
UBS AG, STAMFORD BRANCH,
by
/s/ Robert H. Riley III
Name: Robert H. Riley III
Title: Executive Director
by
/s/ Wilfred Saint
Name: Wilfred Saint
Title: Associate DirectorLoan Portfolio Support, US
ABN AMRO BANK N.V.,
by
/s/ Thomas T. Rogers
Name: Thomas T. Rogers
Title: Vice President
by
/s/ Ann Schwalbengerg
Name: Ann Schwalbengerg
Title: Vice President
THE FUJI BANK, LIMITED, NEW YORK BRANCH,
by
/s/ Raymond Ventura
Name: Raymond Ventura
Title: Vice President & Manager
ING BANK N.V.,
by
/s/ M. Radelaar
Name: M. Radelaar
Title: Senior Relationship Manager
CIBC INC.,
by
/s/ Laura Horn
Name: Laura Horn
Title: Executive Director CIBC World Markets
Corp. As Agent
Guarantor
THE READER'S DIGEST ASSOCIATION, INC.,
by
/s/ Bonnie Mark Monahan
Name: Bonnie Mark Monahan
Title: Vice President and Treasurer
J. P. MORGAN SECURITIES INC., as Syndication Agent,
by
/s/ Joseph E. Tyler, III
Name: Joseph E. Tyler III
Title: Vice Preisdent
Exhibit 10.27
THE READER'S ASSOCIATION, INC.
SENIOR MANAGEMENT INCENTIVE PLAN
ARTICLE I
Purpose of the Plan
1.1 The purpose of the Senior Management Incentive Plan
(the "Plan") of The Reader's Digest Association, Inc. (the
"Company") is to advance the interests of the Company by
providing executive officers and other key employees of the
Company and its designated Subsidiaries (defined below) with
additional incentive to promote the success of the business and
to increase their vested interest in the success of the business
and to increase their vested interest in the success of the
Company, and to encourage them to remain employees, through the
making of certain incentive cash bonus awards ("awards") linked
to performance goals.
ARTICLE II
Administration of the Plan
2.1 The Plan shall be administered and interpreted by a
committee (the "Committee") appointed from time to time by the
Board of Directors of the Company (the "Board") and consisting of
three or more Directors. Members of the Committee shall not be
eligible to participate in the Plan.
2.2 The Committee shall have full authority to make or
withhold awards, to construe and interpret the terms and
provisions of the Plan and any award made hereunder, to adopt,
alter and repeal such administrative rules, guidelines and
practices governing this Plan and perform all acts, including the
delegation of its administrative responsibilities, as it shall,
from time to time, deem advisable, and to otherwise supervise the
administration of this Plan.
2.3 The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan, or in any
award made hereunder, in the manner and to the extent it shall
deem necessary to carry the Plan into effect.
2.4 Any decision, interpretation or other action made or
taken in good faith by or at the direction of the Board or the
Committee arising out of or in connection with the Plan shall be
within the absolute discretion of all and each of them, as the
case may be, and shall be final, binding and conclusive on the
Company and all employees and Participants and their respective
heirs, executors, administrators, successors and assigns.
2.5 No member of the Board, no employee of the Company
and no member of the Committee (nor the Committee itself) shall
be liable for any act or action hereunder, whether of omission or
commission, by any other member or employee or by any agent to
whom duties in connection with the administration of the Plan
have been delegated or, except in circumstances involving his bad
faith, gross negligence or fraud, for anything done or omitted to
be done by himself. The Company or the Committee may consult
with legal counsel, who may be counsel for the Company or other
counsel, with respect to its obligations or duties hereunder, or
with respect to any action or proceeding or any question of law,
and shall not be liable with respect to any action taken or
omitted by it in good faith pursuant to the advice of such
counsel.
2.6 For purposes of this Plan, "designated Subsidiaries"
shall mean such subsidiaries of the Company, 80 percent or more
of the voting capital stock of which is owned, directly or
indirectly, by the Company, which are designated from time to
time by the Committee.
ARTICLE III
Eligibility
3.1 Eligible employees include employees of the Company
and the designated Subsidiaries who are executive officers and
other key employees. "Participants" shall mean all such eligible
employees designated by the Committee.
3.2 A Participant who ceases to be employed by the
Company or a designated Subsidiary by reason of:
(i) transfer at the Company's request to an Affiliate (as
defined in Section 414 of the Internal Revenue Code of 1986, as
amended);
(ii) death;
(iii) disability (as defined under the terms of The
Reader's Digest Association, Inc. Long Term Disability Plan); or
(iv) "early" or "normal" retirement (as defined under the
terms of The Reader's Digest Association, Inc. Retirement Plan)
(in each case, whether or not such Participant is covered by such
plan);
shall be eligible for an award (or portion thereof) for the
fiscal year in which the transfer, death or disability occurs,
only if and to the extent the goals described in Article IV have
been met and the Committee shall decide in its sole discretion;
provided, however, that the award will be for the portion of the
year the Participant was employed determined by multiplying the
final award by a fraction the numerator or which is the number of
months the Participant is employed and the denominator of which
is the number of months in the applicable performance cycle.
3.3 A Participant who ceases to be employed by the
Company or a designated Subsidiary for any reason other than
those enumerated in Section 3.2 above, shall not be eligible for
an award in respect of the fiscal year in which such termination
of employment by the Company or a designated Subsidiary occurs.
For the purposes of this Section, it shall not be considered a
termination of employment when a Participant is transferred from
the Company or a designated Subsidiary to another designated
Subsidiary or to the Company or to any affiliate as defined in
Section 414 of the Internal Revenue Code of 1986, as amended.
ARTICLE IV
Awards Under the Plan
4.1 For each fiscal year, the Committee shall establish a
performance threshold based on one or more of the performance
goals set forth in Section 4.3 which must be attained in order
for any awards to be paid.
4.2 For each fiscal year, the Committee shall establish
individual incentive targets for awards under the Plan and shall
establish performance goals relating to (a) financial performance
based on one or more of the performance goals set forth in
Section 4.3, and (b) individual performance during that fiscal
year.
4.3 For purposes of Sections 4.1 and 4.2, the performance
goals shall be based on any one or more of the following business
criteria relating to the Company or any subsidiary, division or
other unit of the Company: revenue, net income, net income per
share, operating income, earnings per share, cash flow, EBITDA,
total shareholder return, total shareholder return relative to
peers, financial returns (including without limitation, return on
assets, return on equity and return on investment), cost
reduction targets, customer satisfaction, customer growth and
employee satisfaction. The formula for any such award may
include or exclude items to measure the specific objectives, such
as losses from discontinued operations, extraordinary gains and
losses, the cumulative effect of accounting changes, acquisitions
or divestitures, core process redesigns, structural
changes/outsourcing, foreign exchange impacts and any unusual,
nonrecurring gain or loss.
4.4 For each fiscal year, the Committee shall establish a
formula for funding an incentive pool consisting of the maximum
aggregate awards that would be available to all Participants
under the Plan pursuant to the individual award targets.
4.5 No later than 90 days after the commencement of the
fiscal year, the Committee shall establish the individual awards
targets (by grade level) and performance goals pursuant to
Sections 4.1, 4.2, and 4.3 and shall, in its discretion, approve
an incentive pool based on the funding formula pursuant to
Section 4.2.
4.6 Promptly after the end of a fiscal year, the
Committee shall determine the extent to which performance goals
for that fiscal year have been achieved and shall determine the
allocation of individual awards to Participants, with the amount
based on Section 4.2(a) above; provided that 50% of such amount
may be reduced by the Committee in its discretion based on
Section 4.2(b).
4.7 The Committee shall review and, in its discretion,
shall certify the achievement of the applicable financial
performance goals and the individual performance goals of each
executive officer of the Company who is a Participant.
4.8 The Committee may, but need not, pay out the full
amount of the incentive pool for any fiscal year. Any reduction
of any award to an executive officer will not result in an
increase in the amount payable to another executive officer.
4.9 Each award made under the Plan shall be paid or
allocated as soon as practicable after the close of the fiscal
year, except as provided in Article V and unless otherwise
determined by the Committee. The Committee, in its sole
discretion, may permit a Participant to defer payment of his
award under The Reader's Digest Association, Inc. Deferred
Compensation Plan, as such plan may be modified from time to
time, or any other plan applicable to the Participant.
4.10 In the event of the death of a Participant after the
making of the award but prior to the payment of his award
hereunder, payment shall be made to such beneficiary or
beneficiaries as the Participant shall have previously designated
in writing. Such designation shall not be effective unless filed
with the Company. If there is no effective designation of a
beneficiary at the time of the Participant's death, or in the
event that the designated person or persons shall predecease such
Participant, any such award payable shall be made to the
Participant's estate or legal representative.
4.11 The amount paid to any employee with respect to any
award shall not exceed $2,500,000.
ARTICLE V
Amendment or Termination of the Plan
5.1 Notwithstanding any other provision of this Plan, the
Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or
terminate it entirely, retroactively or otherwise; provided,
however, that any such amendment, suspension or termination may
not, without the Participant's consent, adversely affect any of
the awards theretofore made to him under the Plan.
ARTICLE VI
Miscellaneous
6.1 No person shall have any claim or right to be made an
award under the Plan, and neither this Plan, the establishment of
any goals or standards nor the making of an award under this Plan
shall give any Participant or other employee any right with
respect to continuance of employment by the Company or any
subsidiary, nor shall there be a limitation in any way on the
right of the Company or any subsidiary by which an employee is
employed to terminate his employment at any time.
6.2 Except by will or the laws of descent and
distribution, no right or interest in any award made under this
Plan shall be assignable or transferable, and no right or
interest of any Participant hereunder shall be subject to any
lien, obligation or liability of such Participant.
6.3 The Company will bear all expenses incurred in
administering this Plan.
6.4 This Plan and the obligations of the Company
hereunder shall be subject to all applicable Federal and state
laws, rules and regulations and to such approvals by any
governmental or regulatory agency as may from time to time be
required. The Board may make such changes in this Plan as may be
necessary or desirable, in the opinion of the Board, to comply
with the laws, rules and regulations of any governmental or
regulatory authority, or to be eligible for tax benefits under
the Code, or any other laws or regulations of any Federal, state,
local or foreign government.
6.5 The Company shall have the right to deduct from any
payment to be made pursuant to this Plan, or to otherwise require
prior to the payment of any amount hereunder, payment by the
Participant of, any Federal, state or local taxes required by law
to be withheld.
6.6 No assets shall be segregated or earmarked in respect
of any award hereunder and no Participant shall have any right to
assign, transfer, pledge or hypothecate his interest, or any
portion thereof, in his award. The Plan and the making of awards
hereunder shall not constitute a trust.
6.7 This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of
the State of New York (regardless of the law that might otherwise
govern under applicable New York principles of conflict of laws).
6.8 Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so
apply, and wherever any words are used herein in the singular
form they shall be construed as though they were also used in the
plural form in all cases where they would so apply. The titles
to Articles of this Plan are intended solely as a convenience and
shall not be used as an aid in construction of any provisions
thereof.
6.9 This Plan shall be known as "The Reader's Digest
Association, Inc. Senior Management Incentive Plan."
6.10 The material terms consisting of the business
criteria, maximum amount, and eligible employees shall be subject
to the approval of the stockholders before payments may be made.
Exhibit 10.28
STOCK PURCHASE AGREEMENT
by and among
THE READER'S DIGEST ASSOCIATION, INC.,
BOOKS ARE FUN, LTD.
and
THE OTHER PARTIES LISTED HEREIN
AUGUST 25, 1999
TABLE OF CONTENTS
Page
ARTICLE I PURCHASE AND SALE 2
1.1 Definitions 2
1.2 Purchase and Sale 9
1.3 Purchase Price 10
1.4 Closing 10
1.5 Delivery of Securities; Payment 11
1.6 Payment of Indebtedness; Closing Working
Capital 12
1.7 Adjustment 13
1.8 Current Taxes Payable Adjustment 14
1.9 Withholding Calculation Procedures 15
1.10 Payments to Occur Immediately Prior to
Closing 15
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE
SELLERS 16
2.1 Ownership of Stock 16
2.2 Authority of Seller 16
2.3 No Violation 16
2.4 Consents and Approvals 16
2.5 Equityholders' Agreement 17
2.6 Amounts Payable 17
2.7 Brokers', Finders' Fees, etc. 17
2.8 Affiliate Contracts 18
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF THE
COMPANY 18
3.1 Corporate Organization 18
3.2 Authorization 18
3.3 Capitalization 19
3.4 Subsidiaries 20
3.5 No Violation 20
3.6 Consents and Approvals of Governmental
Authorities 20
3.7 Financial Statements and Statistics of the
Company 20
3.8 Absence of Undisclosed Liabilities 21
3.9 Absence of Certain Changes 21
3.10 Title to Properties; Encumbrances 23
3.11 Patents, Trademarks, Trade Names 24
3.12 Material Contracts 24
3.13 Litigation 25
3.14 Compliance with Laws 26
3.15 Taxes 26
3.16 Benefit Plans 27
3.17 Labor Disagreements 29
3.18 Environmental Matters 29
3.19 Brokers', Finders' Fees, etc. 30
3.20 Affiliate Transactions 31
3.21 Indebtedness 31
3.22 Insurance 31
3.23 Vendors; Warehouses 31
3.24 Year 2000 Compliance 32
3.25 Certain Other Matters 32
3.26 Fractional Interests 32
3.27 Schedules 33
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER 33
4.1 Corporate Organization 33
4.2 Authorization 33
4.3 No Violation 33
4.4 Consents and Approvals of Governmental
Authorities 34
4.5 Sophisticated Investor 34
4.6 Other Investment Representations 34
4.7 Brokers', Finders' Fees, etc. 34
4.8 Ability to Pay 35
ARTICLE V CONDUCT OF BUSINESS PENDING CLOSING 35
5.1 Regular Course of Business 35
5.2 Amendments 35
5.3 Capital Changes 35
5.4 Organization 36
5.5 Contracts 36
5.6 Compensation 36
5.7 Representations 36
5.8 Taxes 36
ARTICLE VI ADDITIONAL AGREEMENTS 37
6.1 Additional Covenants 37
6.2 Reasonable Access 37
6.3 Confidentiality 38
6.4 Amendment of Charter Documents; Insurance 38
6.5 Employee Matters 38
6.6 Operating Facilities 39
6.7 No Solicitation 39
6.8 Termination of Discussions 39
6.9 Notice of Certain Matters 39
6.10 Unaudited Financial Statements 40
6.11 Stock Options and Warrants 40
6.12 Equityholders' Agreement 40
ARTICLE VIICONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS 41
7.1 Representations and Warranties 41
7.2 Performance 41
7.3 Approvals and Filings 41
7.4 Third Party Consents 41
7.5 Material Adverse Effect 42
7.6 No Injunction 42
7.7 Opinion of Counsel 42
7.8 Indebtedness 42
7.9 [INTENTIONALLY DELETED] 42
7.10 Non-Competition/Non-Solicitation Agreements 42
7.11 Guarantee of Obligations 42
7.12 Assumption of Professional Fees Agreements 42
ARTICLE VIII CONDITIONS PRECEDENT TO THE SELLERS'OBLIGATIONS 43
8.1 Representations and Warranties 43
8.2 Performance 43
8.3 Approvals and Filings 43
8.4 No Injunction 43
8.5 Opinion of Counsel 43
ARTICLE IX TERMINATION AND ABANDONMENT 44
9.1 Methods of Termination 44
9.2 Procedure upon Termination 44
ARTICLE X INDEMNIFICATION 45
10.1 Survival 45
10.2 Indemnification by the Buyer Indemnitors
and the Sellers 46
10.3 Indemnification by Buyer 47
10.4 Indemnification Procedures 47
10.5 Nature of Other Liabilities 49
10.6 Certain Limitations on Remedies 49
10.7 Amount of Losses 50
10.8 Subrogation 50
ARTICLE XI SELLERS' REPRESENTATIVES; RELEASE 51
11.1 Acknowledgment of Appointment of Sellers'
Representatives 51
11.2 Release 51
ARTICLE XIICERTAIN TAX MATTERS 52
12.1 Tax Indemnity by Buyer Indemnitors 52
12.2 Tax Indemnity by the Buyer 53
12.3 Straddle Periods; Apportionment of Taxes 53
12.4 Filing and Payment Responsibility 54
12.5 Cooperation; Exchange of Information; Tax
Proceedings 56
12.6 Tax Returns Available 58
12.7 Refunds 58
12.8 Adjustments 59
12.9 Survival 59
12.10 Setoff 59
12.11 General Tax Amount 59
ARTICLE XIII MISCELLANEOUS PROVISIONS 60
13.1 Amendment and Modification 60
13.2 Waiver of Compliance 60
13.3 Notices 60
13.4 Binding Nature; Assignment 60
13.5 Entire Agreement 61
13.6 Disclaimer of Implied Warranties 61
13.7 Severability 61
13.8 Expenses 61
13.9 Press Releases and Announcements 61
13.10 Governing Law 62
13.11 Counterparts 62
13.12 Headings 62
13.13 Interpretation; Absence of Presumption 62
Exhibit A - Stockholders
Exhibit B - Warrantholders
Exhibit C - Other Parties
Exhibit D - Optionholders
Exhibit E - Form of Opinion of Sellers' Counsel
Exhibit F - Form of Non-Competition/Non-Solicitation Agreement
Exhibit G - Form of Joinder
Exhibit H - Term Sheet for Incentive Plan
Exhibit I - Form of Guarantee
Exhibit J - Form of Assumption Agreement
Exhibit K - Allocation of Purchase Price
Exhibit L - Form of Opinion of Buyer's Counsel
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with the schedules,
exhibits and annexes hereto, the "Agreement") is made and entered
into as of the 25th day of August 1999, by and among the persons
listed on Exhibit A hereto (collectively, the "Stockholders";
each individually, a "Stockholder"), the persons listed on
Exhibit B hereto (collectively, the "Warrantholders"; each
individually, a "Warrantholder"), the persons listed on Exhibit C
hereto (collectively, the "Other Parties"; each individually, an
"Other Party"; and the Stockholders, Warrantholders and Other
Parties, collectively, the "Sellers"), Books Are Fun, Ltd., an
Iowa corporation (the "Company"), and The Reader's Digest
Association, Inc., a Delaware corporation (the "Buyer").
RECITALS
A. The Stockholders are the owners of all of the issued and
outstanding shares of the common stock, par value $.0l per share,
of the Company (the "Common Stock") and all of the issued and
outstanding shares of the Participating Preferred Stock, par
value $0.01 per share, of the Company (the "Preferred Stock");
and
B. The Warrantholders are the owners of all issued and
outstanding Warrants, and the Other Parties and the other
Optionholders (as defined below) are the owners of all of the
issued and outstanding Stock Options; and
C. On the terms and subject to the conditions contained herein,
the Stockholders desire to sell and the Buyer desires to purchase
all of the Stockholders' rights, title and interests in and to
the number of shares of Common Stock and Preferred Stock set
forth opposite their respective names on Exhibit A hereto (the
"Stock"); and
D. On the terms and subject to the conditions contained herein,
the Warrantholders desire to sell and the Buyer desires to
purchase all of the Warrantholders' rights, title and interests
in and to the Warrants set forth opposite their respective names
on Exhibit B hereto, to the extent that such Warrants are
outstanding and unexercised as of the Closing; and
E. On the terms and subject to the conditions contained herein,
the Other Parties desire that the Stock Options set forth
opposite their respective names on Exhibit C hereto shall be
cancelled immediately prior to the Closing in exchange for the
payments provided hereunder, to the extent that such Stock
Options are outstanding and unexercised as of such time; and
F. On the terms and subject to the conditions contained herein,
the Stock Options set forth opposite the names of individuals
holding Options on Exhibit D hereto (each such individual, other
than any Other Party, an "Optionholder" and collectively, the
"Optionholders") shall be cancelled immediately prior to the
Closing in exchange for the payments provided hereunder (which is
inclusive of the payments made in accordance with Exhibit C, and
the Other Parties listed on both such Exhibits shall be entitled
to payment in accordance with Exhibit C), to the extent that such
Stock Options are outstanding and unexercised as of such time.
NOW THEREFORE, in consideration of the premises and of the
mutual representations, warranties and covenants which are to be
made and performed by the respective parties, it is agreed as
follows:
ARTICLE I
PURCHASE AND SALE
1.
1.1. Definitions. The following terms when used in this
Agreement have the meanings set forth below:
(a) "Accounting Firm" has the meaning set forth in Section
1.7(a).
(b) "Acquisition Proposal" has the meaning set forth in
Section 6.7.
(c) "Affiliate" means any Person controlling, controlled by
or under common control with another Person and, if such a Person
is an individual, any member of the immediate family (including
parents, spouse and children) of such individual and any trust
whose principal beneficiary is such individual or one or more
members of such immediate family and any person who is controlled
by any such member or trust; provided that, with respect to EGI-
BAF Investors, L.L.C. and EGI-BAF Investors II, L.L.C.,
"Affiliate" means any Person of which Sam Zell and/or members of
his family and/or trusts for his or their benefit hold at least
50.1% of the equity interests. As used in this definition,
"control" (including, with correlative meanings, "controlling,"
"controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause
the direction of management or policies (whether through
ownership of securities or partnership or other ownership
interests, by contract or otherwise).
(d) "Affiliated Group" means an affiliated group as defined
in Section 1504 of the Code (or any analogous combined,
consolidated or unitary group defined under state, local or
foreign income Tax law) of which the Company is or has been a
member.
(e) "Agreement" has the meaning set forth in the Preamble.
(f) "Approved Sale" has the meaning set forth in Section
2.5(a).
(g) "Benefit Plans" has the meaning set forth in Section
3.16(a).
(h) "Buyer" has the meaning set forth in the Preamble.
(i) "Buyer Indemnified Parties" has the meaning set forth
in Section 10.2(a).
(j) "Buyer Indemnitors" means each of Earl Kaplan, EGI-BAF
Investors, L.L.C. and EGI-BAF Investors II, L.L.C.
(k) "Buyer Representatives" has the meaning set forth in
Section 6.3.
(l) "CERCLA" has the meaning set forth in Section 3.18.
(m) "Claim Notice" has the meaning set forth in Section
10.4(a).
(n) "Closing" has the meaning set forth in Section 1.4.
(o) "Closing Date" has the meaning set forth in Section
1.4.
(p) "Closing Indebtedness" means the total amount of all
Indebtedness of the Company outstanding as of the close of
business on the Closing Date (without giving effect to repayments
of Indebtedness made by or on behalf of Buyer and after giving
effect to any payments to be made by the Company prior to or at
the Closing) MINUS the amount of Cash of the Company as of the
close of business on the Closing Date (without giving effect to
any contribution of Cash or payments to be made by or on behalf
of the Buyer at or after the Closing and after giving effect to
any payments to be made by the Company prior to or at the
Closing), such Cash to be calculated in accordance with GAAP and
on the same basis of calculation as employed for Cash on the
December 31, 1998 balance sheet included in the Financial
Statements (provided that such Cash shall be reduced by
(including to a negative amount, if necessary) an amount equal to
the sum of the Current Taxes Payable and the General Tax Amount
in the amount set forth in the Schedule delivered pursuant to
Section 1.8).
(q) "Closing Working Capital" means the amount of Working
Capital of the Company as of the close of business on the Closing
Date (without giving effect to the Closing and after giving
effect to any payments to be made by the Company prior to or at
the Closing).
(r) "Code" means the Internal Revenue Code of 1986, as
amended.
(s) "Common Stock" has the meaning set forth in the
Recitals.
(t) "Company" has the meaning set forth in the Preamble.
(u) "Company Equity Securities" has the meaning set forth
in Section 3.3(d).
(v) "Confidentiality Agreement" means the Confidentiality
Agreement, dated May 19, 1999, by and between the Company and the
Buyer.
(w) "Contracts" has the meaning set forth in Section
3.12(a).
(x) "Contribution Agreement" means the Contribution
Agreement dated August 25, 1999, among EGI-BAF Investors L.L.C.,
EGI-BAF Investors II, L.L.C. and the other parties thereto.
(y) "Controlled Group Liability" has the meaning set forth
in Section 3.16(g).
(z) "Controlling Party" has the meaning set forth in
Section 12.5(c).
(aa) "Credit Agreement" means the Credit Agreement, dated
May 1, 1997, as amended, between the Company, Paribas, Chicago
Branch (f/k/a Banque Paribas Chicago Branch) and certain lenders.
(bb) "Current Taxes Payable" has the meaning set forth in
Section 1.8.
(cc) "date hereof" means the date of this Agreement.
(dd) "Defense Notice" has the meaning set forth in Section
10.4(c).
(ee) "EGI Group" has the meaning set forth in Section
2.5(a).
(ff) "Election Period" has the meaning set forth in Section
10.4(b).
(gg) "Encumbrance" means any mortgage, pledge, lien,
assessment, charge, security interest, conditional or other sale
agreement, claim, right-of-way, easement, encroachment, option,
right of first offer, right of first refusal, voting or use
restriction or other equitable charge or encumbrance of any kind
(and the term "Encumber" shall have the correlative meaning).
(hh) "Environmental Laws" has the meaning set forth in
Section 3.18.
(ii) "Equityholder" shall mean any holder of Stock, Stock
Options or Warrants.
(jj) "Equityholders' Agreement" means the Equityholders'
Agreement dated May 1, 1997 among the Company, certain Sellers
and the other parties thereto, as amended as set forth on
Schedule 3.3(b).
(kk) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
(ll) "Estimated Closing Indebtedness" has the meaning set
forth in Section 1.6.
(mm) "Estimated Working Capital Differential" has the
meaning set forth in Section 1.6.
(nn) "Final Statement" has the meaning set forth in Section
1.7(a).
(oo) "Financial Statements" has the meaning set forth in
Section 3.7(a).
(pp) "Fractional Interest" shall mean, with respect to each
Equityholder, the fraction set forth next to such Equityholder's
name on Exhibit K, Part II hereto, as revised pursuant to Section
6.11.
(qq) "GAAP" means generally accepted accounting principles
of the United States applied in a manner consistent with past
practices of the Company.
(rr) "General Tax Amount" has the meaning set forth in
Section 1.8.
(ss) "hereof," "herein" and "herewith" have the meaning set
forth in Section 13.13(ii).
(tt) "HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(uu) "including" has the meaning set forth in Section
13.13(iii).
(vv) "Indebtedness" means, without duplication, (1) any
obligations of the Company for borrowed money, including
obligations under the Credit Agreement and the revolving facility
thereunder, (2) obligations evidenced by mortgages, notes, bonds,
debentures or similar instruments, obligations for the deferred
purchase price of goods or services (other than trade payables or
accruals incurred in the ordinary course of business), and
obligations under capital leases and obligations with respect to
letters of credit or swaps, (3) all prepayment premiums or
penalties and other amounts becoming due as a result of this
transaction or otherwise, (4) any unpaid interest owing on any
such obligations, and (5) any guarantees, assumptions or similar
obligations with respect to any of the foregoing.
(ww) "Indebtedness Certificate" has the meaning set forth in
Section 1.6.
(xx) "Indemnified Party" has the meaning set forth in
Section 10.4(a).
(yy) "Indemnifying Party" has the meaning set forth in
Section 10.4(a).
(zz) "Indemnity Notice" has the meaning set forth in Section
10.5.
(aaa) "Initial Statement" has the meaning set forth in
Section 1.7(a).
(bbb) "Intellectual Property Rights" has the meaning set
forth in Section 3.11.
(ccc) "Interim Financial Statements" has the meaning set
forth in Section 3.7(b).
(ddd) "IRS" means the United States Internal Revenue
Service.
(eee) "Kaplan Group" has the meaning set forth in
Section 2.5(a).
(fff) "Knowledge" shall mean: (i) in the case of the
Company, the actual knowledge of the president or chief executive
officer or the chief financial officer of the Company after due
inquiry of the persons listed in Schedule 1.1(ddd); (ii) in the
case of each individual Seller, the actual knowledge of such
individual Seller after due inquiry of the other
representative(s), agent(s) or employee(s) of such individual, if
any, responsible for the relevant matters; and (iii) in the case
of each Seller which is not an individual, the actual knowledge
of the representative(s), agent(s) or employee(s) of such Seller
having responsibility for such Seller's relationship with the
Company after due inquiry of the representative(s), agent(s) or
employee(s) of such Seller, if any, responsible for the relevant
matters.
(ggg) "Liquidation and Dividend Percentage" has the
meaning set forth in Section 1.3(b)(i).
(hhh) "Losses" has the meaning set forth in Section
10.2(a).
(iii) "Material Adverse Effect" shall mean any change,
effect, event or occurrence that (x) has a material adverse
effect on the financial condition, properties, business or
results of operations of the Company or (y) that prevents or
materially delays or impairs the ability of any of the parties
hereto to consummate the transactions contemplated hereby;
provided, however, that a Material Adverse Effect shall not
include any effect to the extent caused by or arising from any of
the following: (i) changes which adversely impact the domestic
or international publishing or book distribution or retail
bookselling, video or audio tape retailing or display marketing
industries generally and do not disproportionately impact the
Company; or (ii) any material change in the financial markets of
the United States, including any suspension of trading or the
establishment of minimum or maximum prices on any exchange or
over-the-counter market of the United States.
(jjj) "Maximum Liability" has the meaning set forth in
Section 10.6(c).
(kkk) "Mirror Option Agreement" has the meaning set
forth in Section 1.5(f).
(lll) "Noncontrolling Party" has the meaning set forth
in Section 12.5(c).
(mmm) "Notice of Disagreement" has the meaning set forth
in Section 1.7(a).
(nnn) "OPA" has the meaning set forth in Section 3.18.
(ooo) "Option Calculator" has the meaning set forth in
Section 1.9.
(ppp) "Option Reviewer" has the meaning set forth in
Section 1.9.
(qqq) "Optionholder" or "Optionholders" has the meaning
set forth in the Recitals.
(rrr) "or" has the meaning set forth in Section
13.13(iv).
(sss) "Other Party" or "Other Parties" has the meaning
set forth in the Preamble.
(ttt) "Particular Current Taxes Payable" has the meaning
set forth in Section 1.8.
(uuu) "Permitted Encumbrances" means (i) liens for
current property taxes not yet due and payable, (ii) liens
imposed by law and incurred in the ordinary course of business
for obligations not yet due to carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or
deposits under workers' compensation laws and (iv) liens created
in the ordinary course of business which, in the case of all of
the foregoing (i)-(iv), could not reasonably be expected to,
individually or in the aggregate, materially interfere with the
present use of or materially impair the value of the affected
assets or properties or otherwise have a Material Adverse Effect.
(vvv) "Person" means an individual, a partnership, a
company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity
or any department, agency or political subdivision thereof.
(www) "Post-Closing Period" means each taxable period
that begins, as to the Company or any of its Subsidiaries, after
the Closing Date and the portion, beginning after the Closing
Date, of each Straddle Period.
(xxx) "Pre-Closing Period" means each taxable period
that ends, as to the Company or any of its Subsidiaries, on or
before the Closing Date and the portion, ending on the Closing
Date, of each Straddle Period.
(yyy) "Preferred Stock" has the meaning set forth in the
Recitals.
(zzz) "Purchase Price" has the meaning set forth in
Section 1.3(a).
(aaaa) "QSSSub" means a "qualified Subchapter S
subsidiary" within the meaning of Section 1361(b) of the Code and
comparable provisions of state and local law.
(bbbb) "RCRA" has the meaning set forth in Section 3.18.
(cccc) "Released Persons" has the meaning set forth in
Section 11.2.
(dddd) "Remaining Purchase Price" has the meaning set
forth in Section 1.3(b)(ii).
(eeee) "S Corp" means an "S corporation" within the
meaning of Section 1361(a) of the Code and comparable provisions
of state and local law.
(ffff) "Seller Indemnified Parties" has the meaning set
forth in Section 10.3.
(gggg) "Sellers" has the meaning set forth in the
Preamble.
(hhhh) "Sellers' Representatives" has the meaning set
forth in Section 11.1.
(iiii) "Severance Payment Options" has the meaning set
forth in Section 6.5(a).
(jjjj) "Stock" has the meaning set forth in the Recitals.
(kkkk) "Stock Option" or "Stock Options" has the meaning
set forth in Section 6.11(a).
(llll) "Stockholder" and "Stockholders" have the meaning
set forth in the Preamble.
(mmmm) "Straddle Period" means any taxable period
commencing, as to the Company or any of its Subsidiaries, on or
before and ending, as to the Company or any of its Subsidiaries,
after the Closing Date.
(nnnn) "Subsidiary" means any corporation, limited
liability company, partnership or other entity as to which the
Company owns or has owned at least 50% of the stock, membership
interests, partnership interests or other equity interests.
(oooo) "Tax" means, with respect to any Person, any (i)
federal, state, local or foreign income, gross receipts,
franchise, estimated, alternative minimum, add-on minimum, sales,
use, transfer, registration, value added, excise, natural
resources, severance, stamp, occupation, premium, windfall
profit, environmental, customs, duties, real property, personal
property, capital stock, social security, unemployment,
disability, payroll, license, employee or other withholding, or
other tax, of any kind whatsoever, including any interest,
penalties or additions to Tax or additional amounts in respect of
the foregoing; (ii) liability of such Person, for the payment of
any amounts of the type described in clause (i) arising as a
result of being (or ceasing to be) a member of any Affiliated
Group (or being included (or required to be included) in any Tax
Return relating thereto); and (iii) liability of such Person for
the payment of any amounts of the type described in clause (i) as
a result of any express or implied obligation to indemnify or
otherwise assume or succeed to the liability of any other person.
(pppp) "Tax Proceeding" means any Tax audit, examination,
contest, litigation or other proceeding.
(qqqq) "Tax Returns" or "Returns" means returns,
declarations, reports, claims for refund, information returns or
other documents (including any related or supporting schedules,
statements or information and including any Forms 1099) filed or
required to be filed in connection with the determination,
assessment or collection of Taxes of any party or the
administration of any laws, regulations or administrative
requirements relating to any Taxes.
(rrrr) "Third Party Claim" has the meaning set forth in
Section 10.4(a).
(ssss) "Threshold" has the meaning set forth in Section
10.6(a).
(tttt) "Top 10 Suppliers" has the meaning set forth in
Section 3.23(a).
(uuuu) "Total Liquidation and Dividend Amount" has the
meaning set forth in Section 1.3(b)(i).
(vvvv) "Transaction Bonuses" shall mean the payments set
forth on Schedule 5.6.
(wwww) "Triggering Equityholders" has the meaning set
forth in Section 2.5(a).
(xxxx) "Warrant" or "Warrants" has the meaning set forth
in Section 6.11(a).
(yyyy) "Warrantholder" or "Warrantholders" has the
meaning set forth in the Preamble.
(zzzz) "Working Capital", with respect to the Company, as
of any date, means (i) the sum of Inventory, Accounts Receivable
(other than any such Accounts Receivable in respect of Taxes) and
Prepaid Expenses (other than Prepaid Expenses in respect of Taxes
and only to the extent that the increase in remaining Prepaid
Expenses as of the Closing Date from remaining Prepaid Expenses
on December 31, 1998 does not exceed $500,000) of the Company,
MINUS (ii) the sum of all current liabilities (other than any
current liability in respect of Taxes and the Current Portion of
Long-Term Debt (which the Company represents included interest as
of December 31, 1998)), each such item to be calculated as of the
close of business on such day in accordance with GAAP and on the
same basis of calculation as employed for such item on the
December 31, 1998 balance sheet included in the Financial
Statements.
(aaaaa) "Working Capital Differential" means the amount of
Closing Working Capital MINUS $ 23,883,600 (and shall be,
therefore, a positive number if Closing Working Capital is
greater than $23,883,600 and a negative number if Closing Working
Capital is less than $23,883,600).
(bbbbb) "Working Capital Differential Certificate" has the
meaning set forth in Section 1.6.
1.2. Purchase and Sale. Subject to the terms and conditions set
forth herein, at the Closing, (i) the Stockholders will sell and
the Buyer will purchase all of the Sellers' rights, title and
interests in and to the Stock, (ii) the Warrantholders will sell
and the Buyer will purchase all of the Warrantholders' rights,
title and interests in and to the Warrants and (iii) all Stock
Options will be cancelled.
1.3. Purchase Price.
(a) The total purchase price to be paid by the Buyer, in the
manner hereinafter set forth (the "Purchase Price"), shall be
$380,000,000 PLUS the Working Capital Differential MINUS the
aggregate amount of Closing Indebtedness. The amount of Purchase
Price to be paid by the Buyer at or (as provided herein and
subject to Section 1.10) immediately prior to the Closing shall
be $380,000,000 PLUS 75% of the Estimated Working Capital
Differential (if positive, or 100% if negative) MINUS the amount
of the Estimated Closing Indebtedness. Such amount shall be
subject to adjustment, following calculation of the Working
Capital Differential and actual Closing Indebtedness, as provided
in Section 1.7.
(b) The Purchase Price shall be paid as follows and as more
fully set forth on Exhibit K:
(i) First, an amount equal to the sum of the liquidation value
of, PLUS all accumulated, unpaid and undeclared preferential
dividends on, the Preferred Stock as of the Closing Date shall be
paid to the Equityholders listed on Exhibit K, Part I in
accordance with the percentages set forth therein (as to each
Equityholder, such party's "Liquidation and Dividend Percentage,"
the aggregate of such amounts, in dollars, the "Total Liquidation
and Dividend Amount") (Exhibit K, Part I includes a calculation
of the Total Liquidation and Dividend Amount as of October 1,
1999); and
(ii) Second, the amount of the Purchase Price remaining after the
payment of the Total Liquidation and Dividend Amount (the
"Remaining Purchase Price") shall be paid to the Equityholders
listed on Exhibit K, Part II in accordance with the Fractional
Interests set forth therein.
(c) All payments in respect of the cancellation of Stock
Options, whether payable at or immediately prior to Closing, in
connection with the Working Capital Adjustment or otherwise,
shall be net of applicable withholding Taxes as determined
pursuant to the procedures set forth in Section 1.9. In addition
to the reductions to Purchase Price contemplated hereby, an
amount of Cash equal to the sum of the Current Taxes Payable and
the General Tax Amount set forth on the schedule delivered
pursuant to Section 1.8 shall be retained by the Company, but
shall not be considered in the amount of Cash used to calculate
Closing Indebtedness or Estimated Closing Indebtedness.
1.4. Closing. The closing of the purchase and sale of the Stock
(the "Closing") shall take place at the offices of Wachtell,
Lipton, Rosen & Katz, New York, NY on October 1, 1999, subject to
the satisfaction or waiver (by the applicable party) of the
conditions set forth in Articles VII and VIII by such date, or,
if not so satisfied or waived by such date, the third business
day following the satisfaction or waiver (by the applicable
party) of the conditions set forth in Articles VII and VIII, or
at such other place or on such other date as the Buyer and the
Company shall agree. The date on which the Closing occurs shall
be the "Closing Date".
1.5. Delivery of Securities; Payment. At the Closing (except as
otherwise provided below):
(a) each Stockholder shall deliver or cause to be delivered to
the Buyer one or more stock certificates representing in the
aggregate the number of shares of Stock set forth opposite the
name of such Stockholder on Exhibit A, duly endorsed in blank for
transfer or accompanied by duly executed stock powers and all
applicable stock transfer stamps (the cost of which, if any,
shall be borne 50% by Buyer and 50% by the Company paid prior to
the Closing, except to the extent refundable in which case it
will be borne to such extent by the Company) and other
instruments requisite to proper transfer, all in proper form;
(b) each Warrantholder shall deliver to the Buyer one or more
certificates representing in the aggregate the Warrants set forth
opposite the name of such Warrantholder on Exhibit B (less any
Warrants which have been exercised for cash or for shares of
Stock and as to which such Warrantholder has become a Stockholder
hereunder), duly endorsed in blank for transfer or accompanied by
any other instruments requisite to proper transfer, including any
transfer stamps, all duly executed and in proper form;
(c) each Other Party and Optionholder shall deliver to the Buyer
immediately prior to the Closing one or more certificates and/or
option agreements representing in the aggregate the Stock Options
set forth opposite the name of such Other Party or Optionholder
on Exhibits C and D, respectively (or other evidence reasonably
satisfactory that such Stock Options have been cancelled and
satisfied) (less any Stock Options which have been validly
exercised for shares of Stock and as to which such Other Party or
Optionholder has become a Stockholder hereunder and less any
Stock Options which have been forfeited in accordance with their
terms), for cancellation by the Company immediately prior to the
Closing;
(d) the Buyer shall pay to the Equityholders listed on Exhibit
K, Part I, (which payment shall be made in the case of the Other
Parties, immediately prior to the Closing) by wire transfer of
immediately available funds (to the account(s) designated by such
Persons in writing not less than three business days prior to
Closing), the Total Liquidation and Dividend Amount payable at
Closing (net of applicable withholding taxes, if any) in
accordance with the Liquidation and Dividend Percentage set forth
next to each Equityholder's name on Exhibit K, Part I;
(e) the Buyer shall pay to the Equityholders listed on Exhibit
K, Part II by (i) wire transfer of immediately available funds
to the account(s) designated by such Equityholder in writing not
less than three business days prior to Closing or (ii) bank check
posted to the address at which such Equityholder's pay check from
the Company is regularly delivered or such address otherwise
provided to Buyer by such Equityholder not less than three
business days prior to Closing, such Equityholder's Fractional
Interest of the Remaining Purchase Price payable at Closing in
accordance with Section 1.3 (provided that any payment in respect
of Stock Options (which shall be made effective as of immediately
prior to Closing) or Warrants shall be made net of the exercise
price thereof (and net of any Tax withholding), the amount of
which exercise price which otherwise would have been paid shall
then be distributed to all Equityholders in accordance with each
Equityholder's Fractional Interest); and
(f) Earl P. Kaplan and David Kaplan, Stockholders, shall deliver
to the Company for cancellation stock certificates representing
(in the aggregate) 64,114 shares of Common Stock and 3,280.376
shares of Preferred Stock which are all of the shares of stock
(other than .001 share which is being sold by Earl P. Kaplan
hereunder) subject to that certain Common and Preferred Stock
Option Agreement (the "Mirror Option Agreement"), dated as of May
1, 1997, by and among Earl P. Kaplan and David Kaplan and the
Company, and are excluded from the calculations of interests
contained in Exhibit K; the Company shall cancel the stock
certificates so delivered; the Company shall pay, in full
satisfaction of the Company's obligations under the Mirror Option
Agreement, immediately prior to Closing $673.95, the nominal
aggregate purchase price for all such shares as provided in the
Mirror Option Agreement, such payment to be made (net of
applicable withholding Taxes); and the Mirror Option Agreement
shall thereafter be deemed fully exercised and terminated, and
each party to the Mirror Option Agreement hereby agrees to such
treatment; it being understood and agreed that the balance of the
purchase price for the Preferred Stock that otherwise would have
been payable under the Mirror Option Agreement has been allocated
pursuant to Exhibit K, Part I as provided therein, to the Other
Parties as part of their Total Liquidation and Dividend Amount.
1.6. Payment of Indebtedness; Closing Working Capital. Not less
than three business days prior to the Closing, the Chief
Financial Officer of the Company shall deliver to the Buyer (i) a
certificate (the "Working Capital Differential Certificate")
which shall (in a form of reasonable detail illustrating the
calculation thereof) set forth a good faith estimate of the
amount of the Working Capital Differential (the "Estimated
Working Capital Differential"), and (ii) a certificate (the
"Indebtedness Certificate") which shall (in a form of reasonable
detail illustrating the calculation thereof) (a) set forth a good
faith estimate of the total amount of Indebtedness anticipated to
be outstanding on the Closing Date and a good faith estimate of
the anticipated Closing Indebtedness (the "Estimated Closing
Indebtedness"), and (b) identify each of the Company's creditors
with respect to whom Indebtedness is owed and the respective
amounts of Indebtedness anticipated to be owed to such creditors
as of the close of business on the Closing Date. Buyer shall be
given access to the books and records of the Company and
permitted to review the working papers of the Company relating to
the Working Capital Differential Certificate and the Indebtedness
Certificate a reasonable period prior to the third business day
prior to the Closing. The Company shall use reasonable efforts
to revise the certificates referred to above to the extent Buyer
advises the Company of errors therein. The Buyer shall, at the
Closing, pay to each of the Company's creditors its respective
amount of the Indebtedness as set forth on the Indebtedness
Certificate and shall receive documentation from each such
creditor as is reasonably necessary to evidence the payment and
the release by such creditor of any and all Encumbrances securing
such Indebtedness and relating to the Company Equity Securities
or any assets or properties of the Company.
1.7. Adjustment. (a) Within 30 days after the Closing Date, the
Buyer shall prepare and deliver to the Sellers' Representatives a
statement setting forth a calculation of the amount of Closing
Indebtedness and the Working Capital Differential (each, an
"Initial Statement"). During the 30 days immediately following
receipt of each Initial Statement, the Sellers' Representatives
and their representatives shall be granted access to the books
and records of the Company relating to the Initial Statements and
permitted to review the working papers of the Buyer relating to
the Initial Statements. An Initial Statement shall become final
and binding upon the parties hereto (and shall thereupon become a
"Final Statement") on the 30th day following receipt thereof by
the Sellers' Representatives unless the Sellers' Representatives
deliver to the Buyer a notice of disagreement with the
calculations on the Initial Statement (a "Notice of
Disagreement") prior to such 30th day. Any Notice of
Disagreement shall specify in reasonable detail by line item the
nature of any disagreement so asserted and the change in the
calculation of the amount of Closing Indebtedness and/or the
Working Capital Differential implied thereby. If a timely Notice
of Disagreement is received by the Buyer, then the Initial
Statement (as resolved either by the agreement of the Buyer and
the Sellers' Representatives or by the Accounting Firm in
accordance with this Section 1.7) relating thereto shall become
final and binding upon the parties hereto (and shall thereupon
become a "Final Statement") on the earlier of (x) the date on
which the Buyer and the Sellers' Representatives resolve in
writing any differences they may have with respect to any matter
specified in the Notice of Disagreement with respect to such
Initial Statement and agree upon a Final Statement and (y) the
date on which the Accounting Firm, after performing appropriate
procedures, finally resolves in writing any matters with respect
to such Initial Statement that are in dispute by providing the
Buyer and the Sellers' Representatives with a Final Statement.
During the 30 days immediately following the delivery of a Notice
of Disagreement, the Buyer and the Sellers' Representatives shall
seek in good faith to resolve in writing (and thereby agree upon
a Final Statement) any differences which they may have with
respect to any matter specified in such Notice of Disagreement.
At the end of such 30-day period, the Buyer and the Sellers'
Representatives shall submit to the Accounting Firm for review
and resolution any and all matters which remain in dispute and
which were included in such Notice of Disagreement, and, within
30 days of such submission, the Accounting Firm shall make a
final written determination (which shall thereupon become a
"Final Statement"), binding on the parties hereto, of the amount
of Closing Indebtedness and/or the Working Capital Differential,
as applicable, which determination shall be, by line item, at or
between the amount of such line item on the applicable Initial
Statement and the amount of such line item on the applicable
Notice of Disagreement. The fees of the Accounting Firm incurred
pursuant to this Section shall be borne by the party against whom
more (by dollar amount) of the differences specified in the
Notice of Disagreement are resolved. For purposes of the
foregoing, "Accounting Firm" shall mean Arthur Andersen LLP
(using a U.S. office with expertise in such matters), or, if such
firm is unable or unwilling to undertake the responsibilities
required of the Accounting Firm hereunder, such other nationally
recognized independent public accounting firm (using a U.S.
office with expertise in such matters) as shall be agreed upon by
the Buyer and the Sellers' Representatives in writing, provided
that in any case neither the Accounting Firm nor the senior
persons performing services as the Accounting Firm hereunder
shall have any significant relationship with any party hereto.
(a) [Hidden text]
(b) If the amount of Closing Indebtedness reflected on the Final
Statement exceeds the amount of Estimated Closing Indebtedness,
then within 10 business days after the Final Statement becomes
final and binding on the parties hereto, the Sellers'
Representatives shall make payment to the Buyer by wire transfer
in immediately available funds of the amount of such excess. If
the amount of Estimated Closing Indebtedness exceeds the amount
of Closing Indebtedness reflected on the Final Statement, then,
within 10 business days after the Final Statement becomes final
and binding on the parties hereto, the Company shall make payment
(net of any required Tax withholding) by wire transfer in
immediately available funds to an account or accounts designated
by the Sellers' Representatives (who shall distribute the same to
the Equityholders in accordance with each Equityholder's
Fractional Interest, subject to the Total Liquidation and
Dividend Amount having been paid pursuant to Section 1.5(d)) the
amount of such excess payment; provided, however, that to the
extent any such excess is attributable to an overpayment to the
Company's creditors, then such portion of the excess shall be
included in the payment to the account designated by Sellers'
Representatives only to the extent such portion of the excess is
returned to the Company.
(c) If the amount of the Working Capital Differential reflected
on the Final Statement exceeds 75% of the amount of the Estimated
Working Capital Differential (if positive, or 100% if such
estimate was negative), within 10 business days after the Final
Statement becomes final and binding on the parties hereto, the
Buyer shall make payment of the amount (net of any required Tax
withholding) of such excess to an account or accounts designated
by the Sellers' Representatives (who shall distribute the same to
the Equityholders in accordance each Equityholder's Fractional
Interest, subject to the Total Liquidation and Dividend Amount
having been paid pursuant to Section 1.5(d)) by wire transfer in
immediately available funds. If 75% of the amount of the
Estimated Working Capital Differential (if positive, or 100% if
such estimate was negative) exceeds the amount of the Working
Capital Differential reflected on the Final Statement, within 10
business days after the Final Statement becomes final and binding
on the parties hereto, the Sellers' Representatives shall make
payment to the Buyer by wire transfer in immediately available
funds of the amount of such excess.
(d) The amount of any payment to be made pursuant to this
Section 1.7 shall bear interest from and including the date of
Closing to but excluding the date of payment at a rate per annum
equal to 5.5%; provided, however, that interest shall be included
in payments made pursuant to the proviso to the second sentence
of Section 1.7(b) only to the extent that the creditors returning
excess to the Company return interest thereon.
(e) The payment of any amount by the Buyer pursuant to
paragraphs (b), (c) or (d) above shall be made without any offset
other than applicable Tax withholding and shall satisfy in full
the Buyer's obligations to deliver such amounts to the
Equityholders under Section 1.3, Section 1.5 and this Section
1.7.
1.8. Current Taxes Payable Adjustment. In the event that
Sellers' Representatives so elect, the Sellers' Representatives
shall deliver to the Buyer not less than three business days
prior to the Closing a schedule stating, by jurisdiction, type of
Tax and taxable period, Sellers' Representatives' good faith and
reasonable estimate of any accruals as of the Closing Date for
current Taxes payable in the ordinary course of the Company (for
each jurisdiction, type of Tax, and taxable period, the
"Particular Current Taxes Payable"), the aggregate amount of such
accruals (the "Current Taxes Payable") and an additional amount,
if any, not less than zero and not in excess of $150,000 (the
General Tax Amount"). Each of the Particular Current Taxes
Payable and the Current Taxes Payable shall be a credit balance
as a liability or zero in amount. In addition to the reductions
to Purchase Price contemplated by Section 1.3, an amount of Cash
equal to the sum of the Current Taxes Payable and the General Tax
Amount set forth on the schedule delivered pursuant to this
Section 1.8 shall be retained by the Company, but shall not be
considered in the amount of Cash used to calculate Closing
Indebtedness or Estimated Closing Indebtedness. Buyer shall not
be obligated for any additional costs (other than reasonable time
of personnel) as a result of Sellers' Representatives' decision
to make the election referred to in this Section 1.8; provided,
however, that the parties shall work together to make alternative
arrangements in light thereof.
1.9. Withholding Calculation Procedures. In the case of any
payment hereunder in respect of the cancellation of Stock Options
and any payment of Transaction Bonuses: (i) the Option
Calculator shall provide the Option Reviewer the Option
Calculator's proposed good faith and reasonable calculation of
the amount of Tax withholding required in connection with such
payment at least five days prior to the date such payment is to
be made for the Option Reviewer's review and comment, (ii) the
Option Reviewer shall provide its good faith and reasonable
comments on the correctness of such calculation to the Option
Calculator within three days of receipt of such calculation,
(iii) withholding shall be made in respect of such payment as so
calculated taking into account such comments of the Option
Reviewer, except to the extent the Option Calculator disagrees
with the Option Reviewer's comments in which case the Option
Calculator and the Option Reviewer shall endeavor in good faith
to resolve such disagreement over such comments and, failing
that, such disagreement shall be resolved expeditiously by the
Accounting Firm prior to the date such payment is required to be
made. In the case of any payment hereunder in respect of the
cancellation of Stock Options and any payment of Transaction
Bonuses: (x) "Option Calculator" shall mean the Company in the
case of any such payment to be made on or prior to the Closing
Date and shall mean the Buyer in the case of any other payment
and (y) "Option Reviewer" shall mean the Buyer in the case of any
payment to be made on or prior to the Closing Date and shall mean
the Sellers' Representatives in the case of any other payment.
1.10. Payments to Occur Immediately Prior to Closing. Any
payments by Buyer described herein and contemplated to occur
immediately prior to Closing shall be subject to and contingent
upon the Closing occurring immediately after the payment of any
such amounts.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller, severally and not jointly, hereby represents
and warrants, as to such Seller, to the Buyer as follows:
2.
2.1. Ownership of Stock. Such Seller is the owner, beneficially
and of record, of the shares of Stock, Warrants and Stock Options
set forth opposite such Seller's name on Exhibit A, Exhibit B and
Exhibit D hereto, respectively, free and clear of any Encumbrance
except as set forth on Schedule 2.l. At Closing such Seller will
transfer good and marketable title to such shares of Stock,
Warrants and Stock Options free and clear of any Encumbrance.
Except as set forth on such Exhibits and except for such Seller's
interest as an employee of the Company, if any, such Seller has
no beneficial interest in the Company.
2.2. Authority of Seller. Such Seller has the requisite right,
capacity and power to enter into this Agreement and to consummate
the transactions contemplated herein. The execution and delivery
of this Agreement has been duly authorized by such Seller by all
necessary action. This Agreement has been duly executed and
delivered by such Seller and constitutes a valid and binding
obligation, enforceable against such Seller in accordance with
its terms, except as the same may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to creditors' rights generally and
(b) the application of equitable principles, whether applied by a
court of equity or law.
2.3. No Violation. Except as set forth on Schedule 2.3 hereto,
neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will, with
or without the giving of notice or the passage of time, or both,
(a) with respect to any Seller that is not an individual,
violate, or be in conflict with, or constitute a breach or
default under, or give rise to any right under, any provisions of
the organizational documents of such Seller or, whether or not
such Seller is an individual, any Contract to which such Seller
is a party or by which it or its assets or properties is bound,
(b) require the consent or waiver of, or notice to, any party to
any Contract to which such Seller is a party or by which it or
its assets or properties is bound, or (c) violate any statute or
law or any judgment, decree, order, regulation or rule of any
court or governmental authority to which such Seller or its
assets or properties is subject.
2.4. Consents and Approvals. Except for compliance with the HSR
Act, no consent, approval or authorization of, or declaration,
filing or registration with, any governmental or regulatory
authority or third party is necessary or advisable to be made or
obtained by such Seller in connection with the execution,
delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby.
2.5. Equityholders' Agreement.
(a) Except as set forth on Schedule 2.5, such Seller is a party
to the Equityholders' Agreement, which is a valid and binding
agreement with respect to such Seller, enforceable against such
Seller in accordance with its terms; and such Seller is not (and
to the Knowledge of such Seller, no other Person is) in breach in
any material respect of the Equityholders' Agreement. Such
Seller is not party to any amendment, supplement or binding
interpretation of the Equityholders' Agreement except as set
forth in Schedule 3.3(b). Each Seller hereby agrees that the
transactions contemplated by this Agreement shall be deemed to
constitute an "Approved Sale" (as defined in the Equityholders'
Agreement) for all purposes of the Equityholders' Agreement as to
which both the "Kaplan Group" (as defined in the Equityholders'
Agreement) and the "EGI Group" (as defined in the Equityholders'
Agreement) constitute the "Triggering Equityholders" (as defined
in the Equityholders' Agreement) and as to which such Triggering
Equityholders have validly exercised the "drag-along rights"
provided in Section 4.4(a) of the Equityholders' Agreement for
all purposes of the Equityholders' Agreement, including for all
purposes of Section 4.4(c) of the Equityholders' Agreement,
without regard to any variation between the terms hereof and the
provisions of the Equityholders' Agreement (any such variations
are hereby waived). Such Seller (i) has consented to and shall
raise no objections against the transactions contemplated by this
Agreement and (ii) shall execute and deliver such instruments of
conveyance and transfer and take all other necessary or desirable
actions in connection with the consummation of the transactions
contemplated hereby reasonably requested by the Buyer. Such
Seller agrees that, upon the consummation of the transactions
contemplated by this Agreement, the conditions set forth in
Section 4.4(b) of the Equityholders' Agreement shall have been
fully satisfied.
(b) Except for the Equityholders' Agreement or as set forth in
Schedule 3.3(b): such Seller is not a party to any (i) voting
trusts, proxies or other Contracts with respect to the voting of
any Company Equity Securities, (ii) Contracts restricting the
transfer of any Company Equity Securities, (iii) preemptive or
anti-dilutive rights or rights of first offer or first refusal or
"tag-along", "drag-along" or similar rights with respect to any
Company Equity Securities or (iv) rights with respect to
registration under securities laws with respect to any Company
Equity Securities.
2.6. Amounts Payable. No amount is or will be owed or otherwise
payable to such Seller by the Buyer or the Company as a result of
the transactions contemplated hereby, except with respect to the
payments to such Seller provided in Article I, Article X, Article
XII and Section 6.5.
2.7. Brokers', Finders' Fees, etc. Neither the Company (upon the
Closing) nor the Buyer shall have any liability or obligation to
pay any brokerage commission, finders' fees, or similar
compensation or any legal or professional fees incurred in
connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or authorized (with
respect to Paribas North America, Inc., BankAmerica Investment
Corporation, MIG Partners, IV, Chase Equity Associates, L.P. and
Bank of America, National Association, other than such
authorization granted to (i) EGI-BAF Investors, L.L.C. or EGI-BAF
Investors II, L.L.C. pursuant to the authority granted in Section
11.1 of this Agreement, (ii) EGI-BAF Investors, L.L.C. or EGI-BAF
Investors II, L.L.C. pursuant to the authority granted in the
Contribution Agreement, or (iii) Equity Group Investments, Inc.
pursuant to the authority granted in the Equityholders'
Agreement) by such Seller or any of its Affiliates. Schedule
3.19 lists all persons who may be entitled to any brokerage
commission, finders' fees, or similar compensation or any legal
or professional fees incurred in connection with the transactions
contemplated by this Agreement based on any arrangement or
agreement made by or authorized (with respect to Paribas North
America, Inc., BankAmerica Investment Corporation, MIG Partners,
IV, Chase Equity Associates, L.P. and Bank of America, National
Association, other than such authorization granted to (i) EGI-BAF
Investors, L.L.C. or EGI-BAF Investors II, L.L.C. pursuant to the
authority granted in Section 11.1 of this Agreement, (ii) EGI-BAF
Investors, L.L.C. or EGI-BAF Investors II, L.L.C. pursuant to the
authority granted in the Contribution Agreement, or (iii) Equity
Group Investments, Inc. pursuant to the authority granted in the
Equityholders' Agreement) by such Seller or any of its
Affiliates.
2.8. Affiliate Contracts. Schedule 3.12 lists all Contracts to
which the Company is a party or by which its assets or properties
are bound and to which any Affiliate of such Seller is a party.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer as
follows:
3.
3.1. Corporate Organization. The Company is duly organized,
validly existing and in good standing under the laws of the State
of Iowa and has all requisite corporate power and authority to
carry on its business as now conducted and to own or lease its
properties and assets. The Company is duly qualified or licensed
to do business as a foreign corporation in good standing in each
state of the United States and in each foreign jurisdiction in
which the conduct of its business or the ownership or leasing of
its properties requires such qualification, other than
jurisdictions in which the failure to so qualify would not have a
Material Adverse Effect.
3.2. Authorization. The Company has the requisite power and
authority to enter into this Agreement and to carry out the
transactions contemplated hereby. The board of directors of the
Company has taken all action required to authorize the execution
and delivery of this Agreement, the performance of the Company's
obligations hereunder and the consummation of the transactions
contemplated hereby. No other proceedings on the part of the
Company, its board of directors or holders of any Company Equity
Securities are necessary to authorize the execution, delivery and
performance by the Company of this Agreement. This Agreement is
a valid and binding agreement of the Company, enforceable against
it in accordance with its terms except as the same may be limited
by (a) bankruptcy, insolvency, reorganization, moratorium or
similar laws now or hereafter in effect relating to creditors'
rights generally and (b) the application of equitable principles,
whether applied by a court of equity or law.
3.3. Capitalization. Schedule 3.3(a) hereto sets forth as of the
date hereof: (a) all authorized, issued and outstanding shares
of capital stock of the Company (all of which are listed on
Exhibit A); (b) all outstanding securities issued by the Company
(or, to the Knowledge of the Company, any other Person)
convertible into or exchangeable or exercisable for shares of
capital stock of the Company; (c) all outstanding options (all of
which are listed on Exhibit D), warrants (all of which are listed
on Exhibit B), rights, contracts, commitments, understandings or
arrangements by which the Company is bound to issue or sell or to
purchase or otherwise acquire or retire any additional shares of
capital stock or other securities of or equity interest in the
Company or securities convertible into or exchangeable for such
capital stock or other securities or equity interests in the
Company and (d) all stock appreciation, phantom stock, or similar
rights or rights to participate in revenues or profits or other
derivatives or equity-like interests with respect to the Company
(the foregoing (a)-(d), collectively, "Company Equity
Securities"). The Stock and Warrants to be purchased by the
Buyer and the Stock Options to be cancelled, pursuant to the
terms of this Agreement, constitute all of the Company Equity
Securities. All issued and outstanding shares of capital stock
of the Company are duly authorized, validly issued, fully paid
and nonassessable, and all other Company Equity Securities are
duly issued and valid and binding. Except for the Equityholders'
Agreement or as set forth on Schedule 3.3(b), the Company is not
a party to and, to the Knowledge of the Company, there are no (i)
voting trusts, proxies or other Contracts with respect to the
voting of any Company Equity Securities, (ii) Contracts
restricting the transfer of any Company Equity Securities, (iii)
preemptive or anti-dilutive rights or rights of first offer or
first refusal or "tag-along", "drag-along" or similar rights with
respect to any Company Equity Securities or (iv) rights with
respect to registration under securities laws with respect to any
Company Equity Securities. True and complete copies of the
restated articles of incorporation and bylaws of the Company and
all Contracts respecting Company Equity Securities (including all
Contracts listed on Schedule 3.3(a) or 3.3(b) and all Warrant
Contracts and Stock Option Contracts) have been provided to the
Buyer prior to the date hereof. Schedule 3.3(b) includes a true
and complete copy of the Equityholders' Agreement and all
amendments, supplements and binding interpretations thereof. No
holder of Stock Options has or will have the right to tender to
the Company, pursuant to an exercise of any "put" right or other
right to exercise for a cash payment (in lieu of acquiring
stock), any Stock Options, it being understood that the payments
to be made at or immediately prior to Closing by Buyer pursuant
to Section 1.5 of this Agreement shall not be deemed a violation
of this representation. There are no dividends on Company Equity
Securities that have been declared but remain unpaid.
3.4. Subsidiaries. Schedule 3.4 contains a list of each
corporation, partnership, joint venture or other business
organization or entity in which the Company directly or
indirectly owns or has owned any capital stock or other equity
securities or other interests. The Company is not subject to any
obligation or requirement to provide funds or assets for or to,
to keep well or otherwise support, or to make any investment (in
the form of a loan or capital contribution or otherwise) in, any
Person.
3.5. No Violation. Except as set forth on Schedule 3.5, neither
the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will, with or without the
giving of notice or the passage of time, or both, (a) violate, or
be in conflict with, or constitute a breach or default under, or
give rise to any right under, any provisions of the Articles of
Incorporation or By-laws of the Company or the Equityholders'
Agreement, (b) violate, or be in conflict with, or constitute a
breach or default under, or give rise to a right of sale,
purchase, termination, cancellation, alteration of rights or
acceleration of any Contract to which the Company is a party, or
by which the Company or its assets or properties is bound, (c)
require the consent or waiver of, or notice to any party to any
Contract to which the Company is a party, or by which the Company
or its assets or properties is bound, (d) result in the creation
or imposition of any Encumbrance upon any property or assets of
the Company, or (e) violate any statute or law or any judgment,
decree, order, regulation or rule of any court or governmental
authority to which the Company or its assets or properties is
subject.
3.6. Consents and Approvals of Governmental Authorities. Except
for compliance with the HSR Act, no consent, approval or
authorization of, or declaration, filing or registration with,
any governmental or regulatory authority is necessary or
advisable to be made or obtained by the Company in connection
with the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby.
3.7. Financial Statements and Statistics of the Company.
(a) Schedule 3.7(a) includes accurate and complete copies of the
balance sheets of the Company at December 31, 1998 and December
31, 1997 and the related statements of income, stockholders'
equity and cash flows for the fiscal years then ended (the
"Financial Statements"), in each case accompanied by the audit
report thereon of Ernst & Young, independent certified public
accountants. All such Financial Statements present fairly the
financial position of the Company at the respective dates
thereof, and the results of operations, changes in stockholders'
equity and cash flows of the Company for the periods indicated,
in conformity with GAAP.
(b) The Company has delivered to the Buyer the interim unaudited
balance sheet of the Company at June 26, 1999, and the related
statements of income, stockholders' equity and cash flows for the
six months then ended (the "Interim Financial Statements"). The
Interim Financial Statements present fairly in all material
respects, and the financial statements to be delivered pursuant
to Section 6.10 will present fairly in all material respects, the
financial position of the Company at the date thereof, and the
results of operations, changes in stockholders' equity and cash
flows for the period indicated, subject to changes resulting from
normal year-end adjustments which are not material, individually
or in the aggregate, and subject to the absence of footnote
disclosure, and have been, or will be in the case of the
financial statements to be delivered pursuant to Section 6.10,
prepared in a manner consistent with past practices of the
Company and in conformity with GAAP. The Interim Financial
Statements are attached hereto in Schedule 3.7(b).
(c) Schedule 3.7(c) includes, to the Company's Knowledge, a good
faith estimate of the number of drops, the average revenue per
drop, the number of schools, corporations or day care centers,
and the number of sales representatives by segment, in each case
for the 1998 fiscal year and the six-month period ended June 26,
1999.
3.8. Absence of Undisclosed Liabilities. The Company has no
debts, obligations or liabilities of any nature, whether
absolute, accrued, contingent, liquidated or otherwise, and
whether due or to become due, asserted or unasserted, except (i)
as reflected in the Financial Statements or in the Interim
Financial Statements or not required to be so reflected in
accordance with GAAP and (ii) debts, obligations or liabilities
incurred in the ordinary course of business since the date of the
Interim Financial Statements which could not reasonably be
expected to, individually or in the aggregate, have a Material
Adverse Effect.
3.9. Absence of Certain Changes. Except as set forth in Schedule
3.9, since December 31, 1998, and through the date hereof, the
Company has conducted its business only in the ordinary course
and there has not been:
(a) any adverse change which has or is reasonably likely to have
a Material Adverse Effect (without giving effect to clause (y) of
the definition thereof);
(b) any material theft, damage, destruction, casualty loss,
condemnation or eminent domain proceeding affecting any of the
assets of the Company, whether or not covered by insurance;
(c) any waiver by the Company of any material rights related to
the Company's business, operations or assets;
(d) except for increases in the ordinary course of business and
in accordance with past practice to any employee who is not an
officer, any general or special increase in the compensation of
employees of the Company (including any such increase pursuant to
any bonus, pension, profit-sharing or other plan or commitment);
(e) any sale, assignment, transfer or other disposition of any
material tangible assets or rights of the Company, except in the
ordinary course of business;
(f) any sale, assignment, transfer or other disposition of any
of the Company's material patents, trademarks, trade names,
copyrights, licenses or other intangible assets;
(g) any Encumbrance granted or imposed on any of the assets or
properties of the Company with a fair market value in excess of
$250,000, except Permitted Encumbrances;
(h) any declaration or payment of any dividends or other
distributions with respect to any Company Equity Securities or
redemption or purchase or cancellation, directly or indirectly,
of any Company Equity Securities;
(i) any amendment to any existing employee Benefit Plan that
would increase or decrease the Company's costs or benefits to
participants (other than by a de minimis amount) or termination
of any existing employee Benefit Plan required to be listed on
Schedule 3.16, or the adoption of any new employee Benefit Plan;
(j) any single or group of related capital expenditures or
commitments therefor made in excess of $250,000;
(k) any incurrence of any Indebtedness or other liabilities
(whether absolute, accrued, contingent or otherwise) or any
guarantee of any such Indebtedness, except in the ordinary course
of business consistent with past practice;
(l) any payment, discharge or satisfaction of (i) any material
claims, liabilities or obligations (absolute, accrued, contingent
or otherwise) except in each case in the ordinary course of
business or (ii) any Indebtedness other than in the ordinary
course of business;
(m) any amendment or modification to any provision of the
Articles of Incorporation or the By-laws of the Company;
(n) any material discount or acceptance of less than full
payment with regard to accounts receivable and other amounts due
or any sale of any inventory at less than fair market value or
any bulk sale of such inventory except in the ordinary course of
business;
(o) any change in any method of Tax or financial accounting or
accounting principle or practice except for any such change
required by law or GAAP;
(p) any split, combination or reclassification of any of the
capital stock of the Company or any Company Equity Security or
issuance or authorization of any other securities in respect of,
in lieu of or in substitution for shares of the capital stock of
the Company or any Company Equity Security or repurchase,
cancellation or other acquisition or retirement of any shares of
the capital stock of the Company or any Company Equity Security;
(q) any other material action taken or any other material
transaction entered into other than in the ordinary course of
business and in accordance with past custom and practice, other
than the transactions contemplated by this Agreement;
(r) any action which, if taken after the date hereof, would
require the consent of the Buyer under Article V; and
(s) any agreement or Contract, whether in writing or otherwise,
to take any action described in this Section 3.9.
3.10. Title to Properties; Encumbrances. The Company has
good and marketable title to, or valid rights to use, all
properties and assets (tangible and intangible) necessary to
conduct the Company's business as presently conducted by the
Company in all material respects. Schedule 3.10(a) hereto lists
all real properties and interests therein owned or leased by the
Company as of the date hereof. Except as set forth in Schedule
3.10(b):
(a) the Company has good and marketable title to each of the
real properties required to be listed in Schedule 3.10(a) and has
good title to all tangible personal properties and other assets
shown as owned by the Company on its books and records (except
for properties and assets acquired under installment purchase
contracts or held pursuant to capitalized leases), except for
such defects of title, if any, as could not reasonably be
expected to, individually or in the aggregate, materially
interfere with the present use of or materially impair the value
of such properties or assets or otherwise have a Material Adverse
Effect (without giving effect to clause (y) of the definition
thereof);
(b) none of the properties or assets of the Company is subject
to any Encumbrance except (i) Encumbrances securing Indebtedness
(a complete and correct list of which is set forth in Schedule
3.10(b) hereto), all of which shall be terminated and released at
or prior to the Closing upon Buyer's payment pursuant to Section
1.6, or (ii) Permitted Encumbrances;
(c) with respect to each parcel of real property owned by the
Company: (i) there are no leases, subleases, licenses, or other
agreements granting to any party or parties the right of use or
occupancy of any portion of the parcel of real property; (ii)
there are no pending and, to the Knowledge of the Company,
threatened, condemnation proceedings affecting such parcel; (iii)
there are no outstanding options or rights of first refusal to
purchase the parcel of real property, or any portion thereof or
interest therein; and (iv) there are no parties (other than the
Company) in possession of any parcel of real property; and
(d) with respect to real property leased or subleased by the
Company: (i) each lease or sublease is in full force and effect
as of the date hereof; and (ii) the Company is not, and to the
Knowledge of the Company no other party to such leases or
subleases is, in material breach or default or has repudiated any
material provision thereof.
3.11. Patents, Trademarks, Trade Names. Except as noted
thereon, Schedule 3.11 lists all material patents, trademarks,
service marks and trade names and all registrations and
applications for registration for any of the foregoing
(collectively, the "Intellectual Property Rights") owned or used
(pursuant to license agreements or otherwise) in the conduct of
the businesses of the Company as of the date hereof. To the
Knowledge of the Company as of the date hereof and except as set
forth in Schedule 3.11 hereto, the Company's use of Intellectual
Property Rights does not conflict with or infringe on the rights
of any third person, except for such conflicts or infringements
which could not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect (without giving effect
to clause (y) of the definition thereof). Except as set forth in
Schedule 3.11, the Company owns or possesses a valid license to
use all Intellectual Property Rights as necessary for the present
operation of its business, and the Company has no Knowledge, as
of the date hereof, of (a) any infringement by third parties of
the Company's rights in such Intellectual Property Rights; or (b)
any claim contesting the validity or enforceability of such
Intellectual Property Rights, except where the loss or expiration
of the Intellectual Property Rights could not reasonably be
expected to, individually or in the aggregate, have a Material
Adverse Effect (without giving effect to clause (y) of the
definition thereof).
3.12. Material Contracts.
(a) Schedule 3.12 lists all written or oral agreements,
contracts and commitments (or groups of related agreements,
contracts and commitments with the same or related parties)
("Contracts") to which the Company is a party or by which its
assets are bound comprising the following:
(i) Contracts (other than purchase orders) which have a term of
one year or more or involve commitments in excess of $250,000;
(ii) purchase orders (or group of related purchase orders) to buy
inventory for amounts in excess of $650,000;
(iii) Contracts to which any Affiliate of the Company or, to
the Company's Knowledge, of any Seller, officer or director of
the Company or any entity in which such person holds an interest
(other than a de minimis interest) is a party;
(iv) Contracts pursuant to which the Company is entitled or
obligated to acquire or sell any assets from or to a third party
for a purchase price in excess of $250,000 (other than Contracts
between the Company and its independent contractors on a form
consistent in all material respects with the forms of agreement
included in Schedule 3.25);
(v) Contracts which are collective bargaining agreements, union
or labor agreements;
(vi) Contracts creating any Encumbrance, other than Permitted
Encumbrances, and Contracts which evidence, secure or otherwise
relate to or create any Encumbrance relating to any Indebtedness
for which the Company has or could have any liability in excess
of $250,000;
(vii) Contracts which limit the ability of the Company to
engage in any business or conduct its business in any geographic
or product market or to buy or sell any goods or services from or
to any Person (other than restrictions contained in purchase
orders which limit sales by the Company to the direct selling
channel);
(viii) Contracts to which the United States government or any
department, agency or instrumentality thereof or any state or
local governmental agency or authority is a party involving
amounts in excess of $100,000;
(ix) Contracts which relate to the purchase, redemption, transfer
or voting of Company Equity Securities;
(x) Contracts which are employment agreements with any employee
of the Company;
(xi) Contracts which provide for a joint venture, partnership or
similar arrangement between the Company and any other Person; and
(xii) any other Contract of the Company the loss of which
could reasonably be expected to have, directly or indirectly,
individually or in the aggregate, a Material Adverse Effect
(without giving effect to clause (y) of the definition thereof).
True and complete copies of all Contracts required to be listed
on Schedule 3.12 have been provided to the Buyer prior to the
date hereof.
(b) Except as set forth in Schedule 3.12, (x) each Contract of
the Company required to be disclosed in Schedule 3.12 is a valid
and binding obligation, enforceable in accordance with its terms
in all material respects, (y) the Company has performed all the
material obligations required to be performed by it in connection
with the Contracts required to be disclosed in Schedule 3.12, has
not given notice of the cancellation thereof, is not in material
breach thereof and is not in receipt of any written claim of
default under any such Contract and (z) to the Knowledge of the
Company as of the date hereof, no such Contract has been breached
in any material respect or cancelled by any other party thereto
and the Company has not received any written notice of any
default by it thereunder.
3.13. Litigation. Except as set forth in Schedule 3.13,
there is no action, proceeding, claim or investigation pending
or, to the Knowledge of the Company, threatened against the
Company, which could reasonably be expected to result, directly
or indirectly, individually or in the aggregate, in a Material
Adverse Effect. The Company is not in violation of any judgment,
order or decree entered against it or to or by which its assets
or properties are subject or bound.
3.14. Compliance with Laws. The Company has conducted its
business in compliance with all laws, rules, regulations,
ordinances, orders, judgments and decrees applicable to its
business, properties or operations, except for violations which
could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect.
3.15. Taxes.
(a) The Company has filed all Tax Returns that it was required
to file, all such Tax Returns are true, correct and complete and
the Company has paid all Taxes shown on such Tax Returns as
owing, except, in each case, for failures, that could not
reasonably be expected, individually or in the aggregate, to have
a Material Adverse Effect (without giving effect to clause (y) of
the definition thereof).
(b) Schedule 3.15 lists all federal income Tax Returns
filed by the Company for any taxable year ending on or after
December 31, 1990, and lists all federal, state, local or foreign
income Tax Returns that have been audited or currently are the
subject of audit. The Company has made available to the Buyer
correct and complete copies of all income Tax Returns filed by it
for all open taxable years and all examination reports and
statements of deficiencies received with respect to such returns.
The Company has made available to Buyer a good faith draft of the
Company's 1998 federal income Tax Return.
(c) The Company has never been a member of an Affiliated Group
filing a consolidated federal income Tax Return.
(d) Except as set forth in Schedule 3.15 attached hereto:
(i) the Company has not consented to extend to a date later than
the date hereof the time in which any Tax may be assessed or
collected by any taxing authority;
(ii) no deficiency or proposed adjustment which has not been
settled or otherwise resolved for any amount of Tax has been
proposed, asserted or assessed by any taxing authority against
the Company;
(iii) there is no action, suit, taxing authority proceeding
or audit now pending against the Company with respect to any
Taxes; and
(iv) no written claim has been made within the past three years
(and no written claim has, to the Knowledge of the Company, been
made at any time prior to such three-year period) by a taxing
authority in a jurisdiction where the Company does not currently
file Tax Returns that the Company is or may be subject to Taxes
assessed by such jurisdiction.
(e) The Company has timely withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or
owing to any employee, creditor, independent contractor, or other
third party (other than any such Taxes arising from a
misclassification of an employee as an independent contractor),
and the Company has timely collected and paid all Taxes required
to have been collected and paid in connection with any amounts
received from any customer or other third party.
(f) For all taxable periods (and any portion of a taxable
period) ending prior to March 31, 1997, the Company was an S
Corp. The Company has never been liable for any Taxes imposed
under Section 1374(a) or 1375(a) of the Code.
(g) The Tax Returns of the Company with respect to federal
income Taxes have been examined by the IRS and the examination
has been closed, or the statute of limitations with respect to
such Tax Returns has expired, for all Tax periods through and
including the taxable year ending December 31, 1996.
(h) No election has been made to have the provisions of Section
341(f) of the Code apply to the Company.
(i) The Company is not a party to or bound by any Tax sharing or
similar agreement or arrangement.
(j) Except as set forth on Schedule 3.15(j), no deficiency or
proposed adjustment that has not been settled or otherwise
resolved relating to the classification of any individual as an
independent contractor or employee has been proposed, asserted or
assessed by any taxing authority against the Company nor has any
such individual proposed or asserted any challenge formally in
writing that has not been settled or otherwise resolved (which
challenge actually involves the Company or of which challenge the
Company has Knowledge) to the Company's classification of such
individual.
(k) The Company has not agreed, and is not required, to make any
adjustment under Section 481 of the Code (or any comparable
provision of state, local or foreign law) by reason of a change
in accounting methods or otherwise (except for a possible
adjustment resulting from the Form 3115 relating to the
calculation of uniform capitalization submitted by the Company to
the IRS dated December 31, 1998).
(l) The Company has not misclassified any employee as an
independent contractor or failed to timely withhold and pay any
Taxes required to have been withheld and paid in connection with
amounts paid or owing to any such employee so misclassified.
3.16. Benefit Plans.
(a) Schedule 3.16 contains an accurate and complete list of all
Benefit Plans (i) maintained or sponsored by the Company, (ii)
contributed to by the Company or to which the Company has an
obligation to contribute, or (iii) covering any current or former
employees, officers, directors or independent contractors of the
Company, or with respect to which the Company has any material
liability. For purposes of the Agreement, the term "Benefit
Plans" shall mean: (i) employee benefit plans as defined in
Section 3(3) of ERISA, (ii) employment agreements, and (iii) any
other employee benefit plan, program, policy, practice, or other
arrangement, whether or not written, including any bonus,
incentive, deferred compensation, vacation, stock purchase, stock
option, severance, change of control or fringe benefit plan,
program or agreement, whether or not subject to ERISA, and
whether or not funded. The Company has not had, at any time
during the last six years, any obligation to contribute to any
"multiple employer welfare arrangement" as such term is defined
in Section 3(40) of ERISA, any "multiemployer pension plan" as
such term is defined in Section 3(37) of ERISA, or with respect
to any employee benefit plan of the type described in Sections
4063 and 4064 of ERISA or in Section 413(c) of the Code (and
regulations promulgated thereunder). Each Employee Benefit Plan
that is an employee welfare benefit plan under Section 3(1) of
ERISA is either (i) funded through an insurance company contract
and is not a "welfare benefit fund" within the meaning of Section
419 of the Code or (ii) unfunded.
(b) The Company does not contribute to or have any liability
with respect to any Benefit Plan which provides health, life
insurance, accident or other "welfare-type" benefits to current
or future retirees or current or future former employees, their
spouses or dependents, other than in accordance with Section
4980B of the Code or applicable state continuation coverage law.
(c) The Company does not sponsor or contribute to or have any
liability with respect to any Benefit Plan that is a "defined
benefit plan" as defined in Section 3(35) of ERISA or that is
intended to be qualified under Section 401(a) of the Code.
(d) Through the date hereof, each Benefit Plan and all related
trusts, insurance contracts and funds have been maintained,
funded and administered in compliance with its terms, all
reporting and disclosure requirements and applicable laws and
regulations, including ERISA and the Code. As of the date
hereof, no actions, suits, claims (other than routine claims for
benefits), Taxes, penalties or Encumbrances with respect or
relating to the Benefit Plans are pending or, to the Knowledge of
the Company, threatened, or have been assessed or incurred.
(e) With respect to each Benefit Plan, the Company has provided
Buyer with true, complete and correct copies, to the extent
applicable, of (i) all documents pursuant to which the Benefit
Plans are maintained, funded and administered, including all
amendments thereto, (ii) the most recent annual report (Form 5500
series) filed with the IRS (with attachments), (iii) the most
recent actuarial report, (iv) the most recent financial
statements, and (v) all governmental rulings and determinations
and opinions (and pending requests for governmental rulings,
determinations and opinions).
(f) Except as set forth in Schedule 3.16(f) or as specifically
contemplated by Section 1.5, Section 6.5 and Section 6.11 of this
Agreement, neither the execution and delivery of the Agreement
nor the consummation of the transactions contemplated hereby will
(either alone or in conjunction with any other event such as
termination of employment) result in, cause the accelerated
vesting or delivery of, or increase the amount or value of, any
payment or benefit to any employee, officer or director of the
Company. No amount paid or payable by the Company in connection
with the transactions contemplated hereby (either solely as a
result thereof or as a result of such transactions in conjunction
with any other event such as termination of employment) will be
an "excess parachute payment" within the meaning of Section 280G
of the Code; provided, that the foregoing representation is not
made with respect to any amounts payable pursuant to the plan
provided for in Section 6.5(b) or the agreements provided for in
Section 7.10.
(g) There does not now exist, nor do any circumstances exist
that could result in, any Controlled Group Liability that would
be a liability of the Company following the Closing. For the
purposes of the foregoing, "Controlled Group Liability" means any
and all liabilities (i) under Title IV of ERISA, (ii) under
Section 302 of ERISA, (iii) under Sections 412 and 4971 of the
Code and (iv) as a result of a failure to comply with the
continuation coverage requirements of Section 601 et seq. of
ERISA and Section 4980B of the Code.
(h) All individuals who are or were in the past entitled to
coverage under any Benefit Plan under the terms thereof or under
applicable law or regulation are receiving and have received (as
applicable) such coverage.
3.17. Labor Disagreements. Except as set forth in Schedule
3.17, since December 31, 1998, the Company has not experienced
any material labor disputes or any material work stoppages, and,
to the Knowledge of the Company, as of the date hereof there is
no such dispute or work stoppage threatened against the Company.
3.18. Environmental Matters. Except for matters disclosed in
Schedule 3.18, and except for matters that could not reasonably
be expected to result, individually or in the aggregate with all
such other matters, in a Material Adverse Effect: (i) the
properties, operations and activities of the Company are in
compliance with all applicable Environmental Laws; (ii) the
Company and the properties and operations of the Company are not
subject to any existing, pending or, to the Knowledge of Company,
threatened action, suit, claim, investigation, inquiry or
proceeding by or before any governmental authority under any
Environmental Law; (iii) all notices, permits, licenses, or
similar authorizations, if any, required to be obtained or filed
by the Company under any Environmental Law in connection with any
aspect of the business of the Company, including those relating
to the treatment, storage, disposal or release of a hazardous or
otherwise regulated substance, have been duly obtained or filed
and will remain valid and in effect after the Closing, and the
Company is in compliance with the terms and conditions of all
such notices, permits, licenses and similar authorizations; (iv)
the Company has satisfied and is currently in compliance with all
financial responsibility requirements applicable to its
operations and imposed by any governmental authority under any
Environmental Law, and the Company has not received any notice of
noncompliance with any such financial responsibility
requirements; (v) there are no physical or environmental
conditions existing on any property of the Company or resulting
from the Company's operations or activities, past or present, at
any location, that would give rise to any on-site or off-site
remedial obligations imposed on the Company under any
Environmental Laws or that would impact the soil, groundwater,
surface water or human health; (vi) since the effective date of
the relevant requirements of applicable Environmental Laws and to
the extent required by such applicable Environmental Laws, all
hazardous or otherwise regulated substances generated by the
Company have been transported, to the Company's Knowledge, only
by carriers authorized under Environmental Laws to transport such
substances and wastes, and disposed of only at treatment,
storage, and disposal facilities authorized under Environmental
Laws to treat, store or dispose of such substances and wastes;
(vii) there has been no exposure of any person or property to
hazardous substances or any pollutant or contaminant, nor has
there been any release of hazardous substances, or any pollutant
or contaminant into the environment by the Company or in
connection with its properties or operations that could
reasonably be expected, individually or in the aggregate, to give
rise to any claim against the Company for damages or
compensation; and (viii) the Company has made available to Buyer
all internal and external environmental audits and studies and
all correspondence on substantial environmental matters in the
possession of the Company relating to any of the current or
former properties or operations of the Company.
For purposes of this Agreement, the term "Environmental
Laws" shall mean any and all laws, statutes, ordinances, rules,
regulations, or orders of any Governmental Entity pertaining to
health or the environment currently in effect in any and all
jurisdictions in which the Company owns property, including the
Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the
Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976 ("RCRA"), as
amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste
Amendments Act of 1984, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, the Oil Pollution Act of 1990
("OPA"), any state laws implementing, the foregoing federal laws,
and all other environmental conservation or protection laws. For
purposes of this Agreement, the terms "hazardous substance" and
"release" have the meanings specified in CERCLA and RCRA and
shall include petroleum and petroleum products, radon and PCB's,
and the term "disposal" has the meaning specified in RCRA;
provided, however, that to the extent the laws of the state in
which the property is located establish a meaning for "hazardous
substance," "release," or "disposal" that is broader than that
specified in either CERCLA or RCRA, such broader meaning shall
apply.
3.19. Brokers', Finders' Fees, etc. Neither the Company (as
of the Closing) nor the Buyer shall have any liability or
obligation to pay any brokerage commission, finders' fees, or
similar compensation or any legal or professional fees incurred
in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on
behalf of the Company or any Seller. Schedule 3.19 lists all
persons who may be entitled to any brokerage commission, finders'
fees, or similar compensation or any legal or professional fees
incurred in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on
behalf of the Company or, to the Knowledge of the Company, any
Seller.
3.20. Affiliate Transactions.
(a) Except as disclosed in Schedule 3.20(a), to the Knowledge of
the Company, no Seller or any officer or director or Affiliate of
the Company or of any Seller or any entity in which any such
Person owns any beneficial interest (other than a de minimis
interest), is or has been since January 1, 1998 a party to any
material Contract or transaction with the Company or has any
interest (other than a de minimis interest) in any material
property, real or personal or mixed, tangible or intangible, used
in the business of the Company; and no Affiliate of EGI-BAF
Investors, L.L.C. or EGI-BAF Investors II, L.L.C. (ignoring the
proviso to the first sentence of the definition of "Affiliate")
or any entity in which any such Person owns any beneficial
interest (other than a de minimis interest), to the Knowledge of
such entities, is a party to any such Contract or transaction or
has any such interest other than on an arm's-length basis.
(b) Except as set forth in Schedule 3.20(b), no amount is or
will be owed or otherwise payable to any party hereto, any
current or former holder of any Company Equity Securities or any
current or former employees or independent contractors of the
Company by the Buyer or the Company as a result of the
transactions contemplated hereby except with respect to the
payments provided in Article I, Article X, Article XII and
Section 6.5.
(c) Except as set forth in Schedule 3.20(c), no current or
former holder of any Company Equity Securities and no current or
former employee or independent contractor of the Company owes any
monies or is otherwise obligated to make payments to the Company
(other than the repayment of customary employee advances in de
minimis amounts made in the ordinary course of business and
obligations of independent contractors with respect to inventory
or sales materials purchased in the ordinary course of business
pursuant to agreements described in Section 3.25(a)).
3.21. Indebtedness. Schedule 3.21 sets forth a true and
complete list of all Indebtedness of the Company, in each case
showing, as of the date set forth thereon, the aggregate
principal amount thereof and the name of any Person which
directly or indirectly guaranteed such debt. None of such
Indebtedness was incurred in connection with, or in contemplation
of, the transactions contemplated by this Agreement.
3.22. Insurance. Schedule 3.22 lists and describes all
policies of insurance currently maintained by the Company or
covering its assets or operations. Except as set forth on
Schedule 3.22, all such insurance policies are in full force and
effect, the Company has not defaulted under and is not in default
with respect to its obligations under any insurance policies, the
Company has not been refused any insurance, nor has coverage been
limited by any insurance carrier to which the Company has applied
for insurance or with which the Company has carried insurance,
during the last two years.
3.23. Vendors; Warehouses.
(a) In each of the two most recently completed fiscal years, no
vendor or supplier of goods or services to the Company has
accounted for over 10% of the aggregate purchases by the Company
from all of its vendors or suppliers in such fiscal year.
Schedule 3.23(a) contains a true and complete list of the 10 most
significant (by amounts paid by the Company) suppliers (the "Top
10 Suppliers") of the Company for each of the two most recently
completed fiscal years, including the amount paid in each such
period to each Top 10 Supplier.
(b) There is no material disagreement between the Company and
any Top 10 Supplier or any warehouse with which the Company does
business and, to the Knowledge of the Company, there has been no
material disruption thereof and there exists no basis for any
such material disruption. Since December 31, 1998, to the
Knowledge of the Company, as of the date hereof, no Top 10
Supplier has refused the sale of books to the Company or
substantially increased the price at which it sells books to the
Company or otherwise materially and adversely altered the terms
on which it supplies books to the Company.
3.24. Year 2000 Compliance. The Company has taken steps
(summarized in Schedule 3.24) that are reasonable to ensure that
the occurrence of the year 2000 will not materially and adversely
affect the information and business systems of the Company, and
no expenditures in excess of currently budgeted items will be
required in order to cause such systems to operate properly
following the change of the year 1999 to 2000. The Company has
taken the actions described in such Schedule (to the extent
described therein), has resolved (or is in the process of
resolving) any issues arising as a result of tests taken or
otherwise to the Knowledge of the Company, and is not aware of
any fact that would lead one to reasonably conclude that the
Company will be unable to resolve any of such issues on the
timetable set forth in Schedule 3.24 (and in any event on a
timely basis in order to be resolved before the year 2000).
Neither the Company nor any Affiliate of the Company on behalf of
the Company has guaranteed to or agreed with any customer or
third Person that goods or services sold or performed by the
Company will not be affected by any "Year 2000 Problem."
3.25. Certain Other Matters.
(a) Included in Schedule 3.25 are forms of each type of
agreement used by the Company with respect to the engagement of
independent contractors and other sales representatives at any
time since January 1, 1998. The Company is not party to any
arrangements with independent contractors or other sales
representatives that differ from, supplement or are inconsistent
with, in any material respect, the relevant form of agreement
contained in Schedule 3.25.
(b) Since December 31, 1998, the Company has not experienced (or
received notice of) the loss, termination or other departure of
independent contractors or other sales representatives
collectively accounting for 10% or more of sales during any six-
month period since January 1, 1998 that have not been replaced or
planned to be replaced.
3.26. Fractional Interests. Exhibit K, Part I hereto
contains a true and complete list of the Equityholders entitled
to the Total Liquidation and Dividend Amount (with respect to
dividends, assuming an October 1, 1999 Closing Date) and each
such Equityholder's Liquidation and Dividend Percentage (which
represents such Equityholder's proportionate right to the Total
Liquidation and Dividend Amount hereunder based on such
Equityholder's fully diluted equity interest in the Company after
giving effect to Section 1.5(f)). Exhibit K, Part II hereto
contains a true and complete list of each Equityholder and such
Equityholder's Fractional Interest (which represents such
Equityholder's proportionate right to the Remaining Purchase
Price hereunder based on such Equityholder's fully diluted equity
interest in the Company). Payment to (a) the applicable
Equityholders set forth on Exhibit K, Part I of the Total
Liquidation and Dividend Amount in accordance with each such
Equityholder's Liquidation and Dividend Percentage and (b) all
Equityholders of each such Equityholder's Fractional Interest of
the Remaining Purchase Price shall satisfy in full all
obligations to such Equityholder under, and is consistent with,
all rights of each such Equityholder under the relevant
instruments, agreements and documents creating rights for such
Equityholder in such capacity.
3.27. Schedules. For purposes of this Agreement, any matter
that is disclosed in a Schedule to this Agreement in such a way
as to make its relevance to the information called for by another
Schedule to this Agreement readily apparent shall be deemed to
have been included in such other Schedule, notwithstanding the
omission of an appropriate cross-reference thereto. Disclosure
of any fact or item in any Schedule shall not necessarily mean
that such item or fact is material to the Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer hereby represents and warrants to the Company and
each of the Sellers as follows:
4.
4.1. Corporate Organization. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws
of the State of Delaware.
4.2. Authorization. The Buyer has the requisite power and
authority to enter into this Agreement and to carry out the
transactions contemplated hereby. The board of directors of the
Buyer has taken all action required to authorize the execution
and delivery of this Agreement, the performance of the Buyer's
obligations hereunder and the consummation of the transactions
contemplated hereby. No other corporate proceedings on the part
of the Buyer are necessary to authorize the execution, delivery
and performance by the Buyer of this Agreement. This Agreement
is a valid and binding Agreement of the Buyer, enforceable
against it in accordance with its terms except as the same may be
limited by (a) bankruptcy, insolvency, reorganization, moratorium
or similar laws now or hereafter in effect relating to creditors'
rights generally and (b) the application of equitable
principles, whether applied by a court of equity or law.
4.3. No Violation. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated
hereby will violate any provisions of the certificate of
incorporation or by-laws of the Buyer, or violate, or be in
conflict with, or allow the termination of, or constitute a
default under, or cause the acceleration of the maturity of, any
material debt or obligation pursuant to any material agreement or
commitment to which the Buyer is a party or by which the Buyer is
bound, or, to the best knowledge of the Buyer, violate any
statute or law or any judgment, decree, order, regulation or rule
of any court or governmental authority to which the Buyer is
subject.
4.4. Consents and Approvals of Governmental Authorities. Except
for compliance with the HSR Act and for consents, approvals or
authorizations which have been obtained, no consent, approval or
authorization of, or declaration, filing or registration with,
any governmental or regulatory authority is necessary or
advisable to be made or obtained by the Buyer in connection with
the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby.
4.5. Sophisticated Investor. The Buyer is a sophisticated
investor, represented by independent legal and investment counsel
with experience in the acquisition and valuation of ongoing
businesses and acknowledges that it has received, or has had
access to, all information which it considers necessary or
advisable to enable it to make an informed investment decision
concerning its purchase of the Stock. The Buyer is acquiring the
Stock for investment purposes only, and not with a view to, or
for, any public resale or other distribution thereof. The Buyer
is an "accredited investor" as such term is defined in the
regulations promulgated under the Securities Act of 1933, as
amended.
4.6. Other Investment Representations. (a) The Buyer and its
employees, agents and accounting and legal representatives have
been afforded reasonable access to the books, records, key
personnel, facilities and other information reasonably related to
the Stock and the business and affairs of the Company; (b) the
Buyer and its employees, agents and accounting and legal
representatives have been given a reasonable opportunity to ask
questions relating to the Stock and the business and affairs of
the Company and to receive answers thereto; (c) the Buyer has
performed such due diligence as the Buyer has deemed necessary in
order to review the business and affairs of the Company in
connection with its acquisition of the Stock; (d) in completing
the transactions contemplated in accordance with this Agreement,
the Buyer has not and is not relying on any representation or
warranty, whether by Seller, the Company or any other Person,
which is not expressly stated in this Agreement and (e) the Buyer
understands that no party hereto nor any Affiliates,
representatives or agents of any party is making any
representation or warranty whatsoever, oral or written, express
or implied, other than as set forth in this Agreement, and the
Buyer is not relying on any statement, representation or
warranty, oral or written, express or implied, made by another
party hereto, such other party's Affiliates, representatives or
agents, or any other Person, except as set forth in this
Agreement.
4.7. Brokers', Finders' Fees, etc. Neither the Company nor any
Seller shall have any liability or obligation to pay any
brokerage commission, finder's fees, or similar compensation in
connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of the
Buyer.
4.8. Ability to Pay. The Buyer has available to it sufficient
funds or credit capacity to enable it to consummate the
transactions contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PENDING CLOSING
From the date hereof to the Closing, (i) no Stockholder,
Warrantholder or Other Party shall transfer or Encumber their
respective Stock, Warrants or Stock Options and (ii) except as
set forth in Schedule 5.1 or consented to or approved by the
Buyer in writing, the Company shall conform to the following (and
shall not enter into any Contract for any transaction that would
violate the following if consummated at any time from the date
hereof through the Closing):
5.
5.1. Regular Course of Business. The Company shall carry on its
business substantially in the same manner as heretofore conducted
and shall not engage in any transaction or activity, enter into
any agreement or make any commitment except in the ordinary
course of business consistent with past practice or as required
by the terms of this Agreement.
5.2. Amendments. No change or amendment shall be made in the
Articles of Incorporation, By-laws or other governing instruments
of the Company.
5.3. Capital Changes. The Company will not do any of the
following:
(a) declare or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock,
other than pursuant to Section 1.5(d) or (f);
(b) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into
or exchangeable for any shares of its capital stock, or any
options, warrants or conversion or other rights to acquire any
shares of its capital stock or any such securities or obligations
or any other Company Equity Securities (including any
cancellation of Stock Options or Warrants through any exercise or
put for a cash payment), other than pursuant to Section 1.5(d) or
(f); (ii) effect any reorganization or recapitalization; or (iii)
split, combine or reclassify any of its capital stock or other
Company Equity Securities or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock or other Company
Equity Securities; and
(c) except for the issuance of Stock to Optionholders other than
the Sellers in accordance with the terms of Stock Options listed
on Schedule 3.3(a), (i) issue, deliver, award, grant or sell, or
authorize or propose the issuance, delivery, award, grant or sale
(including the grant of any Encumbrance) of, any shares of any
class of its capital stock (including shares held in treasury),
any securities convertible into or exercisable or exchangeable
for any such shares, or any rights, warrants or options to
acquire any such shares, or any Company Equity Security; or (ii)
amend or otherwise modify the terms of any Company Equity
Securities the effect of which shall be to make such terms more
favorable to the holders thereof.
5.4. Organization. The Company shall use reasonable efforts to
preserve its corporate existence and business organization intact
and to preserve its properties, tangible and intangible assets,
books and records, goodwill and relationships with its employees,
independent contractors, suppliers, customers and others with
whom it has business relations. The Company shall continue
construction with respect to the Fairfield, Iowa headquarters
building in accordance with the plan therefor (a true and
complete copy of which has been provided to the Buyer) in all
material respects.
5.5. Contracts. No contracts or commitments (or groups of
related contracts or commitments) shall be entered into, renewed
or amended by or on behalf of the Company involving the
expenditure of more than $250,000 or otherwise of a type that
would be required to be disclosed under Section 3.12(a)(i)-(xii),
provided, however, that the Company (i) may continue to make
payments with respect to the construction of the Fairfield, Iowa
headquarters building to the extent of the Company's 1999 capital
budget (a true and complete copy is included in Schedule 5.5
hereto) and (ii) may purchase inventory up to but not exceeding
$650,000 per order in the ordinary course of business.
5.6. Compensation. Except as set forth in Schedule 5.6 hereto,
the Company will not (a) grant any increase in compensation other
than normal merit and cost-of-living increases in the ordinary
course of business and in accordance with past practice to an
employee who is not an officer or (b) enter into or, except as
required by law, amend (except for amendments that do not
increase or decrease the costs of or benefits to participants
under any Benefit Plan by more than a de minimis amount) any
Benefit Plan, employment contract or consulting agreements.
5.7. Representations. The Company shall not take any action
which the Company reasonably expects would cause any of the
representations and warranties set forth herein to become untrue
in any material respect. In addition, the Company shall not
undertake any transaction of the type specified in (c) through
(s) of Section 3.9.
5.8. Taxes. The Company will not, except as required by law,
change any method of Tax accounting or practice used by the
Company (except for such changes resulting from the Form 3115
relating to the calculation of uniform capitalization submitted
by the Company to the IRS dated December 31, 1998) or make any
Tax election or settle or compromise any Tax dispute.
ARTICLE VI
ADDITIONAL AGREEMENTS
The parties hereto hereby covenant and agree as follows:
6.
6.1. Additional Covenants.
(a) Sellers, the Company and the Buyer shall each use their
reasonable best efforts to (i) take, or cause to be taken, all
appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable law or otherwise
to consummate and make effective the transactions contemplated by
this Agreement, (ii) obtain from any governmental or regulatory
authority or other third party any consents, licenses, permits,
waivers, approvals, authorizations or orders (and provide any
notices or filings) necessary or advisable to be obtained or made
(or provided) by Sellers, the Buyer or the Company in connection
with the authorization, execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby,
(iii) make all necessary filings with respect to this Agreement
required under the HSR Act as promptly as practicable after the
date hereof, and thereafter make any other required submissions
pursuant to the filings under the HSR Act, and (iv) make all
necessary filings, and thereafter make any other required
submissions, with respect to this Agreement required under any
other applicable law; provided that the Sellers, Buyer and the
Company shall cooperate with each other in connection with the
making of all such filings. Neither Sellers, nor the Buyer nor
the Company shall take any action, the intent or effect of which
is to frustrate, hinder or delay the consummation of the
transactions contemplated by this Agreement.
(b) Each party hereto shall promptly inform the other of any
communication from the Federal Trade Commission, the United
States Department of Justice or any other governmental or
regulatory authority regarding any of the transactions
contemplated hereby. If any party hereto or any Affiliate
thereof receives a request for additional information or
documentary material from any governmental or regulatory
authority with respect to the transactions contemplated hereby,
then such party will endeavor in good faith to make or cause to
be made, as soon as reasonably practicable and after consultation
with the Buyer and the Company, an appropriate and satisfactory
response in compliance with such request.
6.2. Reasonable Access. The Company shall afford to the Buyer
and to its authorized representatives, during reasonable business
hours, full access to the facilities, properties, personnel,
books and records of the Company in order that the Buyer may have
full opportunity to make such additional investigation as it
shall reasonably desire to make of the affairs of the Company.
For the purpose of facilitating such investigation, the Company
shall promptly designate individuals, each of whom shall be
empowered to receive and act upon such requests, and the Buyer
shall use its reasonable best efforts so that no communication
shall be made by the Buyer or its authorized representatives with
any employee, officer or agent of the Company who has not been so
designated in writing without the prior written consent of the
designee. Notwithstanding the foregoing, the Buyer, directly or
indirectly, shall not contact any customer, independent
contractor, distributor or supplier of the Company without the
consent of the Company (it being understood and agreed that the
Company and the Buyer shall develop a joint plan pursuant to
which the Company shall, promptly following the date hereof,
introduce the Buyer to and provide the Buyer access to such
customers, independent contractors, distributors and suppliers as
Buyer may request to facilitate transition).
6.3. Confidentiality. The Buyer and the Buyer Representatives,
through access granted by the Buyer, will be provided certain
information relating to the Company which is non-public,
confidential or proprietary in nature. The Buyer shall, and
shall cause its directors, officers, employees, partners,
affiliates, agents, advisors and representatives (the "Buyer
Representatives") to, and the Company shall, comply fully with
and be bound by all terms and conditions of the Confidentiality
Agreement.
6.4. Amendment of Charter Documents; Insurance. For a period of
six (6) years after the Closing Date, the Buyer shall not amend
the corporate charter or by-laws of the Company, if the effect of
doing so would be to reduce or narrow the scope of the Company's
obligations to indemnify its officers and directors who served in
such capacities prior to the Closing Date or to reduce or narrow
the scope of any exculpatory provision in favor of any such
person. The Buyer acknowledges that the intent of this provision
is to give such Persons the benefits of indemnity and exculpation
to the full extent contained in the corporate charter and by-laws
of the Company as of the date hereof. This Section 6.4 is
intended to be for the benefit of, and shall be enforceable by,
the persons referred to above, their heirs and personal
representatives, and shall be binding on the Company, the Buyer,
and their respective successors and assigns.
6.5. Employee Matters.
(a) The Buyer agrees that the Company will continue to employ
for a period of at least three (3) months from the Closing Date
all of the Company's employees on substantially the same terms in
the aggregate for each employee as he or she was employed
(excluding equity-based compensation) by the Company prior to the
Closing Date, provided that the Company may terminate any
employee at any time for cause. The Buyer further agrees that it
will continue to employ for a period of at least six (6) months
from the Closing Date all of the employees listed on Schedule
6.5, provided that the Company may terminate any employee at any
time for cause. Notwithstanding the foregoing, the Buyer agrees
that in the event that it terminates the employment of any of the
employees set forth on Schedule 6.5 who has entered into an
agreement pursuant to Section 7.10 hereof without cause on or
before the one-year anniversary of the Closing Date, it will
provide to such employee, as a severance payment, at such
employee's election: (a) the severance compensation otherwise
payable, if any, pursuant to his or her employment contract with
the Company (which contract, if any, is identified on Schedule
6.5), or (b) one year's salary and welfare benefits for a period
of one year after the date of his or her termination (the
"Severance Payment Options"). In addition, the Buyer agrees that
it will notify, in writing, such terminated employees of their
Severance Payment Options hereunder not later than five (5) days
after the termination of their employment.
(b) Immediately following the Closing, the Buyer shall cause the
Company to adopt an incentive plan in accordance with the term
sheet set forth in Exhibit H hereto; provided that the
Stockholders have previously approved such plan in a manner
intended to satisfy the requirements of Section 280G(b)(5)(A)(ii)
of the Code and the proposed Treasury Regulations thereunder, and
provided, further, that such approval has taken place in
accordance with the procedures and documentation that have been
previously provided to the Buyer, and provided, finally, that the
percentage and identity of the Stockholders that approved such
plan satisfy the requirements of such Code section and Treasury
Regulations.
6.6. Operating Facilities. The Buyer agrees that it will
maintain for a period of at least two (2) years from the Closing
Date the principal operating facilities of the Company in
Fairfield, Iowa and will not change the location of the principal
operating facilities of the Company during such period.
6.7. No Solicitation. From the date hereof until the earlier to
occur of (i) the termination of this Agreement pursuant to the
terms and conditions hereof and (ii) the Closing, the Company
shall not, and shall instruct its representatives, directors,
officers, agents and Affiliates not to, initiate, solicit,
negotiate, accept, discuss or furnish any information toward any
proposal or with respect to any proposal to acquire (whether by
merger, purchase of stock, purchase of assets or otherwise) all
or substantially all or any significant part of the business,
properties, capital stock or capital stock equivalents of the
Company (an "Acquisition Proposal").
6.8. Termination of Discussions. The Company represents and
warrants to the Buyer that the Company and its representatives,
directors, officers, agents and Affiliates have terminated all
discussions and negotiations with third parties respecting any
Acquisition Proposal, and the Company is not a party to or bound
by any agreement for an Acquisition Proposal (other than a
confidentiality agreement) other than pursuant to the terms and
conditions of this Agreement. Since June 1, 1999 the Company has
not waived or amended, and following the date hereof the Company
shall not waive or amend, any provision of any agreement
respecting the confidentiality of information furnished by or on
behalf of the Company.
6.9. Notice of Certain Matters. Each party hereto covenants and
agrees to give prompt notice in writing to the Buyer and the
Company of the occurrence of any event that would reasonably be
expected to result in the failure to satisfy a condition
specified herein and of any notice or other communication from
any third Person alleging that the consent of such third Person
is or may be required in connection with the transactions
contemplated by this Agreement.
6.10. Unaudited Financial Statements. The Company shall
prepare and deliver to the Buyer unaudited consolidated balance
sheets and statements of earnings prepared in accordance with
GAAP (subject to changes resulting from normal year-end
adjustments which are not material, individually or in the
aggregate, and subject to the absence of footnote disclosure) and
in a manner consistent with the Interim Financial Statements for
each full fiscal month beginning with July 1999 and ending prior
to the Closing Date of the type customarily generated by the
Company as soon as available, but no later than 30 days after the
end of the relevant fiscal month.
6.11. Stock Options and Warrants.
(a) Prior to the Closing Date, the terms of each option to
purchase shares of Common Stock or Preferred Stock (individually,
a "Stock Option" and collectively, the "Stock Options") which are
then outstanding and exercisable, and the terms of each
outstanding warrant to purchase Common Stock or Preferred Stock
(individually, a "Warrant" and collectively, the "Warrants")
shall be complied with by the Company, subject to the terms of
this Agreement. To the extent any such Stock Options shall have
been exercised in whole or in part, (i) the holder thereof shall
have executed a joinder to this Agreement, in the form of Exhibit
G, to become a Stockholder hereunder with respect to all of the
shares of Common Stock and Preferred Stock issuable with respect
to such Stock Option (with appropriate modifications to Exhibits
A, B, C, D and K, as applicable) and (ii) the holder thereof
shall cease to be an Optionholder hereunder with respect to such
exercised Stock Options. In the event that any Stock Options are
terminated or expire without exercise prior to Closing, Exhibits
A, B, D and K, as applicable, shall be revised accordingly.
(b) Each Other Party and Warrantholder agrees not to tender to
the Company, pursuant to an exercise of any "put" right or other
right to exercise for payment of cash, or otherwise exercise or
convert in any manner, any Stock Options or Warrants, as
applicable, prior to the Closing.
(c) Immediately prior to the Closing, each Stock Option then
outstanding and unexercised shall be cancelled and terminated in
exchange for the cash payment to the applicable Other Party or
Optionholder as provided in Section 1.5, and upon the Closing any
Warrants then outstanding and unexercised shall be sold to the
Buyer hereunder as provided in Section 1.5.
6.12. Equityholders' Agreement.
(a) The Company and Sellers shall comply with the Equityholders'
Agreement in all respects and shall enter into such amendments,
supplements or modifications thereto or waivers thereunder as may
be required to fully effect the terms of this Agreement.
(b) Sellers hereby covenant that, as to the Company, the
Equityholders' Agreement shall terminate upon the Closing.
ARTICLE VII
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
The obligations of the Buyer under this Agreement shall be
subject to the satisfaction, on or before the Closing, of each of
the following conditions:
7.
7.1. Representations and Warranties. The representations and
warranties of the Sellers and the Company contained herein (i)
which are qualified as to materiality, shall be true and accurate
in all respects and (ii) which are not so qualified, shall be
true and accurate in all material respects, in each case as of
the date made and as of the Closing as though such
representations and warranties were made at and as of the Closing
(other than representations and warranties which speak only as of
a specific date, which need only be true and accurate as of such
date), and the Buyer shall have received at the Closing a
certificate, dated the Closing Date, signed by the Sellers and
the president or a vice president of the Company to such effect.
7.2. Performance. The Sellers and the Company shall have
performed and complied, in all material respects, with all
agreements, obligations and conditions required to be performed
or complied with by them on or prior to the Closing; and the
Buyer shall have received at the Closing a certificate, dated the
Closing Date, signed by the Sellers and the president or a vice
president of the Company to such effect.
7.3. Approvals and Filings. The waiting period under the HSR Act
shall have expired or been terminated and all other consents,
authorizations and approvals from, and all declarations, filings
and registrations with, government or regulatory authorities
other than as could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect (without
giving effect to clause (y) of the definition thereof) (provided
that those listed on Schedule 7.3 shall have been obtained or
made in any case without qualification as to materiality),
required to consummate the transactions contemplated hereby and
permit the Company to continue its business consistent with its
past practice shall have been obtained or made, in any case,
without the imposition of any condition on or the payment of any
fees (other than ordinary filing fees) by the Company or the
Buyer.
7.4. Third Party Consents. The Buyer shall have received copies
or other evidence acceptable to the Buyer of all third party
consents, waivers, approvals, authorizations or actions other
than as could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect (without giving
effect to clause (y) of the definition thereof) (provided that
those listed on Schedule 7.4 shall have been obtained or made in
any case without qualification as to materiality), required to
consummate the transactions contemplated by this Agreement, in
any case, without the imposition of any conditions on the Company
or the Buyer or the payment (x) prior to the Closing of (i) any
fees (other than non-significant fees) by the Company or (ii) any
fees by the Buyer or (y) after the Closing of any fees by the
Buyer or the Company.
7.5. Material Adverse Effect. There shall not have occurred any
Material Adverse Effect (without giving effect to clause (y) of
the definition thereof) since December 31, 1998.
7.6. No Injunction. There shall not be in effect any preliminary
or permanent injunction or other order issued by any state or
federal court which prevents the consummation of the transactions
contemplated hereby.
7.7. Opinion of Counsel. The Buyer shall have received written
opinions dated as of the Closing Date from counsel to the Company
and the Buyer Indemnitors in the forms attached hereto as Exhibit
E.
7.8. Indebtedness. Upon the payment of Indebtedness by the Buyer
pursuant to Section 1.6 in accordance with the Indebtedness
Certificate, all Indebtedness of the Company shall have been
repaid and discharged and any related Encumbrance released, and
all obligations under Contracts with respect thereto shall have
been released; and the Buyer shall have received a payoff,
release and termination letter executed by all other parties to
such Indebtedness and documentation for the release of all
Encumbrances, confirming the foregoing in form and substance
reasonably satisfactory to the Buyer.
7.9. [INTENTIONALLY DELETED]
7.10. Non-Competition/Non-Solicitation Agreements. Each of
the individuals listed in Exhibit F shall have entered into a Non-
Compete/Non-Solicitation Agreement substantially in the form
attached as Exhibit F hereto and the Stockholders of the Company
shall have previously or simultaneously approved such agreement
in a manner intended to satisfy the requirements of Section
280(G)(b)(5)(A)(ii) of the Code and the Treasury Regulation
thereunder and in accordance with the procedures and
documentation that have been previously provided to the Buyer,
and the percentage and identity of Stockholders that approved
such agreement shall have satisfied the requirements of such Code
section and Treasury Regulations.
7.11. Guarantee of Obligations. The Person listed as the
Guarantor in Exhibit I shall have executed a guarantee
substantially in the form attached as Exhibit I hereto.
7.12. Assumption of Professional Fees Agreements. The
Company, the Buyer Indemnitors and the parties listed in Schedule
3.19 shall have delivered an agreement in the form attached as
Exhibit J hereto by which the Buyer Indemnitors shall have
assumed, and the Company shall have been released from, all
obligations in respect of the agreements and arrangements
required to be listed on Schedule 3.19.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE SELLERS' OBLIGATIONS
The obligations of the Sellers under this Agreement shall be
subject to the satisfaction, on or before the Closing, of each of
the following conditions:
8.
8.1. Representations and Warranties. The representations and
warranties of the Buyer contained herein shall be true and
accurate in all material respects as of the date when made and as
of the Closing as though such representations and warranties were
made at and as of the Closing, and the Sellers shall have
received at the Closing a certificate, dated the Closing Date,
signed by the president or a vice president of the Buyer to such
effect.
8.2. Performance. The Buyer shall have performed and complied
with, in all material respects, all agreements, obligations and
conditions required by this Agreement to be performed or complied
with by it on or prior to the Closing; and the Sellers shall have
received at the Closing a certificate, dated the Closing Date,
signed by the president or a vice president of the Buyer to such
effect.
8.3. Approvals and Filings. The waiting period under the HSR Act
shall have expired or been terminated and all other material
consents, authorizations and approvals from, and all material
declarations, filings and registrations with, government agencies
or third parties required to consummate the transactions
contemplated hereby without a violation of law shall have been
obtained or made.
8.4. No Injunction. There shall not be in effect any preliminary
or permanent injunction or other order issued by any state or
federal court which prevents the consummation of the transactions
contemplated hereby.
8.5. Opinion of Counsel. The Sellers shall have received a
written opinion or opinions dated as of the Closing Date from
Buyer in the form or forms attached hereto as Exhibit L.
ARTICLE IX
TERMINATION AND ABANDONMENT
9.
9.1. Methods of Termination. This Agreement may be terminated
and the transactions herein contemplated may be abandoned at any
time but not later than the Closing:
(a) by mutual consent of the Company and the Buyer; or
(b) by either the Company or the Buyer at any time after October
30, 1999 (provided that if the only cause for the Closing not
having occurred is the lack of expiration or termination of the
waiting period under the HSR Act such date shall be extended
until 5 business days after such expiration or termination, but
in no case beyond December 31, 1999); provided that the party
seeking termination is not in material violation or breach of its
agreements, representations or warranties contained in this
Agreement; or
(c) by the Company if there has been a material violation or
breach by the Buyer of its agreements, representations or
warranties contained in this Agreement and if the Company and the
Sellers are not then in material violation or breach of its
agreements, representations or warranties contained in this
Agreement; or
(d) by the Buyer if there has been a material violation or
breach by any of the other parties hereto of its agreements,
representations or warranties contained in this Agreement and if
the Buyer is not then in material violation or breach of its
agreements, representations or warranties contained in this
Agreement.
9.2. Procedure upon Termination. In the event of termination and
abandonment by the Company, or the Buyer, or both, pursuant to
this Article IX, written notice thereof shall forthwith be given
to the other parties and this Agreement shall terminate and be
abandoned without further action by the Buyer, the Company or the
Sellers. If this Agreement is terminated as provided herein:
(a) each party will redeliver or destroy all documents, work
papers and other confidential material of any other party
relating to the transactions contemplated hereby, whether
obtained before or after the execution hereof, to the parties
furnishing the same promptly upon request to do so; and
(b) no party hereto shall have any liability or further
obligation to any other party to this Agreement, except as
provided in Section 6.3 with respect to the Confidentiality
Agreement (which shall survive the termination of this
Agreement), and except for such legal and equitable rights and
remedies which any party may have by reason of any material
breach or violation of this Agreement by any other party.
ARTICLE X
INDEMNIFICATION
10.
10.1. Survival. All representations, warranties, covenants
and agreements made by any party in this Agreement or pursuant
hereto shall survive until December 31, 2000; provided that
Section 3.10 (Title to Properties) and Section 3.15 (Taxes) and
Article XII (and in each such case Article X with respect
thereto) shall survive the Closing and continue in full force and
effect until 30 days following the expiration of all applicable
statute of limitations periods (as extended) with respect
thereto; provided further that Article I, Article II (other than
Sections 2.3 and 2.4 with respect to which the December 31, 2000
date shall apply), Section 3.2 (Authorization), Section 3.3
(Capitalization), Section 4.2 (Authorization), Section
10.2(a)(iii) and Section 11.1 (and in each such case Article X
with respect thereto) shall survive the Closing and continue in
full force and effect for 10 years thereafter (provided further
that the foregoing 10-year limitation shall not apply to Third
Party Claims with respect to such matters covered by such 10-year
limitation, as to which no time limitation shall apply); provided
further that any representation, warranty, covenant or agreement
as to which a Claim Notice or Indemnity Notice or notice pursuant
to Section 12.5(e) has been duly given shall survive with respect
to the matters covered by such notice until resolution of the
matters covered by such Claim Notice or Indemnity Notice; and
provided further that all claims for damages made by virtue of
any representations, warranties, covenants and agreements of any
party in this Agreement or pursuant hereto shall be made under,
and subject to the applicable limitations set forth in, this
Article X or Article XII. The sole recourse and exclusive remedy
of the Buyer on the one hand and the Sellers on the other hand
(as well as the Sellers' Representatives and the Buyer
Indemnitors) against each other after the Closing arising out of
this Agreement (including the purchase and sale or cancellation
of Company Equity Securities) or any certificate delivered in
connection with this Agreement, other than with respect to a
claim of actual fraud and except for claims relating to Taxes
(with respect to which Tax matters the exclusive remedies shall
be as provided in this Article X and Article XII), shall be to
assert a claim for indemnification under the indemnification
provisions of this Article X or the Guarantee to be delivered
pursuant to Section 7.11, provided that the foregoing shall not
restrict any rights to injunctive relief or specific performance
to the extent available and provided further that, for the
avoidance of doubt, the limitations of remedies to the provisions
of this Article X and Article XII as exclusive remedies shall not
apply to the non-competition/non-solicitation agreements to be
delivered pursuant to Section 7.10, the guarantee to be delivered
pursuant to Section 7.11, the assumption agreement(s) to be
delivered pursuant to Section 7.12 or the release contained in
Section 11.2, which shall be enforceable in the courts generally
in accordance with their terms. Without limiting the foregoing
and other than with respect to a claim of actual fraud and except
as otherwise provided in this Agreement, each of the Buyer and
each Seller (as well as the Sellers' Representatives and the
Buyer Indemnitors) hereby expressly waives, releases, disavows
and repudiates, to the fullest extent permitted by law, any right
or remedy of recission, or similar right or remedy granted under
any state or federal law, rule, regulation or interpretation
thereof, whether now in force or hereafter enacted, applicable
with respect to any of the transactions contemplated by this
Agreement or otherwise with respect to the Buyer's acquisition of
and such Seller's sale of Company Equity Securities hereunder.
10.2. Indemnification by the Buyer Indemnitors and the
Sellers.
(a) Indemnification by the Buyer Indemnitors. Subject to
Section 10.1 and Section 10.6, the Buyer Indemnitors shall
severally (which, for the avoidance of doubt, shall mean that
Earl Kaplan, on the one hand, shall be responsible for 50%, and
EGI-BAF Investors, L.L.C. and EGI-BAF Investors II, L.L.C.
individually and collectively, on the other hand, shall be
responsible for 50%) indemnify the Buyer, its Affiliates, its
respective directors, officers, employees and agents, and their
respective successors and assigns (collectively, the "Buyer
Indemnified Parties") from and against and in respect of any and
all losses (including actual diminution in value), costs, fines,
liabilities, claims, penalties, interest, damages and expenses
(including reasonable legal fees and expenses incurred in the
investigation, defense and settlement of claims and actions or
the enforcement of this Article X) (collectively "Losses") that
may be suffered or incurred by any of them resulting from, in
connection with or arising out of:
(i) any breach of any representation, warranty, covenant or
agreement made by the Company, the Sellers' Representatives, the
Buyer Indemnitors or any Sellers (other than Paribas North
America, Inc., Bank America Investment Corporation, Bank of
America Illinois, Chase Equity Associates, L.P. and MIG Partners
IV, if the Closing does not occur) in this Agreement or contained
in any closing certificate executed and delivered by, or on
behalf of, the Company or any Sellers in connection with this
Agreement;
(ii) any action, suit or proceeding relating to the foregoing;
and
(iii) any action, suit or proceeding by or on behalf of any
Equityholder relating to such Equityholder's Company Equity
Securities including claims relating to the calculation of such
Equityholder's Fractional Interest or the consideration received
therefor or the treatment of such Equityholder's Company Equity
Securities in connection with the transactions contemplated by
this Agreement and claims relating to the execution, delivery and
performance of this Agreement or relating to the Equityholder's
Agreement.
(b) Indemnification by Each Seller. Subject to Section 10.1
and Section 10.6, each Seller shall severally, but not jointly
with any other Seller (which, for the avoidance of doubt, as used
in this paragraph, shall mean that each Seller shall be
responsible for 100% with respect to the representation,
warranty, covenant and agreement of such Seller but not for those
of any other Seller), indemnify the Buyer Indemnified Parties
from and against and in respect of any and all Losses that may be
suffered or incurred by any of them resulting from, in connection
with or arising out of any breach of any representation,
warranty, covenant or agreement made by such Seller in this
Agreement or contained in any closing certificate executed and
delivered by, or (with its authorization) (with respect to
Paribas North America, Inc., BankAmerica Investment Corporation,
MIG Partners, IV, Chase Equity Associates, L.P. and Bank of
America, National Association, other than such authorization
granted to (i) EGI-BAF Investors, L.L.C. or EGI-BAF Investors II,
L.L.C. pursuant to the authority granted in Section 11.1 of this
Agreement, (ii) EGI-BAF Investors, L.L.C. or EGI-BAF Investors
II, L.L.C. pursuant to the authority granted in the Contribution
Agreement, or (iii) Equity Group Investments, Inc. pursuant to
the authority granted in the Equityholders' Agreement) on behalf
of, such Seller in connection with this Agreement.
10.3. Indemnification by Buyer. Subject to Section 10.1 and
Section 10.6, Buyer shall indemnify and hold the Sellers, their
Affiliates and their respective directors, officers, employees
and agents, and their respective successors and assigns (the
"Seller Indemnified Parties") harmless from and against and in
respect of any and all Losses that may be suffered or incurred by
any of them resulting from, in connection with or arising out of:
(i) any breach of any representation, warranty, covenant or
agreement made by the Buyer in this Agreement or contained in any
closing certificate executed and delivered by, or on behalf of,
the Buyer in connection with this Agreement; or
(ii) any action, suit or proceeding relating to the foregoing.
10.4. Indemnification Procedures. All claims for
indemnification with respect to Third Party Claims (other than
claims relating to Taxes) under this Agreement shall be asserted
and resolved as follows:
(a) A party claiming indemnification under this Agreement (an
"Indemnified Party") shall promptly (1) notify the party from
whom indemnification is sought (the "Indemnifying Party") of any
third party claim or claims ("Third Party Claim") asserted
against the Indemnified Party which could give rise to a right of
indemnification under this Agreement and (2) transmit to the
Indemnifying Party a written notice ("Claim Notice") describing
in reasonable detail the nature of the Third Party Claim, a copy
of all papers served with respect to such claim (if any), a non-
binding estimate of the amount of damages attributable to the
Third Party Claim, if reasonably possible, and the basis of the
Indemnified Party's request for indemnification under this
Agreement.
(b) Within fifteen (15) days after receipt of any Claim Notice
(the "Election Period"), the Indemnifying Party shall notify the
Indemnified Party (1) whether the Indemnifying Party disputes its
liability to the Indemnified Party with respect to such Third
Party Claim or alternatively (2) whether the Indemnifying Party
admits to its liability to the Indemnified Party with respect to
such Third Party Claim (which shall be without (and thereby
waive) reservation or limitation as to scope or amount or
survival) and shall, at the sole cost and expense of the
Indemnifying Party, defend the Indemnified Party against such
Third Party Claim.
(c) If the Indemnifying Party notifies (a "Defense Notice") the
Indemnified Party within the Election Period that the
Indemnifying Party admits to its liability to the Indemnified
Party under this Agreement and that the Indemnifying Party elects
to assume the defense of the Third Party Claim, then the
Indemnifying Party shall have the right to defend, at its sole
cost and expense, such Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by
the Indemnifying Party to a final conclusion or settled at the
discretion of the Indemnifying Party in accordance with this
Section 10.4. The Indemnifying Party shall have full control of
such defense and proceedings including any compromise or
settlement thereof; provided that, without the prior written
consent of the Indemnified Party, the Indemnifying Party shall
not enter into any settlement of any Third Party Claim which is
non-monetary in nature or which includes any monetary term as to
which the Indemnifying Party has not admitted its liability. The
Indemnified Party is hereby authorized, at the sole cost and
expense of the Indemnifying Party (but only if the Indemnified
Party is actually entitled to indemnification hereunder or if the
Indemnifying Party assumes the defense with respect to the Third
Party Claim), to file, during the Election Period, any motion,
answer or other pleadings which the Indemnified Party shall deem
necessary or appropriate to protect its interests or those of the
Indemnifying Party; provided that prior notice of such filing is
given to the Indemnifying Party. If requested by the
Indemnifying Party, the Indemnified Party shall, at the sole cost
and expense of the Indemnifying Party, cooperate with the
Indemnifying Party and its counsel in contesting any Third Party
Claim which the Indemnifying Party elects to contest. The
Indemnified Party may participate in, but not control, any
defense or settlement of any Third Party Claim controlled by the
Indemnifying Party pursuant to this Section 10.4 and, except as
permitted above, shall bear its own costs and expenses with
respect to such participation.
(d) If the Indemnifying Party fails to notify the Indemnified
Party within the Election Period that the Indemnifying Party
elects to defend the Indemnified Party pursuant to this Section
10.4, then the Indemnified Party shall have the right to defend,
at the sole cost and expense of the Indemnifying Party, the Third
Party Claim by all appropriate proceedings. The Indemnified
Party shall have full control of such defense and proceedings;
provided, however, that the Indemnified Party may not enter into,
without the Indemnifying Party's consent, which shall not be
unreasonably withheld or delayed, any compromise or settlement of
such Third Party Claim unless prior to so entering such
compromise or settlement the Indemnified Party provides the
Indemnifying Party with notice of the material terms of such
compromise or settlement and offers the Indemnifying Party the
opportunity (such opportunity to remain open for one week or such
lesser period of time as may be reasonably practicable under the
circumstances) to assume control of the defense thereof and
thereby admit to its liability to the Indemnified Party with
respect to such Third Party Claim (which shall be without (and
thereby waive) reservation or limitation as to scope or amount or
survival). The Indemnifying Party will have the right to be kept
reasonably informed with respect to, and to reasonably
participate in (but not control) at its own expense, any defense
or settlement controlled by the Indemnified Party pursuant to
this Section 10.4, including the right to receive copies of all
pleadings and motion papers and the right to attend all hearings,
subject to any applicable confidentiality restrictions and non-
waiver of any such provisions.
(e) Any judgment entered or settlement agreed upon in the manner
provided herein shall be binding upon the Indemnifying Party and
shall be conclusively deemed to be an obligation with respect to
which the Indemnified Party is entitled to prompt indemnification
hereunder, subject to the Indemnifying Party's right to appeal an
appealable judgment or order.
(f) The failure to provide notice as provided in this Article X
shall not excuse any party from its continuing obligations
hereunder; provided, however, that any claim shall be reduced by
the Losses to the extent resulting from such party's delay or
failure to provide notice as provided in this Article X.
10.5. Nature of Other Liabilities. In the event any
Indemnified Party should have a claim against any Indemnifying
Party hereunder which does not involve a Third Party Claim, the
Indemnified Party shall promptly transmit a written notice (the
"Indemnity Notice") to the Indemnifying Party, describing in
reasonable detail the nature of the claim and the basis of the
Indemnified Party's request for indemnification under this
Agreement.
10.6. Certain Limitations on Remedies. Notwithstanding any
provision herein or in this Agreement to the contrary:
(a) Subject to (e) below, the Buyer Indemnified Parties shall
not be entitled to assert any claim or claims for indemnification
or reimbursement pursuant to Section 10.2 (other than in respect
of Article I, Article II (other than Sections 2.3 and 2.4 with
respect to which the Threshold shall apply), Section 3.2
(Authorization), Section 3.3 (Capitalization), Section 3.15
(Taxes) (other than Section 3.15(l) with respect to which the
Threshold shall apply), Section 3.19 (Brokers', Finders' Fees,
etc.), Section 11.1 and Article XII (other than Section 12.1(f)
with respect to which the Threshold shall apply)) until, and only
to the extent that, such claim or claims in the aggregate exceed
$3 million (the "Threshold"); provided, that the Threshold shall
also not apply to Section 10.2(a)(iii).
(b) Subject to (e) below, the Seller Indemnified Parties shall
not be entitled to assert any claim or claims for indemnification
or reimbursement pursuant to Section 10.3 (other than in respect
of Article I, Section 4.2 (Authorization), Section 4.7 (Brokers',
Finders' Fees, etc.) and Article XII) until, and only to the
extent that, such claim or claims in the aggregate exceed the
Threshold.
(c) Subject to (e) below, the aggregate liability of all of the
Sellers and the Buyer Indemnitors for Losses under Section 10.2
(other than in respect of Article I, Article II (other than
Sections 2.3 and 2.4 with respect to which the Maximum Liability
shall apply), Section 3.2 (Authorization), Section 3.3
(Capitalization), Section 3.15 (Taxes) (other than Section
3.15(l) with respect to which the Maximum Liability shall apply),
Section 3.19 (Brokers', Finders' Fees, etc.), Section 11.1 and
Article XII (other than Section 12.1(f) with respect to which the
Maximum Liability shall apply)) shall be limited to $30 million
(the "Maximum Liability"); provided that the Maximum Liability
shall also not apply to Section 10.2(a)(iii).
(d) Subject to (e) below, the aggregate liability of the Buyer
for Losses arising under Section 10.3 (other than in respect of
Article I, Section 4.2 (Authorization), Section 4.7 (Brokers',
Finders' Fees, etc.) and Article XII) shall be limited to the
Maximum Liability.
(e) For the avoidance of doubt, other than as provided in
Section 10.1, there shall be no limitations on any liability for
(and the Threshold and Maximum Liability shall not apply to)
Losses with respect to which indemnification or payment is sought
in respect of Article I, Article II (other than the application
of the Threshold and Maximum Liability to Sections 2.3 and 2.4),
Section 3.2 (Authorization), Section 3.3 (Capitalization),
Section 3.15 (Taxes) (other than application of the Threshold and
Maximum Liability to clause (l) thereof), Section 3.19 (Brokers',
Finders' Fees, etc.), Section 4.2 (Authorization), Section 4.7
(Brokers', Finders' Fees, etc.), Section 10.2(a)(iii), Section
11.1 and Article XII (other than the application of the Threshold
and Maximum Liability to Section 12.1(f)) and the enforcement
thereof.
10.7. Amount of Losses. The amount of any Loss payable
hereunder (i) shall be reduced by any insurance proceeds which
the Indemnified Party may actually collect with respect to the
event or occurrence giving rise to such Losses, (ii) shall be
reduced by any amounts which the Indemnified Party may actually
collect from third parties in connection with Losses for which
indemnification is sought under this Agreement, (iii) shall be
increased by any Tax (or increased by any reduction in any Tax
benefit) actually borne by the Indemnified Party in cash that
would not have been borne but for such Losses or the payment of
any indemnity in respect thereof and (iv) shall be decreased by
any Tax benefit (or decreased by any reduction in any Tax)
actually realized by the Indemnified Party in cash with respect
to the taxable year in which the indemnification payment is made
or any prior taxable year that would not have been realized but
for such Losses or the payment of any indemnity in respect
thereof (it being understood and agreed that any Tax or Tax
benefit realized by the Company with respect to the Pre-Closing
Period shall not be considered a Tax or Tax benefit borne or
realized by the Buyer Indemnified Parties for purposes of clauses
(iii) and (iv)). The Indemnified Party shall use commercially
reasonable efforts to pursue insurance claims that may reduce or
eliminate Losses. If the Indemnified Party both collects
proceeds from any insurance company or third party and receives a
payment from the Indemnifying Party hereunder in respect of the
same Loss, and the sum of such proceeds and payment is in excess
of the Loss with respect to the matter that is the subject of the
indemnity, then the Indemnified Party shall promptly refund to
the Indemnifying Party the amount of such excess to the extent
that such Indemnified Party is not obligated to refund such
amount to another party.
10.8. Subrogation. After any indemnification payment is made
to any Buyer Indemnified Party pursuant to this Agreement, the
Sellers' Representatives, on behalf of all of the Sellers, shall,
to the extent of such payment, be subrogated to all rights (if
any) of such Buyer Indemnified Party against any third party
insurer under any insurance policy in connection with the Losses
to which such payment relates. Any Buyer Indemnified Party
receiving an indemnification payment pursuant to this Agreement
shall execute, upon the written request of the Indemnifying
Party, an instrument reasonably necessary to evidence such
subrogation rights.
ARTICLE XI
SELLERS' REPRESENTATIVES; RELEASE
11.
11.1. Acknowledgment of Appointment of Sellers'
Representatives. The Sellers represent and warrant that they
have irrevocably and unconditionally appointed Earl P. Kaplan,
EGI-BAF Investors, L.L.C. and EGI-BAF Investors II, L.L.C.,
acting jointly as their agent and attorney-in-fact (collectively,
the "Sellers' Representatives"), to take any and all action on
the Sellers' behalf in connection with this Agreement (including
as contemplated by Section 4.4(d) of the Equityholders'
Agreement). With respect to the Sellers, the Buyer shall be
required only to deal with the Sellers' Representatives, acting
jointly, whose actions and omissions shall be conclusive, final
and binding as between the Buyer, on the one hand, and the other
parties hereto, on the other hand.
11.2. Release. Effective upon the Closing, each Seller, on
behalf of himself or herself, on behalf of any beneficial owner
of Company Equity Securities owned by such Seller or in which
such Seller has a beneficial interest, and on behalf of all
spouses, heirs, predecessors, successors, assigns,
representatives or agents of such Seller (including any trust of
which the undersigned is the trustee or which is for the benefit
of the undersigned or a member of his or her family), to the
greatest extent permitted by law, hereby waives, releases and
discharges any and all claims or causes of action that any such
Seller has, had or may have against the Released Persons (as
defined below) arising out of, or related to, or otherwise in
connection with any and all aspects of the transactions
contemplated hereby and its purchase, sale and ownership of such
Company Equity Securities and any relationships with the Company
in connection therewith and hereby acknowledges that the purchase
or cancellation for cash at the Closing of the Company Equity
Securities held by the undersigned, as contemplated hereby, is in
full satisfaction of any and all rights that such Seller may have
had with respect to any Company Equity Securities owned by such
Seller or in which such Seller has an interest and any other
rights hereby released (other than any claim or obligation under
Article X); provided that such release pursuant to this sentence,
in the case of the lenders under the Credit Agreement, who are
parties hereto, with respect to the Indebtedness thereunder,
being subject to the repayment thereof as contemplated by Section
1.6 hereof and as set forth in such lenders' payoff letter to be
delivered in connection with the Closing. For purposes of the
foregoing, the term "Released Persons" shall mean each of the
Company, the Buyer, and all of their respective Subsidiaries and
affiliates, and the directors, officers, employees, partners,
principals, agents, attorneys-in-fact, proxies, insurers or co-
insurers, controlling shareholders, attorneys, advisors, legal
representatives, and assigns of each of them. In addition, each
Seller, to the maximum extent permitted by applicable law, hereby
makes a general release of all claims and obligations that such
Seller may have against the Company or the Buyer or their
respective subsidiaries and Affiliates as of the Closing Date
based on or arising out of any acts, events or omissions
occurring on or prior to the Closing Date, including any claims
or obligations in respect of the transactions contemplated hereby
(other than any claim or obligation under Article X); provided
that (x) such release pursuant to this sentence, in the case of
the lenders under the Credit Agreement, who are parties hereto,
with respect to the Indebtedness thereunder, being subject to the
repayment thereof as contemplated by Section 1.6 hereof and as
set forth in such lenders' payoff letter to be delivered in
connection with the Closing; and (y) such release pursuant to
this sentence, shall not apply to claims of, or obligations to,
the Sellers: (a) pursuant to indemnification rights under the
Restated Articles of Incorporation or bylaws of the Company; (b)
for any salary, bonus or other compensation benefits payable in
the ordinary course of the Company's business consistent with
past practice and outstanding as of Closing; (c) for vested
rights under the Benefit Plans disclosed on Schedule 3.16; and
(d) outstanding accounts payable as of Closing under Contracts
disclosed as items (ii) and (iii) on Schedule 3.20(a).
ARTICLE XII
CERTAIN TAX MATTERS
12.
12.1. Tax Indemnity by Buyer Indemnitors . Each Buyer
Indemnitor shall severally (which, for the avoidance of doubt,
shall mean that Earl Kaplan, on the one hand, shall be
responsible for 50% and EGI-BAF Investors, L.L.C. and EGI-BAF
Investors II, L.L.C., individually and collectively on the other
hand, shall be responsible for 50%) indemnify the Buyer
Indemnified Parties and the Company from and against any Losses
arising in respect of:
(a) any Tax imposed on the Company or any of its present or
former Subsidiaries (or for which the Company or any Subsidiary
is liable under applicable Tax law) for the Pre-Closing Period
(other than (i) any such Taxes that would not have arisen but for
an election under Code Section 338 or comparable provision of
state, local or foreign law made by the Buyer with respect to the
purchase of the Company pursuant to this Agreement, (ii) any such
Taxes that would not have arisen but for a transaction undertaken
by the Company on the Closing Date after the Closing outside the
ordinary course of business at the direction of the Buyer or with
the specific prior written consent of the Buyer in a separate
document specifically referring to this provision (it being
agreed and understood that any payment for and in cancellation of
the Stock Options and any payment of the Transaction Bonuses on
the Closing Date shall not occur after the Closing), (iii) Taxes
payable in the ordinary course in the amount of the Particular
Current Taxes Payable applicable to such type of Taxes in such
jurisdiction for such taxable period to the extent that such
amount of Particular Current Taxes Payable has not previously
been applied to reduce the indemnification or payment obligations
of the Buyer Indemnitors under this Article XII or increase the
Company's or the Buyer's indemnification or payment obligations
under this Article XII for such type of Taxes in such
jurisdiction for such taxable period and (iv) any Tax described
in Section 12.1(f));
(b) any Tax resulting from the failure, if any, of the Company
to be an S Corp (or any of its corporate Subsidiaries to be a
QSSSub) for any taxable period (or portion thereof) ending prior
to March 31, 1997, and any Tax imposed under Section 1374(a) or
1375(a) of the Code on the Company or any of its present or
former Subsidiaries during any such taxable period (or portion
thereof);
(c) any Tax for the Pre-Closing Period resulting from the
failure by the Company or any of its present or former
Subsidiaries to withhold and pay timely any Taxes required to
have been withheld and paid in connection with amounts paid or
owing to any employee, creditor, independent contractor, or other
third party (other than any such Taxes arising from a
misclassification of an employee as an independent contractor),
or the failure by the Company or any of its present or former
Subsidiaries to collect and pay timely any Taxes required to have
been collected and paid in connection with any amounts received
from any customer or other third party;
(d) any Tax imposed on any of the Equityholders or on any former
shareholder of the Company (or for which any of them is liable
under applicable Tax law) for any taxable period;
(e) any Tax arising by reason of any inclusion of any income or
gain in the Post-Closing Period from (A) any Section 481
adjustment (except for such an adjustment resulting from the Form
3115 relating to the calculation of uniform capitalization
submitted by the Company to the IRS dated December 31, 1998) with
respect to the Company or any of its present or former
Subsidiaries made in the Pre-Closing Period, (B) any installment
sale made by the Company or any of its Subsidiaries prior to the
Closing or (C) any payment after the Closing Date, or any
adjustment after the Closing Date to any payment, for or in
cancellation of the Stock Options or of the Transaction Bonus;
and
(f) any Tax for the Pre-Closing Period resulting from the
misclassification by the Company or any of its present or former
Subsidiaries of any employee as an independent contractor or the
failure to timely withhold and pay any Taxes required to have
been withheld and paid in connection with amounts paid or owing
to any such employee so misclassified.
12.2. Tax Indemnity by the Buyer. The Buyer shall indemnify
and hold the Equityholders harmless from and against any Losses
arising in respect of any Tax imposed on the Company or any of
its Subsidiaries (or for which the Company or any of its
Subsidiaries is liable under applicable Tax law) other than any
such Taxes for which the Buyer Indemnitors are liable under this
Article XII or Article X.
12.3. Straddle Periods; Apportionment of Taxes.
(a) For federal income Tax purposes, for the taxable period that
includes the day following the Closing Date, the Buyer shall
report the Company as a member for the Post-Closing Period of the
affiliated group filing consolidated federal income Tax Returns
of which the Buyer is the common parent. If the Company is
permitted but not required under applicable Tax law to treat the
Closing Date as the last day of a taxable period, the Buyer, the
Equityholders and the Company shall treat such date as the last
day of a taxable period. Where it is necessary to apportion the
liability for a Straddle Period between the Pre-Closing Period
and the Post-Closing Period, such liability shall be apportioned
between the period deemed to end at the close of the Closing Date
and the period deemed to begin at the beginning of the day
following the Closing Date on the basis of an interim closing of
the books, except that real property Taxes, personal property
Taxes and similar Taxes shall be apportioned on a daily basis.
(b) In the event that, after the Closing Date, the Buyer, the
Company or any member of the Affiliated Group of which the Buyer
or the Company is a member actually realizes in cash (which shall
include any reduction in, or refund of (including actual
utilization of a Tax credit), Taxes actually paid) a Tax benefit
(whether for a Pre-Closing Period or a Post-Closing Period) that
it would not have actually realized but for the payment (whether
at or immediately prior to Closing, in connection with the
Working Capital Adjustment or otherwise) for and in cancellation
of Stock Options pursuant to this Agreement or the payment of
Transaction Bonuses, the Buyer shall pay the Sellers'
Representatives (who shall receive such amount on behalf of all
the Equityholders as if part of the Purchase Price), or the
amount that the Buyer Indemnitors are obligated to pay the Buyer
Indemnified Parties and the Company shall be reduced by, the
amount of such Tax benefit promptly after such actual realization
(but not in duplication of any Tax benefit paid or to be paid to
the Sellers' Representatives (on behalf of the Equityholders) or
that reduced or will reduce the Buyer Indemnitors' obligations);
provided, however, that the Buyer Indemnitors shall pay the Buyer
the amount of any reduction in any such Tax benefit (including
any related interest and penalties) resulting from any Tax
Proceeding promptly after such reduction is actually realized by
the Buyer, the Company or any member of the Affiliated Group of
which the Buyer or the Company is a member in cash. The Buyer
shall not, and shall cause the Company not to, report in the Post-
Closing Period any loss, deduction or credit arising from the
payment on or prior to the Closing Date for and in cancellation
of Stock Options pursuant to this Agreement or the payment on or
prior to the Closing Date of Transaction Bonuses, unless
otherwise required by a "determination" within the meaning of
Section 1313(a) of the Code.
12.4. Filing and Payment Responsibility.
(a) Sellers' Representatives shall (at their sole expense)
prepare and file or cause the Company to prepare and file, with
respect to the Company and each of its Subsidiaries, any Tax
Return (other than any amended Tax Return that includes only a
claim for a refund to which the Buyer, the Company and its
Subsidiaries are entitled pursuant to Section 12.7) for any
taxable period ending on or before the Closing Date, and, except
as provided in the last sentence of this Section 12.4(a), the
Buyer Indemnitors shall pay all Taxes due with respect thereto
(which Taxes shall, in the case of such Taxes due after the
Closing Date, be paid to the Company at least five days prior to
the date on which such Taxes are required to be paid to the
applicable Taxing authority); provided, however, that (i)
Sellers' Representatives shall provide the Buyer copies of such
proposed Tax Returns at least 30 days prior to the due date of
any such Tax Returns for the Buyer's review and comment, (ii)
such Tax Returns shall be prepared consistently with past
practice, past elections and past methods of accounting of the
Company, except as otherwise required by law, and (iii) when
filed, such Tax Returns shall reflect any reasonable and good
faith comments of the Buyer regarding the correctness of such Tax
Return under applicable Tax law and such Tax Returns' compliance
with Section 12.4(a)(ii), except to the extent that Sellers'
Representatives disagree reasonably and in good faith with such
comments, in which case the Buyer and Sellers' Representatives
shall endeavor reasonably and in good faith to resolve such
disagreement over such comments and, failing that, such
disagreement shall be resolved expeditiously by the Accounting
Firm prior to the date such Tax Return is due. In the case of
any Tax Return for which Sellers' Representatives and the Buyer
Indemnitors are responsible pursuant to this Section 12.4(a),
provided that Sellers' Representatives and the Buyer Indemnitors
have complied with their obligations with respect to such Tax
Return pursuant to this Section 12.4(a), the Buyer shall, at its
election, either sign or cause to be signed such Tax Return or
provide Sellers' Representatives with such reasonably requested
powers of attorney required to enable Sellers' Representatives to
file or cause to be filed such Tax Return. In connection with
the filing after the Closing Date of a Tax Return that is the
responsibility of the Sellers' Representatives and the Buyer
Indemnitors under this Section 12.4(a), (x) the Company shall
pay, and the Buyer Indemnitors shall not be required to pay, any
Taxes due in the ordinary course in connection with such filing
up to the amount of the Particular Current Taxes Payable
applicable to such type of Taxes in such jurisdiction for such
taxable period to the extent that such amount of Particular
Current Taxes Payable has not previously been applied to reduce
the indemnification or payment obligations of the Buyer
Indemnitors under this Article XII or increase the Company's or
the Buyer's indemnification or payment obligations under this
Article XII for such type of Taxes in such jurisdiction for such
taxable period and (y) the Buyer shall pay the Sellers'
Representatives (who shall receive such amount on behalf of all
the Equityholders as if part of the Purchase Price) the excess,
if any, of the amount of the Particular Current Taxes Payable
applicable to such type of Taxes in such jurisdiction for such
taxable period over the Taxes due in the ordinary course in
connection with such filing, to the extent that such amount of
Particular Current Taxes Payable has not previously been applied
to reduce the indemnification or payment obligations of the Buyer
Indemnitors under this Article XII or increase the Company's or
the Buyer's indemnification or payment obligations under this
Article XII for such type of Taxes in such jurisdiction for such
taxable period.
(b) The Buyer (at its sole expense) shall file and prepare any
Tax Return with respect to the Company or any of its Subsidiaries
(other than Tax Returns that are the responsibility of the
Sellers' Representatives and the Buyer Indemnitors under Section
12.4(a)); provided, however, that (i) the Buyer Indemnitors shall
pay the Company at least five days prior to the due date of any
such Tax Return the amount of any Taxes payable in connection
with such Tax Return for which the Buyer Indemnitors are liable
under Section 12.1 and (ii) in the case of any Straddle Period
Tax Return and in the case of any amended Tax Return for the Pre-
Closing Period that includes only a claim for a refund to which
the Buyer or the Company and its Subsidiaries are entitled
pursuant to Section 12.7, (A) the Buyer shall provide the
Sellers' Representatives copies of such proposed Tax Returns at
least 30 days prior to the due date of any such Tax Returns for
Sellers' Representatives' review and comment, (B) such Tax
Returns shall be prepared consistently with past practice, past
elections and past methods of accounting of the Company, except
as otherwise required by law, and (C) when filed, such Tax
Returns shall reflect any reasonable and good faith comments of
Sellers' Representatives regarding the correctness of such Tax
Return under applicable Tax law and such Tax Returns' compliance
with Section 12.4(b)(ii)(B), except to the extent that the Buyer
disagrees reasonably and in good faith with such comments, in
which case the Buyer and Sellers' Representatives shall endeavor
reasonably and in good faith to resolve such disagreement over
such comments and, failing that, such disagreement shall be
resolved expeditiously by the Accounting Firm prior to the date
such Tax Return is due. The Buyer, the Company and its
Subsidiaries shall not, without the prior written consent of the
Sellers' Representatives (which consent shall not be unreasonably
withheld), file any amended Tax Return with respect to the
Company or any of its present or former Subsidiaries (other than
any Tax Return that includes only a claim for a refund to which
the Buyer, the Company and its Subsidiaries are entitled pursuant
to Section 12.7) for any taxable period ending on or before the
Closing Date. In connection with the filing after the Closing
Date of a Straddle Period Tax Return, (x) the Company shall pay,
and the Buyer Indemnitors shall not be required to pay, any Taxes
allocable to the Pre-Closing Period due in the ordinary course in
connection with such filing up to the amount of the Particular
Current Taxes Payable applicable to such type of Taxes in such
jurisdiction for such taxable period to the extent that such
amount of Particular Current Taxes Payable has not previously
been applied to reduce the indemnification or payment obligations
of the Buyer Indemnitors under this Article XII or increase the
Company's or the Buyer's indemnification or payment obligations
under this Article XII for such type of Taxes in such
jurisdiction for such taxable period and (y) the Buyer shall pay
the Sellers' Representatives (who shall receive such amount on
behalf of all the Equityholders as if part of the Purchase Price)
the excess, if any, of the amount of the Particular Current Taxes
Payable applicable to such type of Taxes in such jurisdiction for
such taxable period over the Taxes allocable to the Pre-Closing
Period due in the ordinary course in connection with such filing
to the extent that such amount of Particular Current Taxes
Payable has not previously been applied to reduce the
indemnification or payment obligations of the Buyer Indemnitors
under this Article XII or increase the Company's or the Buyer's
indemnification or payment obligations under this Article XII for
such type of Taxes in such jurisdiction for such taxable period.
(c) In no event shall the submission of a disagreement with
respect to a Tax Return to the Accounting Firm pursuant to this
Section 12.4 cause such Tax Return to fail to be timely filed.
12.5. Cooperation; Exchange of Information; Tax Proceedings.
(a) Each party hereto shall, and shall cause its Subsidiaries
and Affiliates to, provide to each of the other parties hereto
such cooperation, documentation and information as any of them
reasonably may request in connection with filing any Return,
amended Return or claim for refund, determining a liability for
Taxes or indemnity obligation under this Article XII or a right
to refund of Taxes or apportionment of Taxes between a Pre-
Closing Period and Post-Closing Period or in conducting any Tax
Proceeding; provided, however, that, notwithstanding any other
provision, the Buyer shall not be required to provide any Person
with any consolidated, combined or unitary Tax Return (or copy
thereof) filed or to be filed by the Buyer or any of its
Affiliates and the Buyer shall not be required to provide any
such cooperation and information to the extent that such
cooperation and information would not relate principally to the
Company and its Subsidiaries; provided further, however, that in
the event that the Buyer withholds from any party hereto any Tax
Return, cooperation or information pursuant to the immediately
preceding proviso, the Buyer shall be required to provide pro
forma information or an extract or summary or other reasonable
substitute, in each case relating solely to the Company and its
Subsidiaries, of the cooperation or information reasonably
requested by Sellers' Representatives pursuant to this sentence.
The cooperation and information required to be provided by the
parties pursuant to this Section 12.5 shall include providing
copies of all relevant portions of relevant Returns, together
with all relevant portions of relevant accompanying schedules and
relevant work papers, relevant documents relating to rulings or
other determinations by taxing authorities and relevant records
concerning the ownership and Tax basis of property and other
information, which any such party may possess. Each party will
retain all Returns, schedules and work papers, and all material
records and other documents relating to Tax matters, in such
party's possession, of the Company or any of its Subsidiaries for
all Pre-Closing Periods until the later of (i) the expiration of
the statute of limitations for the taxable periods to which the
Returns and other documents relate or (ii) eight years following
the due date (without extension) for such Returns. Thereafter,
the party holding such Returns or other documents may dispose of
them; provided, however, that such party shall give each other
party 60 days written notice and the opportunity to be provided
such Returns prior to doing so.
(b) With respect to any Tax Proceeding of or with respect to the
Company or any of its Subsidiaries for a taxable period that ends
on or prior to the Closing Date or a Straddle Period: (i) the
Controlling Party (as defined below) shall be entitled to control
(at its sole expense) the Tax Proceeding, (ii) the Controlling
Party shall consult with the Noncontrolling Party (as defined
below) and keep the Noncontrolling Party updated as to such Tax
Proceeding, (iii) the Noncontrolling Party shall be entitled to
participate in any such Tax Proceeding, (iv) the Controlling
Party shall defend such Tax Proceeding vigorously and diligently
as if the Controlling Party were the only party in interest with
respect to the Tax Proceeding and all other taxable periods of
the Company and its Subsidiaries (provided that if the
Controlling Party fails to defend such Tax Proceeding vigorously
and diligently, then the Noncontrolling Party shall be entitled
to assume the defense of such Tax Proceeding), (v) the
Noncontrolling Party shall bear its own expenses in connection
with any such Tax Proceeding and (vi) the Controlling Party shall
not compromise, settle or abandon any such Tax Proceeding without
the prior written consent (which consent shall not be
unreasonably withheld) of the Noncontrolling Party if such
compromise, settlement or abandonment of such Tax Proceeding
could reasonably be expected to adversely affect the
Noncontrolling Party (provided that if the Noncontrolling Party
reasonably withholds consent, then the Noncontrolling Party shall
be entitled to assume the defense of such Tax Proceeding and the
Controlling Party's liability with respect to such Tax Proceeding
shall not exceed the amount that such liability would have been
under the proposed settlement).
(c) In the case of any Tax Proceeding of or with respect to the
Company or any of its Subsidiaries for a taxable period that ends
on or prior to the Closing Date or a Straddle Period: (A)
"Controlling Party" shall mean (x) the Sellers' Representatives
in the case of any Tax Proceeding for any taxable period that
ends on or prior to the Closing Date, (y) the Sellers'
Representatives in the case of any Tax Proceeding for any
Straddle Period if the claim of the applicable Tax authority in
connection with such Tax Proceeding for which the Buyer
Indemnitors would be liable hereunder exceeds the claim of the
applicable Tax authority in connection with such Tax Proceeding
for which the Buyer would be liable hereunder and (z) the Buyer
in the case of any Tax Proceeding for a Straddle Period if the
Sellers' Representatives are not the Controlling Party pursuant
to clause (y) above and (B) "Noncontrolling Party" shall mean the
Buyer if the Sellers' Representatives are the Controlling Party,
and the Sellers' Representatives if the Buyer is the Controlling
Party.
(d) Except as otherwise provided in Section 12.5(b), the Buyer
shall be entitled to control in all respects (at its sole
expense) any Tax Proceeding of or with respect to the Company or
any of its Subsidiaries for any taxable period.
(e) A party claiming indemnification under this Article XII in
connection with any Tax Proceeding shall promptly (i) notify the
party or parties from whom indemnification is sought upon receipt
by the party claiming indemnification of any notice of any Tax
Proceeding asserted against the indemnified party which would
reasonably be expected to give rise to a right of indemnification
under this Article XII and (ii) transmit to the indemnifying
party or parties a written notice describing in reasonable detail
the nature of the Tax Proceeding, a copy of all papers served
with respect to such Tax Proceeding (if any), a non-binding
estimate of the amount of damages attributable to the Tax
Proceeding, if reasonably possible, and the basis of the
indemnified party's request for indemnification under this
Article XII. The failure to provide notice as provided in this
Section 12.5(e) shall not excuse any party from its continuing
obligations hereunder; provided, however, any claim shall be
reduced by the Losses to the extent resulting from such party's
delay or failure to provide notice as provided in this Section
12.5(e).
(f) The Buyer Indemnitors shall pay the Company the amount of
Tax for which the Buyer Indemnitors are liable under Section 12.1
in connection with any Tax Proceeding at least five days prior to
the date such Taxes are required to be paid to the applicable
taxing authority.
12.6. Tax Returns Available. Sellers' Representatives and
the Company shall make available to the Buyer as promptly as
practicable after the date hereof through the Closing Date
complete and correct copies of all Tax Returns reasonably
requested by Buyer filed by or on behalf of, and all material Tax
examination reports and statements of deficiencies assessed
against or agreed to by or on behalf of, the Company or any of
its Subsidiaries.
12.7. Refunds. The Equityholders shall be entitled to any
refunds of Pre-Closing Period Taxes of the Company or any of its
Subsidiaries actually received after the Closing Date by or on
behalf of the Buyer, the Company or any member of the Affiliated
Group of which the Company or the Buyer is a member, whether by
payment, credit, offset or otherwise (other than any such refunds
resulting from a carry back to the Pre-Closing Period from the
Post-Closing Period of any loss, credit or deduction or with
respect to any Taxes for which Buyer is responsible for Pre-
Closing Periods pursuant to Article X or Section 12.2), and
Buyer, the Company and its Subsidiaries shall be entitled to any
other refunds of Taxes of the Company or any of its Subsidiaries
(other than (i) with respect to any Taxes for which the Buyer
Indemnitors are responsible for Post-Closing Periods pursuant to
Article X or this Article XII and (ii) as provided in Section
12.3(b)). The Buyer shall pay, or cause to be paid, to the
Sellers' Representatives (who shall receive such amount on behalf
of all the Equityholders as if part of the Purchase Price) any
refunds to which the Equityholders are entitled under this
Section 12.7 reasonably promptly after such refunds are received
by the Buyer, the Company or any member of the Affiliated Group
of which the Company or the Buyer is a member, but no later than
30 days after such receipt. The Buyer Indemnitors shall pay to
the Buyer any refunds to which the Buyer, the Company and its
Subsidiaries are entitled under this Section 12.7 reasonably
promptly after such refunds are received by any of the
Equityholders, but no later than 30 days after such receipt.
12.8. Adjustments. All amounts paid pursuant to Section 1.7,
Article X or this Article XII will be treated by the parties
hereto as an adjustment to the Purchase Price for all Tax
purposes, unless otherwise required pursuant to a "determination"
within the meaning of Section 1313(a) of the Code.
12.9. Survival. Notwithstanding any other provision hereof,
the provisions of this Article XII shall survive until 30 days
following the expiration of all applicable statutes of
limitations (as extended) and, in the event of any dispute
between the parties relating to such provisions as to which
notice has been given pursuant to Section 12.5(e), which dispute
has not been resolved at the time of such expiration, such
provisions shall survive with respect to the disputed matters
until such dispute has been resolved.
12.10. Setoff. Any rights of setoff with respect to this
Article XII or, to the extent relating to Taxes, Article X shall
not have the effect of avoiding the application of the
limitations set forth in Section 10.6.
12.11. General Tax Amount. At the election of the Sellers'
Representatives, the Buyer Indemnitors shall be entitled to apply
towards any payment obligation of the Buyer Indemnitors under
this Article XII (including the cost of Tax Return preparation)
all or any portion of the General Tax Amount to the extent that
the General Tax Amount has not either previously been used to
reduce a payment obligation of the Buyer Indemnitors under this
Article XII or been paid to the Sellers' Representatives (on
behalf of the Equityholders) pursuant to the immediately
following sentence. At the election of the Sellers'
Representatives, upon 30 days' prior written notice to the Buyer,
the Buyer shall pay to the Sellers' Representatives (who shall
receive such amount on behalf of the Equityholders as if part of
the Purchase Price) the General Tax Amount (without interest)
reduced by any portion thereof previously used to reduce a
payment obligation of the Buyer under this Article XII pursuant
to the immediately preceding sentence.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.
13.1. Amendment and Modification. This Agreement (and any
provision hereof) may be waived, amended, modified and
supplemented only by written agreement of the Buyer and Sellers'
Representatives (whose signatures shall bind all parties hereto
(other than the Buyer) and on whose consent on behalf of all
parties hereto (other than the Buyer) the Buyer may rely),
provided that any waiver, amendment, modification or supplement
hereto shall be binding with respect to any party executing the
same (even if not executed by each of the parties hereto) unless
such waiver, amendment, modification or supplement requires by
its terms the execution by additional parties in order to be so
binding. The execution of any waiver, amendment, modification,
supplement or consent provided by the Sellers' Representatives on
behalf of any or all Sellers shall be deemed the execution of
such Sellers and the Buyer may so rely on such execution.
13.2. Waiver of Compliance. Any failure of any party to
comply with any obligation, covenant, agreement or condition
contained herein may be expressly waived in writing by the party
to whom such obligation is owed (including the Sellers'
Representatives on behalf of any or all Sellers), but such waiver
or failure to insist upon strict compliance shall not operate as
a waiver of, or estoppel with respect to, any subsequent or other
failure.
13.3. Notices. All notices, demands and other communications
required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand, sent by
reputable overnight courier, or mailed, certified or registered
mail, return receipt requested, with postage prepaid to the
addresses indicated on the Schedule of Notice Addresses (unless
another address has been designated in writing).
13.4. Binding Nature; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto without
prior written consent of the other parties (including the
Sellers' Representatives on behalf of any or all Sellers) except
that the Buyer may assign this Agreement to its Affiliate in its
discretion (so long as the Buyer remains obligated with respect
thereto). Except as set forth in Section 6.4, nothing contained
herein, express or implied, is intended to confer on any Person
other than the parties hereto or their successors and permitted
assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement. Except as otherwise expressly
provided herein, nothing contained herein shall be deemed to give
rise to any personal obligation of any of the directors,
officers, stockholders or principals of any of the parties
hereto, by reason of any breach or violation of any of the
provisions hereof or otherwise, and no party hereto shall have
any rights against, or be entitled to sue or seek any recovery
from, any such Persons.
13.5. Entire Agreement. This Agreement, including the
Schedules and Exhibits hereto, embodies the entire agreement and
understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other
than those expressly set forth or referred to herein. Except for
the Confidentiality Agreement, this Agreement supersedes all
prior agreements and understandings between the parties with
respect to such subject matter.
13.6. Disclaimer of Implied Warranties. It is the explicit
understanding of each of the parties hereto that no party hereto
nor any Affiliates, representatives or agents of any party is
making any representations or warranty whatsoever, oral or
written, express or implied, other than those set forth in this
Agreement, and no party hereto is relying on any statement,
representation or warranty, oral or written, express or implied,
made by another party hereto or such other party's Affiliates,
representatives or agents, except as set forth in this Agreement.
13.7. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by
any rule of law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
13.8. Expenses. Except as otherwise expressly provided
herein, each party to this Agreement will pay its own expenses in
connection with the negotiation of this Agreement, the
performance of its obligations hereunder, and the consummation of
the transactions contemplated herein; provided that all expenses
of the Company or any Seller shall be paid by the Sellers and
shall not be paid by the Company (unless the Closing does not
occur or unless such expenses are paid prior to the Closing) or
the Buyer.
13.9. Press Releases and Announcements. No press release
related to this Agreement or the transactions contemplated
herein, or other announcement to the employees, independent
contractors, distributors, customers or suppliers of the Company,
will be issued without the joint approval of the Buyer and the
Company, except as otherwise required by law (including the
securities laws and any requirement of any stock exchange or
listing agreement). With respect to any proposed oral
presentations, the Buyer and the Company shall agree in advance
of any such presentation to a set of permitted "talking points",
and such oral presentations shall be consistent with and not
beyond the parameters of such "talking points".
13.10. Governing Law. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in
accordance with the laws of the State of New York without giving
effect to any conflicts or choice of law provisions of such
State, provided that the internal corporate affairs of any
corporation will be governed by the laws of the state or
organization of such corporation.
13.11. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute
one and the same instrument.
13.12. Headings. The headings contained in this Agreement are
inserted for convenience only and shall not constitute a part
hereof.
13.13. Interpretation; Absence of Presumption. For purposes
of this Agreement, (i) words in the singular shall be held to
include the plural and vice versa and words of one gender shall
be held to include the other gender as the context requires, (ii)
the terms "hereof," "herein," and "herewith" and words of similar
import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole (including all of the Schedules and
Exhibits hereto) and not to any particular provision of this
Agreement, and Article, Section, paragraph, Schedule and Exhibit
references are to the Articles, Sections, paragraphs, Schedules
and Exhibits to this Agreement unless otherwise specified, (iii)
the word "including" and words of similar import when used in
this Agreement shall mean "including, without limitation," unless
otherwise specified, (iv) the word "or" shall not be exclusive
and (v) provisions shall apply, when appropriate, to successive
events and transactions.
[The balance of this page has been intentionally left blank.]
Management's Discussion and Analysis
Dollars in millions, except per share data
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Financial Statements and
notes thereto.
Strategic Initiatives (forward-looking information)
We are undertaking a three-phase strategy to build on our fundamental strengths
and create growth opportunities. In July 1998, we announced Phase I of our
strategy, which involved: reorganizing our business groups on a global basis,
restructuring our editorial organization, establishing new reporting
relationships and reassigning some of our executives.
We made further refinements to our organizational structure in late fiscal 1999
to finalize the global operating segments defined in the Results of Operations:
Company-Wide section of this report.
We announced Phase II of our strategy in September 1998, which targets:
o reducing costs and streamlining processes;
o raising capital by selling some underproductive assets; and
o restructuring some underproductive businesses.
Actions that we have taken as part of the ongoing Phase II include:
o reducing the number of individual promotional mailings globally, including
eliminating related product development and overhead costs. The purpose of
this action is to increase response rates on continuing mailings;
o reducing the circulation rate base for Reader's Digest magazine in the
United States and in most international markets. The purpose of this
action is to improve the efficiency of our promotional spending;
o eliminating or redirecting some product lines, including adult and
children's retail book publishing, the Today's Best Nonfiction(R) book
series, and video or music businesses in selected international markets;
o selling our publishing operations in South Africa and closing our
operations in Chile, Colombia and Peru;
o consolidating our operations in Benelux, the Nordic countries, Germany and
Switzerland, and those in the Czech Republic and Hungary;
o selling important works from our fine art collection;
o outsourcing support functions where it is cost-effective;
o consolidating suppliers and combining purchasing efforts for greater
negotiating leverage;
<PAGE>
o selling international real estate holdings, including those in the United
Kingdom, Canada and Italy; and
o reducing our quarterly dividend from $0.225 per share to $0.05 per share.
We announced Phase III of our strategy in February 1999. Phase III targets
long-term growth. The key elements of Phase III include:
o expanding our presence in five areas of intense consumer interest--health,
home, family, finance and faith;
o selling non-publishing products and services in those areas;
o continuing our geographic expansion;
o developing new marketing channels;
o broadening our customer base to include more younger customers and more
products for older customers; and
o integrating the Internet into all of our businesses.
To implement Phase III, we expect to invest in internal growth opportunities in
our core businesses. We also expect to target acquisitions and form alliances
that leverage our core strengths.
Fiscal 2000 Outlook (forward-looking information)
We expect further significant operating profit improvements and single-digit
revenue declines in our core businesses in 2000 as we continue to implement our
strategy. However, year-over-year profit improvement could be moderated by
investments in major growth initiatives as discussed within the Strategic
Initiatives section of this report.
Results of Operations: Company-Wide
During 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Results of operations have been restated for prior periods to
conform to the operating segments described below:
o Global Books and Home Entertainment publishes and markets Condensed Books,
series and general books, as well as music and video products.
o U.S. Magazines publishes Reader's Digest magazine and several special
interest magazines in the United States. These magazines and other
products are sold through direct and retail marketing, including the
activities of QSP, Inc. (QSP).
o International Magazines publishes Reader's Digest magazine in numerous
editions and languages outside the United States.
Management's Discussion and Analysis of operating profit has been written
excluding the effect of other operating items of $37.9 in 1999, $70.0 in 1998
and $35.0 in 1997.
Other operating items for 1999 include costs associated with cost-reduction and
reengineering activities, including employee retirement and severance benefits,
discontinuation of certain
<PAGE>
unproductive businesses and outsourcing initiatives. The Company also recorded
impairment losses as a result of reengineering efforts, relating principally to
computer hardware and software that will no longer be used in the Company's
operations. In addition, the Company adjusted its remaining accrual balances
from costs originally recorded in prior years and from estimates for certain
claims against the Company.
Other operating items in prior years relate to costs for initiatives that are
substantially complete. These costs primarily relate to workforce reductions,
the discontinuation of certain businesses, and the realignment of business
processes and operations.
Years ended June 30,
---------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Revenues
Global Books and Home Entertainment $1,544.3 $1,680.2 $1,891.5
U.S. Magazines 664.3 656.3 625.5
International Magazines 323.6 354.7 379.5
- --------------------------------------------------------------------------------
Total revenues $2,532.2 $2,691.2 $2,896.5
================================================================================
Operating profit (loss)
Global Books and Home Entertainment $ 80.8 $ 50.0 $ 161.2
U.S. Magazines 101.7 64.9 67.1
International Magazines (15.5) (14.7) (0.5)
- --------------------------------------------------------------------------------
Segment operating profit 167.0 100.2 227.8
Other operating items (37.9) (70.0) (35.0)
- --------------------------------------------------------------------------------
Total operating profit $ 129.1 $ 30.2 $ 192.8
================================================================================
Revenues and Operating Profit
1999 v. 1998
Revenues decreased 6% in 1999 to $2,532.2, compared with $2,691.2 in 1998.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues decreased 5%. The decline in revenues was largely attributable to lower
volumes in Global Books and Home Entertainment. The decrease in Global Books and
Home Entertainment largely resulted from a strategic reduction in mail
quantities, promotional mailings and marginally profitable activities. These
reductions were principally among general books products and, to a lesser
extent, music products in the United States. Modest growth in U.S. Magazines
principally resulted from higher advertising revenues, revenue growth at QSP and
the acquisition of American Woodworker, partially offset by a decrease in
circulation revenues from a strategic reduction in the circulation rate base of
Reader's Digest magazine. Revenues from International Magazines declined
principally as a result of reduced circulation, particularly in the United
Kingdom and Germany, and in Russia, where operations were scaled back in
response to the Russian economic crisis. The declines in International Magazines
revenues were partially offset by subscription price increases primarily in the
United Kingdom, and revenue growth in Brazil.
<PAGE>
Operating profit increased 67% in 1999 to $167.0, compared with $100.2 in 1998.
Operating profit increased significantly in the Global Books and Home
Entertainment and U.S. Magazines segments. The primary reason for the increase
was a strategic reduction in the number of mailings and mail quantities within
each mailing, which reduced product, promotion, and related product development
and overhead costs. Additionally, overhead costs were lower, primarily as a
result of reengineering activities and a reduction in costs for employee
benefits. Operating profit also benefited from the termination of certain
strategic alliances.
1998 v. 1997
Revenues decreased 7% in 1998 to $2,691.2, compared with $2,896.5 in 1997.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues decreased 3%. This decline primarily resulted from lower unit sales,
lower-priced product offerings and sales of a lower-priced mix of Global Books
and Home Entertainment products. The decrease in unit sales was predominantly a
result of lower mail quantities, fewer profitably promotable customers and lower
customer response to promotional mailings. Revenues declined principally in the
United States, Germany and Canada. This decrease was largely offset by growth in
developing markets in Eastern Europe and Latin America.
Operating profit decreased 56% in 1998 to $100.2, compared with $227.8 in 1997.
Operating results reflected lower revenues for Global Books and Home
Entertainment products in most developed markets, including the United States
and Germany, combined with proportionately higher product costs and promotional
spending. These declines were slightly offset by the benefits of cost-reduction
initiatives in most developed markets.
Other Income, Net
1999 v. 1998
Other income, net increased in 1999 to $82.6, compared with $11.3 in 1998. The
increase consisted primarily of gains from the sales of important works from the
Company's fine art collection and certain businesses. These gains were partially
offset by losses from the sales of publishing operations in South Africa and
certain international real estate holdings.
1998 v. 1997
Other income, net decreased in 1998 to $11.3, compared with $17.4 in 1997. This
decrease was primarily because of lower gains on foreign exchange transactions
and hedging activity, lower interest income and higher interest expense. These
declines were partially offset by gains from asset sales.
Income Taxes
1999 v. 1998
The reported tax rate for 1999 was 40.2%, compared with a reported rate of 56.9%
for 1998. Excluding the effect of other operating items, the overall effective
tax rate was 37.9% in 1999 and 37.5% in 1998.
<PAGE>
1998 v. 1997
The reported tax rate for 1998 was 56.9%, compared with a reported rate of 36.5%
for 1997. Excluding the effect of other operating items, the overall effective
tax rate was 37.5% in 1998 and 36.5% in 1997. The higher effective tax rate in
1998 was primarily because of fewer foreign tax credits.
Change in Accounting for Pension Assets
Effective July 1, 1998, the Company changed its method for calculating the
market-related value of pension plan assets. This method is used in determining
the return-on-asset component of annual pension expense and the cumulative net
unrecognized gain (loss) subject to amortization. The Company believes that the
new method is more widely used in practice and is preferable because it results
in pension plan asset values that more closely approximate fair value, while
still mitigating the effect of annual market value fluctuations. In addition,
the new method facilitates the global management of pension plans, as it results
in a consistent methodology for all plans.
This change resulted in a non-cash benefit in 1999 of $40.5 ($25.3 after tax, or
$0.24 per share). This benefit represents the cumulative effect of the change
related to years prior to 1999. In addition, the Company realized $19.0 ($11.9
after tax, or $0.11 per share) in lower pension expense in 1999, compared with
the previous accounting method. Had this change been applied retroactively,
pension expense would have been reduced by $15.8 and $12.5 ($9.9 and $7.8 after
tax, or $0.09 and $0.07 per share) in 1998 and 1997, respectively.
Net Income
1999 v. 1998
The Company reported net income in 1999 of $151.9, or $1.40 for basic earnings
per share and $1.39 for diluted earnings per share. In 1998, the Company
reported net income of $17.9, or $0.16 for basic and diluted earnings per share.
Excluding the effect of other operating items ($0.26 in 1999 and $0.49 in 1998),
gains on sales of certain assets and other businesses ($0.45), and the
cumulative effect of change in accounting principles ($0.24), basic and diluted
earnings per share increased 50% to $0.96 in 1999, compared with $0.64 in 1998.
1998 v. 1997
The Company reported net income of $17.9, or $0.16 per share in 1998, compared
with net income of $133.5, or $1.24 per share in 1997. Excluding the effect of
other operating items, basic and diluted earnings per share decreased 56% to
$0.64 in 1998, compared with $1.45 in 1997.
<PAGE>
Results of Operations: Operating Segments
Global Books and Home Entertainment
1999 v. 1998
Revenues for Global Books and Home Entertainment decreased 8% in 1999 to
$1,544.3, compared with $1,680.2 in 1998. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 7%. This decrease
was primarily attributable to a decline in revenues in the United States, Russia
and the United Kingdom, offset by growth in Germany, France and Brazil.
The decrease in the United States was primarily attributable to the strategic
reduction of the number of mailings to marginal customers, principally for
general books and music products. These declines in the United States were
partially offset by sales of a higher-priced mix of products and the acquisition
of Good Catalog Company in October 1998. In Russia, the economic crisis led the
Company to cease most bulk mailing activity. The decline in the United Kingdom
was driven by the elimination of an unprofitable merchandise catalog business
and video series products, along with reduced mailing activity for music
products.
Germany experienced an increase in responses to mailings as a result of strong
product offerings. In France, increased revenues were primarily a result of a
higher-priced mix of general books products and increased unit sales of music
products. Increased revenues in Brazil primarily reflected increased sales of
music products and revenue growth of Condensed Books, which was launched in
1998.
Operating profit for Global Books and Home Entertainment increased 62% in 1999
to $80.8, compared with $50.0 in 1998. The increase was primarily a result of
improved profitability in the United States, Germany and the United Kingdom,
offset by operating losses in Russia. Within the United States, operating profit
improved as a result of significant reductions in promotion and overhead costs.
In Germany, significantly improved profits were the result of strong customer
response rates to product offerings. In the United Kingdom, growth in operating
profit was realized from promotion cost reductions in general books, the
elimination of unprofitable product lines, cost savings from fewer mailings and
reduced quantities within each mailing. These improvements were partially offset
by weaker performance in Russia as a result of the economic crisis, which led to
substantial losses on mailings and higher inventory reserves.
1998 v. 1997
Revenues for Global Books and Home Entertainment decreased 11% in 1998 to
$1,680.2, compared with $1,891.5 in 1997. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 6%. This decrease
was principally attributable to lower revenues in developed countries, including
the United States. These reductions were predominantly a result of significantly
lower unit sales in series books, Condensed Books and general books and, to a
lesser extent, lower-priced product offerings, principally in music and video
products.
<PAGE>
The decline in series books and Condensed Books revenues was caused by fewer
shipments from reduced mail quantities and, in developed markets, fewer
profitably promotable customers and lower customer response to promotional
mailings. In addition, revenues declined in the United States because of fewer
Condensed Books shipments, a reduced number of series mailings and the scaling
back of a book series.
Declines in general books revenues occurred in most developed countries,
including the United States. The substantial decrease in general books sales in
the United States was primarily a result of lower customer response rates to
promotional mailings and lower mail quantities in 1998. This was offset by
growth in Eastern Europe and Latin America, principally in Russia and Brazil.
Operating profit for Global Books and Home Entertainment decreased 69% in 1998
to $50.0, compared with $161.2 in 1997. Operating results were affected by lower
revenues and higher product costs, in part because of higher inventory reserve
levels in the United States and proportionately higher promotional spending.
U.S. Magazines
1999 v. 1998
Revenues for U.S. Magazines increased by 1% in 1999 to $664.3, compared with
$656.3 in 1998. The increase in revenues was attributable to an increase in
Reader's Digest magazine advertising revenue from more advertising pages sold,
although at lower rates per page, the acquisition of American Woodworker in the
second quarter of 1999, and an increase in the sales of magazine subscriptions
and music products of QSP. Partially offsetting these increases in revenues was
lower circulation for Reader's Digest magazine because of the strategic
reduction of the magazine's circulation rate base.
Operating profit increased 57% in 1999 to $101.7, compared with $64.9 in 1998.
The increase principally resulted from lower overhead costs in 1999, improved
margins at QSP, and lower promotion and production spending for Reader's Digest
magazine because of cost-reduction initiatives. The increase in operating profit
was partially offset by higher promotional spending associated with the
Company's special interest magazines.
1998 v. 1997
Revenues for U.S. Magazines increased 5% in 1998 to $656.3, compared with $625.5
in 1997. The increase in revenues was attributable to the acquisition of Walking
magazine in the third quarter of 1997, the launch of the Reader's Digest Large
Edition for Easier Reading in the first quarter of 1998, higher circulation
revenues for Reader's Digest magazine and growth in subscription sales of QSP.
These increases were slightly offset by lower advertising revenues for Reader's
Digest magazine caused by a decline in the number of advertising pages sold.
Operating profit for U.S. Magazines decreased 3% in 1998 to $64.9, compared with
$67.1 in 1997. This decrease was the result of increased promotional spending
associated with Walking and Reader's Digest Large Edition for Easier Reading and
significantly higher promotional spending to acquire and renew subscribers.
These decreases in operating profit were partially offset by the benefits of
cost-reduction initiatives.
<PAGE>
International Magazines
1999 v. 1998
Revenues for International Magazines decreased 9% in 1999 to $323.6, compared
with $354.7 in 1998. Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 6%. Circulation levels for Reader's Digest
magazine were reduced in most markets, particularly in the United Kingdom. The
Company also reduced the publication frequency of the Russian edition from
twelve to six issues per year in response to the Russian economic crisis. These
actions were partially offset by subscription price increases in most markets.
Advertising revenues declined in most markets primarily as a result of fewer
pages sold at a lower rate per page. Advertising revenues decreased principally
as a result of adverse market conditions in Asia and Canada and circulation
rate-base-related reductions in Italy and The Netherlands.
Operating loss for International Magazines increased 5% in 1999 to ($15.5),
compared with ($14.7) in 1998 principally as a result of lower revenues,
partially offset by reduced product and promotion costs.
1998 v. 1997
Revenues for International Magazines decreased 7% in 1998 to $354.7, compared
with $379.5 in 1997. Excluding the adverse effect of changes in foreign currency
exchange rates, revenues increased 1%. Increased circulation revenues from
developing markets, primarily Russia and Brazil, were partially offset by
circulation declines in several major markets, particularly Germany.
Operating loss for International Magazines increased in 1998 to ($14.7),
compared with ($0.5) in 1997. The increase reflected significantly higher
promotional spending incurred to maintain the circulation rate base in major
markets. The increase in promotional spending was partially offset by
cost-reduction initiatives in most markets.
Liquidity and Capital Resources (forward-looking information)
The consolidated statement of cash flows for the year ended June 30, 1999 is
summarized below:
1999
- --------------------------------------------------------------------------------
Net change in cash due to:
Operating activities $ 222.5
Investing activities 114.6
Financing activities (36.4)
Effect of exchange rate changes on cash and cash equivalents (10.1)
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents $ 290.6
================================================================================
Cash provided by operations increased significantly in 1999. This increase was
principally as a result of growth in net income and improvement in working
capital.
<PAGE>
Investment activities included proceeds from the sale of property, plant and
equipment of $193.0, consisting principally of the Company's operating
facilities in the United Kingdom and important works from the Company's fine art
collection. In addition, the Company realized net proceeds from other long-term
investments of $14.6. Partially offsetting these amounts were the acquisitions
of Good Catalog Company and American Woodworker for a total of $32.7, the
purchase of investments of $35.8 and capital expenditures of $26.3, primarily
relating to information technology.
Financing activities primarily included dividend payments of $41.5 in 1999,
compared with $97.1 in 1998. During 1999, the Company reduced its quarterly
dividend on common stock from $0.225 to $0.05 per share. This resulted in a 58%
reduction in the full-year dividend payment for 1999 to $0.375 per share,
compared with $0.90 per share in 1998.
The Company is a party to a Competitive Advance and Revolving Credit Facility
Agreement (the Credit Agreement), amended as of June 2, 1998, with a syndicate
of domestic and foreign banks. The Credit Agreement, which expires on October
31, 2001, permits competitive advance and revolving credit borrowings of up to
$300.0 by the Company and its designated subsidiaries. Interest rates are based
on several pricing options that can vary based upon operating results of the
Company. The proceeds of the borrowings may be used for general corporate
purposes, including acquisitions, share repurchases and commercial paper backup.
The Credit Agreement contains certain restrictions on the incurrence of debt,
liens and guarantees of indebtedness. The Company must also comply with certain
financial covenants, including a minimum level of consolidated tangible net
worth. At June 30, 1999, there were no borrowings outstanding under the Credit
Agreement and the Company was in compliance with all covenants.
Various international subsidiaries of the Company have available lines of credit
totaling $60.0. At June 30, 1999, no amounts were outstanding under these lines
of credit.
The Company believes that its liquidity, capital resources, cash flow and
borrowing capacity are sufficient to fund normal working capital requirements,
capital expenditures, the payment of dividends, Year 2000 remediation costs and
the implementation of the Company's strategic growth initiatives.
Currency Risk Management (forward-looking information)
In the normal course of business, the Company is exposed to the effect of
foreign exchange rate fluctuations on the United States dollar value of its
foreign subsidiaries' results of operations and financial condition. The Company
purchases foreign currency option and forward contracts to minimize the effect
of fluctuating foreign currency exchange rates on its earnings and specifically
identifiable anticipated transactions. In addition, the Company enters into
forward contracts to minimize the effect of fluctuating foreign currency
exchange rates on certain foreign currency denominated assets and liabilities.
At June 30, 1999, the Company's primary foreign currency market exposures
included the euro and the British pound. The Company estimated that the results
of a uniform 10% weakening in the value of the United States dollar relative to
the currencies in which the options and
<PAGE>
forwards are denominated, with all other variables held constant, would result
in a net decrease in the fair value of these instruments of approximately $9.2.
This estimate, however, includes changes in the fair value of forward contracts
which would be substantially offset by the related impact on the assets and
liabilities being hedged. This calculation assumes that each exchange rate would
change in the same direction relative to the United States dollar. Changes in
exchange rates not only affect the dollar value of the fair value, but also
impact the underlying foreign subsidiaries' income. The Company's sensitivity
analysis as described above does not factor in a potential change in sales
levels, local currency prices, or amounts of options or forwards to cover these
changes.
Additional information concerning derivative financial instruments is available
in Note One and Note Five in Notes to Consolidated Financial Statements.
Year 2000 Readiness (forward-looking information)
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written using
only two digits, rather than four, to represent a year. Date-sensitive software
or hardware may not be able to distinguish between the years 1900 and 2000 and
programs that perform arithmetic operations, comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause system
failures or miscalculations that could disrupt operations.
State of Readiness
The Company's remediation plan for its Year 2000 issue is currently under way
and involves three overlapping phases:
1) Inventory - Creation of an inventory of three functional areas:
applications and information technology (IT) equipment, non-information
technology (non-IT) embedded systems and vendor relationships. All
locations have fully completed the inventory phase.
2) Analysis - Evaluation of the inventoried items for Year 2000 compliance,
the determination of the remediation method and resources required, and
the development of an implementation plan. All locations have fully
completed the analysis phase.
3) Implementation - Execution of the implementation plan for all applicable
hardware and software, interfaces and systems. This involves testing the
changes, beginning to utilize the changed procedures in actual operations,
testing in a Year 2000-simulated environment and vendor interface testing.
The implementation phase, including testing for certain critical applications,
has been substantially completed in most locations for applications, IT
equipment and non-IT embedded systems. The Company anticipates substantial
completion of the implementation phase for all locations by September 1999.
The Company's remediation plan for its Year 2000 issue is an ongoing process and
estimated completion dates are subject to change.
<PAGE>
Risk of the Year 2000 Issue
At this time, the Company believes that its systems will be Year 2000 compliant
in a timely manner for several reasons:
o Most significant marketing and fulfillment systems are already compliant.
o The Company extensively utilizes certain shared applications that have
been or will be remediated once and then deployed to all appropriate
locations.
o Comprehensive testing of all critical systems is conducted in a simulated
Year 2000 environment.
o Critical fulfillment systems in the United States and several developed
international locations use a one-digit field to denote the year;
therefore, the date fields for these systems are updated every 10 years
and the year 2000 does not require separate attention.
The Company believes that the area of greatest risk of the Year 2000 issue
relates to significant suppliers failing to remediate their Year 2000 issues in
a timely manner. The Company has relationships with certain significant
suppliers in most of the locations in which it operates. These relationships may
be material to some local operations and, in the aggregate, may be material to
the Company. The Company relies on suppliers to deliver a broad range of goods
and services worldwide. These include book and magazine printing services,
suppliers of promotional materials and paper, warehouse facilities, lettershops
that assemble promotional mailings, customer service facilities, postal delivery
services, banking services, telecommunications and electricity providers. The
Company has conducted formal communications with its significant suppliers in
all locations to determine the extent to which it may be affected by those third
parties' plans to remediate their own Year 2000 issue in a timely manner. The
level of preparedness of significant suppliers can vary greatly from country to
country. The Company is monitoring its suppliers' progress toward implementing
Year 2000 corrective procedures. If a number of significant suppliers are not
Year 2000 compliant, this could have a material adverse effect on the Company's
results of operations, financial position or cash flow.
Contingency Plans
The Company is in the process of developing its country-by-country contingency
plans. Contingency plans are expected to be substantially completed by October
1999, with subsequent revisions being made, as needed, for the remainder of the
year.
To mitigate the effects of the Company's or significant suppliers' potential
failure to remediate the Year 2000 issue in a timely manner, the Company will
take appropriate actions. Such actions may include having arrangements for
alternate suppliers, re-running processes if errors occur, using manual
intervention to ensure the continuation of operations where necessary, and
scheduling activity in December 1999 that would normally occur at the beginning
of January 2000. If it becomes necessary for the Company to take these
corrective actions, it is uncertain, until the contingency plans are finalized,
whether this would result in significant delays in business operations or have a
material adverse effect on the Company's results of operations, financial
position or cash flow.
<PAGE>
Costs to Address the Year 2000 Issue
The total cost of the Company's remediation plan is estimated at approximately
$15.0 to $18.0 and is being funded through operating cash flows. To manage the
cash flow effects of these incremental costs, the Company has deferred certain
IT development activities and system enhancements. Of the total cost,
approximately $2.0 is attributable to new hardware and software that will be
capitalized. The remainder will be expensed as incurred. To date, approximately
$12.0 of the total cost of the remediation plan has been spent, of which
approximately $1.5 was capitalized.
Impact of the Euro Conversion (forward-looking information)
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
(legacy currencies) and a single currency called the euro. The legacy currencies
are scheduled to remain legal tender as denominations of the euro during the
transition period from January 1, 1999 to December 31, 2001. Beginning January
1, 2002, euro-denominated bills and coins will be introduced and by July 1,
2002, legacy currencies will no longer be legal tender.
The Company performed an internal analysis regarding the business and systems
issues related to the euro conversion and has developed a strategic plan to
ensure that all necessary modifications are made on a timely basis. As the first
step, to accommodate the introduction of the euro on January 1, 1999, the
Company's operations in markets that have adopted the euro are able to accept
payments and pay suppliers in euros, and are able to indicate the euro
equivalent of pricing on invoices. During the transition period, the Company
will be monitoring customer and competitor reaction to the euro and will update
the strategic plan as needed.
During the transition period, the Company believes that the conversion to the
euro will not have a significant impact on the marketing strategy for the
Company's European operations. The euro is not expected to have a significant
competitive impact, including the resulting need to synchronize prices between
markets, primarily because the editorial content of the Company's publishing
products varies. In addition, products are published in local languages and are
sold principally through direct mail rather than retail channels. These factors
result in products that tend to be unique to each market and do not easily lend
themselves to price comparisons across borders. The estimated costs to convert
all affected systems to the euro are not expected to have a material adverse
effect on the Company's results of operations, financial position or cash flow.
New Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for fiscal years beginning after June 15, 2000, will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is an effective hedge, changes in its fair value will be
offset
<PAGE>
against the change in the fair value of the hedged item in either other
comprehensive income or earnings. The ineffective portion of a derivative
classified as a hedge will be immediately recognized in earnings. The Company is
required to adopt the new statement effective July 1, 2000, and has not yet
determined the effect SFAS No. 133 will have on its results of operations and
financial position. This statement is not required to be applied retroactively
to financial statements of prior periods.
In 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This statement, which is effective for
fiscal years beginning after December 15, 1998, will require the Company to
capitalize certain internal-use software costs once certain criteria are met.
This statement is not expected to have a material impact on the Company's
results of operations, financial position or cash flow.
Cautionary Statement (forward-looking information)
This report includes "forward-looking statements" within the meaning of the U.S.
federal securities laws. Forward-looking statements include any statements that
address future results or occurrences. These forward-looking statements
inherently involve risks and uncertainties that could cause actual future
results and occurrences to differ materially from the forward-looking
statements. Some of these risks and uncertainties include factors relating to:
the effect of potentially more restrictive privacy and other governmental
regulation relating to the Company's marketing methods; the effect of modified
and varied promotions; the ability to identify customer trends; the ability to
continue to create a broadly appealing mix of new products; the ability to
attract and retain new and younger magazine subscribers and product customers in
view of the maturing of an important portion of the U.S. customer base; the
ability to attract and retain subscribers and customers in an economically
efficient manner; the effect of selective adjustments in pricing; the ability to
expand and more effectively utilize the Company's customer database; the ability
to expand into new international markets and to introduce new product lines into
new and existing markets; the ability to expand into new channels of
distribution; the ability to negotiate and implement productive acquisitions,
strategic alliances and joint ventures; the ability to integrate newly acquired
and newly formed businesses successfully; the strength of relationships of newly
acquired and newly formed businesses with their employees, suppliers and
customers; the accuracy of the basis of forecasts relating to newly acquired and
newly formed businesses; the ability to contain and reduce costs, especially
through global efficiencies; the cost and effectiveness of reengineering of
business processes and operations; the accuracy of management's assessment of
the current status of the Company's business; the evolution of the Company's
organizational and structural capabilities; the ability of the Company to
respond to competitive pressures within and outside the direct marketing
industry, including the Internet; the effect of worldwide paper and postage
costs; the effect of postal disruptions on deliveries; the effect of foreign
currency fluctuations; the effect of the Year 2000 issue; the effect of the
transition to the euro; and general economic conditions.
<PAGE>
Consolidated Statements of Income
Years ended June 30,
-----------------------------------
In millions, except per share data 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues $2,532.2 $2,691.2 $2,896.5
Product, distribution and
editorial expenses 963.5 1,046.6 1,084.2
Promotion, marketing and
administrative expenses 1,401.7 1,544.4 1,584.5
Other operating items 37.9 70.0 35.0
- --------------------------------------------------------------------------------
Operating profit 129.1 30.2 192.8
Other income, net 82.6 11.3 17.4
- --------------------------------------------------------------------------------
Income before provision for
income taxes 211.7 41.5 210.2
Provision for income taxes 85.1 23.6 76.7
- --------------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principles 126.6 17.9 133.5
Cumulative effect of change in
accounting principles for pension
assets, net of tax of $15.2 25.3 -- --
- --------------------------------------------------------------------------------
Net income $ 151.9 $ 17.9 $ 133.5
================================================================================
Basic and diluted earnings per share
Basic earnings per share
Weighted-average common
shares outstanding 107.3 106.5 106.7
Before cumulative effect of
change in accounting principles $ 1.16 $ 0.16 $ 1.24
Cumulative effect of change in
accounting principles 0.24 -- --
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.40 $ 0.16 $ 1.24
================================================================================
Diluted earnings per share
Adjusted weighted-average common
shares outstanding 108.0 106.7 106.7
Before cumulative effect of change
in accounting principles $ 1.15 $ 0.16 $ 1.24
Cumulative effect of change in
accounting principles 0.24 -- --
- --------------------------------------------------------------------------------
Diluted earnings per share $ 1.39 $ 0.16 $ 1.24
================================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Balance Sheets
June 30,
----------------------------
In millions 1999 1998
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 413.4 $ 122.8
Receivables, net 319.9 376.4
Inventories, net 94.9 162.2
Prepaid expenses and other
current assets 318.3 311.2
- --------------------------------------------------------------------------------
Total current assets 1,146.5 972.6
Property, plant and equipment, net 148.4 285.4
Intangible assets, net 68.5 41.8
Other noncurrent assets 347.1 264.2
- --------------------------------------------------------------------------------
Total assets $1,710.5 $1,564.0
================================================================================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 130.7 $ 172.1
Accrued expenses 352.2 359.3
Income taxes payable 56.0 21.0
Unearned revenue 336.5 355.4
Other current liabilities 110.9 90.0
- --------------------------------------------------------------------------------
Total current liabilities 986.3 997.8
Postretirement and postemployment
benefits other than pensions 146.9 157.6
Other noncurrent liabilities 195.8 150.0
- --------------------------------------------------------------------------------
Total liabilities 1,329.0 1,305.4
- --------------------------------------------------------------------------------
Stockholders' equity
Capital stock 24.8 16.6
Paid-in capital 146.2 144.8
Retained earnings 955.4 845.0
Accumulated other comprehensive loss (56.6) (49.8)
Treasury stock, at cost (688.3) (698.0)
- --------------------------------------------------------------------------------
Total stockholders' equity 381.5 258.6
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,710.5 $1,564.0
================================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
Years ended June 30,
----------------------------
In millions 1999 1998 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $151.9 $ 17.9 $133.5
Cumulative effect of change in
accounting principles (25.3) -- --
Asset impairments 22.8 -- --
Depreciation and amortization 43.7 46.2 46.7
Gains on the sales of certain investments (0.7) (5.2) (7.0)
Gains on the sales of certain assets
and other businesses (78.9) (10.2) (1.4)
Changes in assets and liabilities, net
of effects of acquisitions and
dispositions
Receivables, net 49.5 10.9 (33.3)
Inventories, net 64.1 (1.9) 20.2
Unearned revenue (2.4) 7.6 7.7
Accounts payable and accrued expenses (39.0) 9.3 (36.2)
Other, net 36.8 19.3 (32.9)
- --------------------------------------------------------------------------------
Net change in cash due to operating
activities 222.5 93.9 97.3
- --------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from maturities and sales of
marketable securities and short-term
investments 2.3 32.5 107.3
Purchases of investments (35.8) (2.3) (23.1)
Capital expenditures (26.3) (34.1) (110.6)
Proceeds from sales of businesses and
other long-term investments, net 14.6 45.7 4.5
Proceeds from sales of property, plant
and equipment 193.0 25.0 5.5
Payments for business acquisitions (32.7) -- (16.0)
Other, net (0.5) -- --
- --------------------------------------------------------------------------------
Net change in cash due to investing
activities $114.6 $ 66.8 $(32.4)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid $(41.5) $(97.1) $(193.3)
Common stock repurchased -- -- (66.3)
Other, net 5.1 (5.6) 13.5
- --------------------------------------------------------------------------------
Net change in cash due to financing
activities (36.4) (102.7) (246.1)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (10.1) (4.3) (7.8)
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents 290.6 53.7 (189.0)
- --------------------------------------------------------------------------------
Cash and cash equivalents at beginning
of year 122.8 69.1 258.1
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $413.4 $122.8 $ 69.1
================================================================================
Supplemental information
Cash paid for interest $ 3.5 $ 5.4 $ 5.3
Cash paid for income taxes $ 47.7 $ 20.5 $ 72.2
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Captital Stock
-------------------------------------------------
Unamortized
In millions Preferred Stock Common Stock Restricted Stock
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 28.8 $ 1.4 $ (1.8)
Comprehensive income
Net income
Other comprehensive income:
Translation loss
Net unrealized gain on investments
Total comprehensive income
Stock issued under various plans 0.6
Common stock dividends
Preferred stock dividends
Treasury stock repurchased
- ------------------------------------------------------------------------------------------------
Balance at June 30, 1997 28.8 1.4 (1.2)
================================================================================================
Comprehensive income
Net income
Other comprehensive income:
Translation loss
Net unrealized gain on investments
Total comprehensive income
Stock issued under various plans (12.4)
Common stock dividends
Preferred stock dividends
- ------------------------------------------------------------------------------------------------
Balance at June 30, 1998 28.8 1.4 (13.6)
================================================================================================
Comprehensive income
Net income
Other comprehensive income:
Translation loss
Total comprehensive income
Stock issued under various plans 8.2
Common stock dividends
Preferred stock dividends
- ------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 28.8 $ 1.4 $ (5.4)
================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Treasury Stock,
In millions Paid in Capital Retained Earnings (Loss) Income at Cost Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $138.3 $984.0 $(15.5) $(656.3) $478.9
Comprehensive income
Net income 133.5 133.5
Other comprehensive income:
Translation loss (19.2) (19.2)
Net unrealized gain on investments 1.0 1.0
-----------
Total comprehensive income 115.3
===========
Stock issued under various plans 3.5 7.3 11.4
Common stock dividends (192.0) (192.0)
Preferred stock dividends (1.3) (1.3)
Treasury stock repurchased (66.3) (66.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 141.8 924.2 (33.7) (715.3) 346.0
===================================================================================================================================
Comprehensive income
Net income 17.9 17.9
Other comprehensive income:
Translation loss (16.4) (16.4)
Net unrealized gain on investments 0.3 0.3
-----------
Total comprehensive income 1.8
===========
Stock issued under various plans 3.0 17.3 7.9
Common stock dividends (95.8) (95.8)
Preferred stock dividends (1.3) (1.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 144.8 845.0 (49.8) (698.0) 258.6
===================================================================================================================================
Comprehensive income
Net income 151.9 151.9
Other comprehensive income:
Translation loss (6.8) (6.8)
-----------
Total comprehensive income 145.1
===========
Stock issued under various plans 1.4 9.7 19.3
Common stock dividends (40.2) (40.2)
Preferred stock dividends (1.3) (1.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $146.2 $955.4 $(56.6) $(688.3) $381.5
===================================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Dollars in millions, except per share data
One Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The
Reader's Digest Association, Inc. and its United States and international
subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain prior year amounts have been restated to conform to the current year
presentation. Revenues have been reclassified to reflect certain publisher
remittances as a component of product, distribution and editorial expenses.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts in these financial statements.
Although these estimates are based on management's knowledge of current events
and actions the Company may undertake in the future, actual results may
ultimately differ from those estimates.
New Accounting Standards
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company adopted these
statements effective July 1, 1998 and June 30, 1999, respectively. These
statements modified or expanded the Company's stockholders' equity and segment
disclosures and had no impact on the Company's results of operations, financial
position or cash flow.
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for fiscal years beginning after June 15, 2000, will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is an effective hedge, changes in its fair value will be
offset against the change in the fair value of the hedged item in either other
comprehensive income or earnings. The ineffective portion of a derivative
classified as a hedge will be immediately recognized in earnings. The Company is
required to adopt the new statement effective July 1, 2000, and has not yet
determined the effect SFAS No. 133 will have on its results of operations and
financial position. This statement is not required to be applied retroactively
to financial statements of prior periods.
In 1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement, which is effective for fiscal years beginning
after December 15, 1998, will require the Company to capitalize certain
internal-use software costs once certain criteria are met. This statement is not
expected to have a material impact on the Company's results of operations,
financial position or cash flow.
<PAGE>
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The Company accordingly modified
disclosures relating to its pension and postretirement benefit plans. This
adoption had no effect on the Company's results of operations, financial
position or cash flow.
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." The Company has
reported on the income statement basic and diluted earnings per share results
for all periods presented.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less at the date of purchase to be cash equivalents. The
carrying amount approximates fair value based upon the short-term maturity of
these investments.
Receivables, net
Receivables, net are reflected net of allowances for returns and bad debts of
$153.8, $173.0 and $166.2 at June 30, 1999, 1998 and 1997, respectively.
Additions to the allowances amounted to $509.1, $505.0 and $548.7, respectively,
and amounts written off amounted to $528.3, $498.2 and $575.6 during the years
ended June 30, 1999, 1998 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost or market, primarily determined on
the first-in, first-out (FIFO) basis in most markets. Generally, U.S. inventory
is valued on the last-in, first-out (LIFO) basis.
Financial Instruments
In the normal course of business, the Company is exposed to market risk from the
effect of foreign exchange rate fluctuations on the U.S. dollar value of its
foreign subsidiaries' results of operations and financial condition. The Company
purchases foreign currency option and forward contracts to minimize the effect
of fluctuating foreign currencies on the U.S. dollar value of its subsidiaries'
earnings and specifically identifiable anticipated transactions, generally over
periods ranging up to 12 months. In addition, the Company enters into forward
contracts to minimize the effect of fluctuating foreign currency exchange rates
on certain foreign currency denominated assets and liabilities, generally over
periods ranging up to 12 months. The Company, as a matter of policy, does not
speculate in financial markets, and therefore does not hold financial
instruments for trading purposes.
Foreign currency option contracts that reduce the Company's exposure to the
effects of fluctuating foreign currencies on its earnings, and forward contracts
that reduce exposure to the effects of fluctuating foreign currencies on
specifically identifiable anticipated transactions, do not meet the criteria for
hedge accounting. However, option contracts that are designated as hedges and
that reduce the Company's exposure to the effects of fluctuating foreign
currencies on specifically identifiable anticipated transactions, where it is
probable that the transactions will occur, meet the criteria for hedge
accounting. Forward contracts that reduce the Company's exposure on foreign
currency denominated assets and liabilities meet the criteria for hedge
accounting as they are designated as, and are effective as, hedges of
specifically identified foreign currency denominated assets and liabilities.
<PAGE>
Premiums on option contracts that qualify for hedge accounting are amortized
over the term of the contract and any gains at maturity are included in other
income, net. If an option contract is terminated before its maturity, the
unamortized premium associated with the contract is written off and included in
other income, net. Option contracts that do not qualify for hedge accounting are
recorded at fair market value and changes in market value on such instruments
are included in other income, net. The carrying value of option contracts is
included in prepaid expenses and other current assets.
Forward contracts are included at market value on the balance sheet in prepaid
expenses and other current assets and other current liabilities. Changes in
market value on forward contracts are included in other income, net. In the
event that the underlying foreign currency denominated asset or liability is
extinguished or terminated prior to the forward contract's maturity, the
Company's policy is to enter into a separate forward contract to offset any
changes in market value from that date until the maturity of the original
contract.
Depreciation and Amortization
Property, plant and equipment are stated at cost, except for property, plant and
equipment that have been impaired, for which the carrying amount is reduced to
the estimated fair market value. Buildings, equipment, and furniture and
fixtures are depreciated using the straight-line method over useful lives up to
50 years for buildings and useful lives ranging from three to 15 years for
equipment and furniture and fixtures. Leasehold improvements are amortized using
the straight-line method over the term of the lease or the useful life of the
improvement, whichever is shorter.
Intangible Assets, net
Intangible assets, net are composed of distribution rights, contracts,
subscription lists and other intangible assets, as well as the excess of costs
over the fair value of net assets of acquired businesses. The excess of costs
over the fair value of businesses acquired is amortized, on a straight-line
basis, over varying periods, not in excess of 40 years. Other acquired
intangibles are amortized, on a straight-line basis, over their estimated useful
lives, not in excess of ten years. The Company continually evaluates the
recoverability of its intangible assets to determine whether current events or
circumstances warrant adjustments to the carrying value. Such evaluation may be
based on current and projected income and cash flows from operations of related
businesses on an undiscounted basis as well as other economic and market
variables.
Stock-Based Compensation
Compensation cost is recognized for stock-based compensation using the intrinsic
value method. Under this method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. The Company's policy is to grant stock options at
fair market value at the date of grant.
<PAGE>
Revenues
Sales of Global Books and Home Entertainment products, less provisions for
returns, are recorded at the time of shipment. Sales of magazine subscriptions
are recorded as unearned revenue at the gross subscription price at the time the
orders are received. Proportionate shares of the gross subscription price are
recognized as revenues when the subscriptions are fulfilled.
Promotion Costs
Costs of direct response advertising are matched with the expected revenue
stream. Direct response advertising consists primarily of promotion costs
incurred in connection with the sale of magazine subscriptions, books and other
products.
Promotion costs of $824.1, $927.0 and $942.9 were incurred for the years ended
June 30, 1999, 1998 and 1997, respectively. Prepaid promotion costs, included in
prepaid expenses and other current assets, amounted to $30.7 and $44.3 at June
30, 1999 and 1998, respectively.
Deferred promotion costs, included in other noncurrent assets, amounted to $78.2
and $102.8 at June 30, 1999 and 1998, respectively.
Income Taxes
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes, net of valuation allowances, reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes. These deferred
taxes are measured by applying currently enacted tax laws.
Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income, less preferred
stock dividend requirements ($1.3 for the year ended June 30, 1999), by the
weighted-average number of common shares outstanding during the year. Diluted
earnings per share is computed in the same manner except that the
weighted-average number of common shares outstanding assumes the exercise and
conversion of certain stock options (0.7 million shares for the year ended June
30, 1999).
Options to purchase approximately 5.0 million shares of common stock were
outstanding during 1999, but were not included in the computation of diluted
earnings per share. The exercise prices of these options were greater than the
average market price of the common shares during the period.
For the years ended June 30, 1998 and 1997, basic and diluted earnings per share
were the same.
<PAGE>
Foreign Currency Translation
The functional currency for most foreign operations is the local currency.
Revenues and expenses denominated in foreign currencies are translated at
average monthly exchange rates prevailing during the year. The assets and
liabilities of international subsidiaries are translated into U.S. dollars at
the rates of exchange in effect at the balance sheet date. The resulting
translation adjustment is reflected as a separate component of stockholders'
equity within accumulated other comprehensive income.
The U.S. dollar is used as the functional currency for subsidiaries operating in
highly inflationary economies, for which both translation adjustments and gains
and losses on foreign currency transactions are included in other income, net.
Two Other Operating Items
Other operating items represent charges related primarily to the streamlining of
the Company's organizational structure and the strategic repositioning of
certain businesses. The Company recorded other operating items of $37.9, $70.0
and $35.0 in the years ended June 30, 1999, 1998 and 1997, respectively. The
1998 other operating items of $70.0 were composed primarily of severance costs
associated with workforce reductions. The 1997 other operating items of $35.0
related primarily to the realignment of the organization and operations. The
1999 charges included $22.8 of impairment losses and are net of $55.6 for
adjustments to prior year accruals. The components of other operating items in
1999 are described in further detail below:
o Employee Retirement and Severance Benefits -- The Company identified
approximately 1,000 employees who would be separated as a result of
actions taken during 1999 to streamline the organizational structure
through a combination of voluntary and involuntary severance programs. As
of June 30, 1999, approximately 800 of the 1,000 identified employees had
been separated from the Company.
o Contract Terminations -- These charges represent anticipated costs to
terminate contractual obligations in connection with the Company's
streamlining activities.
o Impairment Losses -- As a result of the restructuring, charges relating to
the carrying value of certain computer hardware and software and, to a
lesser extent, leasehold improvements and furniture and fixtures no longer
used in the Company's operations were charged to impairment losses.
At June 30, 1999, the Company had accruals for other operating items of $76.7.
During 1999, $93.5 was accrued for the above items, of which $60.0 related to
employee retirement and severance benefits. Payments made during 1999 totaled
$52.4, of which $40.9 related to employee retirement and severance benefits. In
addition, adjustments to prior year accruals of $55.6 were made during 1999, of
which $12.6 related to adjustments for various legal claims
<PAGE>
against the Company that resulted in costs that were less than previously
expected. The remaining adjustment of $43.0 was for several actions initiated by
prior management that will not be completed in connection with the three-phase
long-term strategy of the Company. At June 30, 1999, liabilities of $63.0 were
recorded for future payments to accomplish the remaining objectives of the
growth strategy of the Company.
Three Other Income, Net
Components of other income, net are as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Interest income $ 12.5 $ 6.9 $ 11.4
Interest expense (5.7) (9.4) (7.0)
Gains on the sales of certain investments 0.7 5.2 7.0
Gains on the sales of certain assets
and other businesses 78.9 10.2 1.4
(Losses) Gains on foreign exchange (2.5) 1.3 8.5
Other expense, net (1.3) (2.9) (3.9)
- --------------------------------------------------------------------------------
Total other income, net $ 82.6 $ 11.3 $ 17.4
================================================================================
Gains on the sales of certain assets and other businesses in 1999 primarily
consist of gains from the sale of important works from the Company's fine art
collection and certain businesses, partially offset by losses from the sales of
publishing operations in South Africa and certain international real estate
holdings.
Four Supplemental Balance Sheet Information
The components of certain balance sheet accounts as of June 30, 1999 and 1998
are as follows:
Inventories
1999 1998
- --------------------------------------------------------------------------------
Raw materials $ 12.7 $ 21.8
Work-in-progress 20.2 24.7
Finished goods 62.0 115.7
- --------------------------------------------------------------------------------
Total inventories $ 94.9 $ 162.2
================================================================================
If the FIFO method of inventory had been used for United States locations,
inventories would have been $6.7 and $10.8 higher than the amounts reported at
June 30, 1999 and 1998, respectively.
<PAGE>
Property, Plant and Equipment
1999 1998
- -------------------------------------------------------------------------------
Land $ 11.9 $ 12.5
Buildings and building improvements 185.7 303.2
Furniture, fixtures and equipment 238.3 290.4
Leasehold improvements 11.8 16.3
- -------------------------------------------------------------------------------
447.7 622.4
Accumulated depreciation and amortization (299.3) (337.0)
- -------------------------------------------------------------------------------
Total property, plant and equipment $ 148.4 $ 285.4
================================================================================
Intangible Assets
1999 1998
- -------------------------------------------------------------------------------
Distribution rights, contracts,
subscription lists and other $ 58.6 $ 56.3
Excess of cost over fair value of
net assets of businesses acquired 104.8 77.2
- -------------------------------------------------------------------------------
163.4 133.5
Accumulated amortization (94.9) (91.7)
- -------------------------------------------------------------------------------
Total intangible assets $ 68.5 $ 41.8
================================================================================
Accrued Expenses
1999 1998
- -------------------------------------------------------------------------------
Compensation and other employee benefits $ 96.0 $ 93.0
Royalties and copyrights payable 33.9 32.3
Taxes, other than income taxes 16.6 15.8
Other, principally operating expenses 205.7 218.2
- -------------------------------------------------------------------------------
Total accrued expenses $ 352.2 $ 359.3
================================================================================
Other, principally operating expenses includes $76.7 and $109.7 relating to the
remaining balances associated with other operating items at June 30, 1999 and
1998, respectively.
<PAGE>
Five Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk.
These financial instruments are used in the normal course of business to manage
the Company's exposure to fluctuations in foreign currency exchange rates.
The Company may be exposed to credit losses in the event of nonperformance by
the financial institutions that are counterparties to these instruments;
however, the Company mitigates this risk through specific minimum credit
standards and diversification of financial institutions with which it enters
into these derivative transactions.
The Company's derivative financial instruments also involve elements of market
risk as a result of potential changes in foreign currency exchange rates. The
market risk associated with the option contracts and forward contracts relating
to specifically identifiable anticipated transactions is limited to the carrying
value of these contracts in the Company's consolidated balance sheet. Forward
contracts that reduce the Company's foreign exchange exposure on the foreign
currency denominated assets and liabilities outstanding at the end of the year
are effective hedges of existing foreign currency exposures. Therefore, the
impact of potential changes in future foreign currency exchange rates on these
instruments would generally offset the related impact on the assets and
liabilities being hedged.
The following chart summarizes the Company's derivative positions included
within the balance sheet:
Notional/ Fiscal
Principal Carrying Fair Year
Amounts Value Value Maturity
- --------------------------------------------------------------------------------
1999
Forward Contracts
Assets $ 94.0 $ 92.3 $ 92.3 2000
Liabilities $ 94.0 $ 93.8 $ 93.8 2000
Option Contracts
Assets $ 116.1 $ 4.6 $ 5.0 2000
1998
Forward Contracts
Assets $ 62.3 $ 62.1 $ 62.1 1999
Liabilities $ 62.3 $ 62.4 $ 62.4 1999
Option Contracts
Assets $ 59.1 $ 1.8 $ 1.8 1999
- --------------------------------------------------------------------------------
Forward contracts are included in prepaid expenses and other current assets and
other current liabilities in the balance sheet. The carrying value of option
contracts is included in prepaid expenses and other current assets in the
balance sheet.
<PAGE>
Six Pension Plans and Other Postretirement Benefits
Change in Accounting for Pension Assets
Effective July 1, 1998, the Company changed its method for calculating the
market-related value of pension plan assets. This method is used in determining
the return-on-asset component of annual pension expense and the cumulative net
unrecognized gain (loss) subject to amortization. The Company believes that the
new method is more widely used in practice and is preferable because it results
in pension plan asset values that more closely approximate fair value, while
still mitigating the effect of annual market value fluctuations. In addition,
the new method facilitates the global management of pension plans as it results
in a consistent methodology for all plans.
Under the old method, realized and unrealized gains or losses on pension plan
assets were amortized and recognized over a five-year period. Dividends and
interest earned during the plan year were immediately recognized. Under the new
method, the Company recognizes an expected return on pension plan assets and
amortizes differences between actual and expected returns over a five-year
period.
This change resulted in a non-cash benefit in 1999 of $40.5 ($25.3 after tax, or
$0.24 per share). The benefit represents the cumulative effect of the change
related to years prior to 1999. In addition, the Company realized $19.0 ($11.9
after tax, or $0.11 per share) in lower pension expense in 1999, compared with
the previous accounting method. Had this change been applied retroactively,
pension expense would have been reduced by $15.8 and $12.5 ($9.9 and $7.8 after
tax, or $0.09 and $0.07 per share) in 1998 and 1997, respectively.
Change in Measurement Date for Pensions
In 1999, the Company elected to change the measurement date for pension plan
assets and liabilities from June 30 to March 31, as permitted by SFAS No. 87,
"Employers' Accounting for Pensions." This change had no significant effect on
1999 or prior years' pension expense.
Assumptions used to determine pension costs and projected benefit obligations
are as follows:
United States Plans
-------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Discount rate 7.0% 7.0% 7.8%
Compensation increase rate 5.0% 5.0% 5.3%
Long-term rate of return on plan assets 9.5% 9.5% 9.5%
==============================================================================
International Plans
-------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Discount rate 5-12% 4-15% 4-15%
Compensation increase rate 3-10% 3-10% 3-13%
Long-term rate of return on plan assets 5-13% 5-16% 5-16%
==============================================================================
<PAGE>
Components of consolidated net periodic pension (benefit) cost are as follows:
Pension Benefits
-------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Service cost $ 20.5 $ 18.2 $ 19.4
Interest cost 44.6 45.7 46.1
Expected return on plan assets (79.8) (60.7) (54.6)
Amortization (2.9) (3.2) (2.8)
Recognized actuarial gain (9.7) (3.4) (0.1)
Special items 2.4 -- --
- ------------------------------------------------------------------------------
Net periodic pension (benefit) cost $ (24.9) $ (3.4) $ 8.0
==============================================================================
The Company provides medical and dental benefits to United States retired
employees and their dependents. Substantially all of the Company's United States
employees become eligible for these benefits when they meet minimum age and
service requirements. The Company has the right to modify or terminate these
unfunded benefits. Discount rates of 7.0% for 1999, 7.0% for 1998 and 7.8% for
1997 were used in determining the accumulated postretirement benefits liability.
Components of costs for postretirement benefits are as follows:
Other Benefits
-------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Service cost $ 1.8 $ 1.6 $ 2.5
Interest cost 4.6 5.5 7.1
Recognized actuarial gain (2.7) (2.2) (0.7)
Special items (0.4) -- --
- ------------------------------------------------------------------------------
Postretirement benefit costs $ 3.3 $ 4.9 $ 8.9
==============================================================================
<PAGE>
A reconciliation of beginning and ending balances of benefit obligations and
fair value of plan assets, and the funded status of the plans are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------
1999(1) 1998 1999(2) 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 697.2 $ 620.7 $ 81.8 $ 99.1
Service cost 17.4 18.2 1.3 1.6
Interest cost 36.2 45.7 3.5 5.5
Actuarial loss (gain) 23.0 55.2 (14.0) (19.4)
Plan amendments (12.6) 3.1 (6.0) --
Exchange rate changes (6.6) (5.5) -- --
Settlements/curtailments (30.3) (2.7) (0.4) --
Benefits paid (34.2) (43.6) (3.0) (5.0)
Other items (0.3) 6.1 1.5 --
- -----------------------------------------------------------------------------------------
Benefit obligation at end of year 689.8 697.2 64.7 81.8
- -----------------------------------------------------------------------------------------
Change in plan assets
Fair value at beginning of year 936.1 830.3 -- --
Actual return on plan assets 63.8 154.0 -- --
Settlements (24.0) (0.6) -- --
Employer contribution 8.5 8.8 0.1 0.3
IRC section 401(h) transfer (4.1) (4.7) 4.1 4.7
Exchange rate changes (6.5) (7.5) -- --
Benefits paid (34.2) (43.6) (4.2) (5.0)
Other items (11.4) (0.6) -- --
- -----------------------------------------------------------------------------------------
Fair value at end of year 928.2 936.1 -- --
- -----------------------------------------------------------------------------------------
Funded status 238.4 238.9 (64.7) (81.8)
Unrecognized actuarial gain (181.4) (265.2) (49.0) (37.5)
Unrecognized transition asset (12.3) (16.9) -- --
Unrecognized prior service (benefit) cost (3.8) 12.9 (5.0) --
Employer -- 1999 fourth quarter contribution 1.1 -- -- --
- -----------------------------------------------------------------------------------------
Net amount recognized $ 42.0 $ (30.3) $(118.7) $(119.3)
- -----------------------------------------------------------------------------------------
</TABLE>
(1) The benefit obligation and the fair value of plan assets for pension
benefits in 1999 are stated as of March 31, 1999. Similar information in
1998 is stated as of June 30, 1998.
(2) The benefit obligation for other benefits in 1999 is stated as of March
31, 1999. Similar information in 1998 is stated as of June 30, 1998. The
fair value of plan assets for other benefits in both 1999 and 1998 are
stated as of June 30.
During 1999 and 1998, in accordance with Internal Revenue Code section 401(h),
the Company transferred $4.1 and $4.7, respectively, of excess pension assets to
fund postretirement benefits.
<PAGE>
Amounts recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost $ 124.9 $ 34.2 $ -- $ --
Accrued benefit liability (83.1) (64.9) (118.7) (119.3)
Intangible assets, net 0.2 0.4 -- --
- -----------------------------------------------------------------------------------------
Net amount recognized $ 42.0 $ (30.3) $(118.7) $(119.3)
- -----------------------------------------------------------------------------------------
</TABLE>
Select balances of plans with projected and accumulated benefit obligations in
excess of the fair value of plan assets are as follows:
<TABLE>
<CAPTION>
Plans with Projected Plans with Accumulated
Benefit Obligations Benefit Obligations
in excess of Plan Assets in excess of Plan Assets
---------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Projected benefit obligation $ 91.9 $ 100.7 N/A N/A
Accumulated benefit obligation N/A N/A $ 85.6 $ 83.7
Fair value of plan assets $ 2.8 $ 11.9 $ 2.8 $ 2.4
- -----------------------------------------------------------------------------------------
</TABLE>
Health Care Inflation and Cost Trend Rates
The health care inflation assumption used to determine the postretirement
benefits liability was 8.0% for 1999 and 1998, decreasing gradually to 5.5% by
2004 and remaining at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for postretirement benefits. A one-percentage-point increase in assumed
health care cost trend rates would increase the total of the service and
interest cost components and the postretirement benefit obligation by $1.0 and
$5.0, respectively. A one-percentage-point decrease in assumed health care cost
trend rates would decrease the total of the service and interest cost components
and the postretirement benefit obligation by $0.9 and $4.8, respectively.
<PAGE>
Seven Employee Compensation Plans
The Company maintains several employee compensation plans relating to stock or
stock-based awards, including stock options, restricted stock, stock
appreciation rights, phantom stock and phantom stock options.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," and as permitted by that statement, has continued
to measure compensation cost as the excess of the quoted market price of the
Company's stock at the grant date over the amount the employee must pay for the
stock. Since the Company grants stock options at fair market value at the date
of grant, no compensation expense is recognized. Compensation expense is
recognized with respect to phantom stock, stock appreciation rights and phantom
stock options.
SFAS No. 123 requires disclosure of pro forma net income and earnings per share
as if the fair value-based method had been applied in measuring compensation
cost for stock-based awards granted in 1999, 1998, 1997 and 1996.
Management believes that 1999, 1998 and 1997 pro forma amounts are not
representative of the effects of stock-based awards on future pro forma net
income and earnings per share because these pro forma amounts exclude the pro
forma compensation expense related to unvested stock options granted before
1996. In addition, certain options vest over several years, and awards in future
years may occur whose terms and conditions may vary.
As required by SFAS No. 123, the Company has disclosed below the pro forma
impact of using the fair value method to calculate compensation expense of stock
options and stock purchase rights granted.
1999 1998 1997
- --------------------------------------------------------------------------
Net income
As reported $ 151.9 $ 17.9 $ 133.5
Pro forma $ 144.0 $ 10.5 $ 129.1
Earnings per share
As reported--basic $ 1.40 $ 0.16 $ 1.24
Pro forma--basic $ 1.33 $ 0.09 $ 1.20
As reported--diluted $ 1.39 $ 0.16 $ 1.24
Pro forma--diluted $ 1.32 $ 0.09 $ 1.20
- --------------------------------------------------------------------------
<PAGE>
The weighted-average fair value of options granted in 1999, 1998 and 1997 were
$5.91, $8.38 and $9.32, respectively. The weighted-average fair value of options
granted in 1998 includes the value of the November grant less the value of the
October grant as of the date that the November grant was issued (see discussion
of the 1989 and 1994 Key Employee Long Term Incentive Plans, below).
The fair values of the options granted were estimated on the date of their grant
using the Black-Scholes option-pricing model based on the following
weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------
Risk-free interest rate 4.6% 5.5% 6.3%
Expected life 4.2 years 3.7 years 5.1 years
Expected volatility 30.1% 29.4% 23.5%
Expected dividend yield 0.6% 1.0% 3.7%
- --------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------
Weighted Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Prices (000's) Contractual Life (yrs) Exercise Price (000's) Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.94-$18.97 2,165 9.23 $18.94 1 $18.10
$20.00-$29.44 2,930 8.01 $23.84 1,248 $24.90
$30.94-$39.81 125 7.90 $36.71 30 $38.64
$41.25-$48.13 4,495 5.42 $44.50 3,377 $44.53
$50.94-$55.12 70 5.78 $51.69 35 $52.43
- ---------------------------------------------------------------------------------------------------------
9,785 7.07 $32.61 4,691 $39.32
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Changes in outstanding options are as follows:
Shares Subject Weighted Average
(Options in thousands) to Options Exercise Price
- --------------------------------------------------------------------------------
Outstanding at June 30, 1996 6,034 $43.76
Granted 1,722 $41.04
Exercised (130) $25.67
Canceled (733) $44.53
- --------------------------------------------------------------------------------
Outstanding at June 30, 1997 6,893 $43.35
Granted 4,880 $24.76
Exercised (26) $20.13
Canceled (2,965) $32.05
- --------------------------------------------------------------------------------
Outstanding at June 30, 1998 8,782 $36.90
Granted 2,534 $19.54
Exercised (256) $23.14
Canceled (1,275) $38.02
- --------------------------------------------------------------------------------
Outstanding at June 30, 1999 9,785 $32.61
- --------------------------------------------------------------------------------
Options exercisable at June 30, 1999 4,691 $39.32
- --------------------------------------------------------------------------------
Options available for grant at June 30, 1999 3,223
- --------------------------------------------------------------------------------
1989 and 1994 Key Employee Long Term Incentive Plans (the plans)
The plans provide that the Compensation and Nominating Committee of the Board of
Directors (the committee) may grant stock options, stock appreciation rights,
restricted stock, performance units, performance shares and other stock-based
awards to eligible employees. The committee may grant awards up to a maximum of
5,420,000 and 10,800,000 underlying shares of Class A nonvoting common stock
(Class A) under the plans, respectively.
Under the plans, options have been granted with exercise prices not less than
the fair market value of the Class A stock at the time of the grant, with an
exercise term as determined by the committee, not to exceed ten years. The
options have vesting terms as determined by the committee, but generally become
exercisable over four years. On October 9, 1997, options and stock appreciation
rights related to 2.1 million shares of Class A stock were granted to over 800
eligible employees pursuant to the stock-based plans (October grant). The
exercise price of the October grant was $27.03 per share, the fair market value
of the Company's common stock at October 9, 1997. The October grant was never
distributed.
On November 18, 1997, the October grant was canceled and options and stock
appreciation rights related to 2.1 million shares of Class A stock were reissued
to eligible employees at a price of $21.47 per share, the fair market value of
the Class A stock at November 18, 1997 (November grant). This reissuance was in
connection with a significant revision of the Company's executive compensation
structure, involving the elimination of long-term cash performance awards, the
reduction of annual cash bonuses and greater reliance on equity incentive
awards. The other terms of the November grant were not changed from the terms of
the October grant.
<PAGE>
In 1998, the Company granted 596,700 restricted Class A shares with a value of
$15.7 to over 100 employees at no cost. In 1996, the Company granted 51,347
performance-based restricted Class A shares with a value of $2.4 to a key
employee at no cost. The market value of shares awarded is recorded as
unamortized restricted stock which is included in capital stock. Restricted
stock is amortized over the term of the restriction period. Amortization expense
of restricted stock amounted to $7.6, $2.3 and $0.6 for 1999, 1998 and 1997,
respectively.
During 1999, the committee awarded phantom performance shares, which give the
recipients the right to receive cash equal to the value of shares of Class A
stock that are earned if specific performance goals are achieved during a
specific performance period. The 1999 awards relate to the 1999-2000 and
1999-2001 performance periods. The Company has recorded $5.9 as expense during
1999 for both awards.
1989 Employee Stock Purchase Plan (the ESPP)
Under the ESPP, the Company is authorized to issue up to 1,650,000 Class A
shares, principally to its full-time employees in the United States, nearly all
of whom are eligible to participate. Under the terms of the ESPP, employees can
choose every six months to have up to 10% of their annual base earnings withheld
to purchase Class A shares. The purchase price of the shares is 85% of the lower
of the fair market values of the Class A stock on the first and last days of the
six-month purchase period. Approximately 50% of eligible employees have
participated in the ESPP in the last three years.
In addition, several international subsidiaries of the Company have employee
stock purchase plans (international ESPP plans) under which the Company is
authorized to issue up to 300,000 Class A shares to its full-time employees each
year. The terms of the international ESPP plans in most locations are
essentially the same as the ESPP, and the purchase price of the shares is
generally 85% of the lower of the fair market values of the Class A stock on the
first and last days of the six-month purchase period.
Under the ESPP and the international ESPP plans, employees purchased 208,752
shares in 1999, 251,700 shares in 1998 and 239,026 shares in 1997.
The weighted-average fair values of these purchase rights granted in 1999, 1998
and 1997 were $6.99, $8.21 and $13.13, respectively.
The fair values of the purchase rights were estimated on the grant date using
the Black-Scholes option-pricing model based on the following weighted-average
assumptions:
1999 1998 1997
- -----------------------------------------------------------------------
Risk-free interest rate 4.9% 6.5% 5.4%
Expected life 0.5 years 1.0 years 1.0 years
Expected volatility 37.1% 34.0% 29.5%
Expected dividend yield 0.6% 3.5% 4.3%
=======================================================================
<PAGE>
Other Employee Compensation Plans
Effective July 1, 1998, the Company amended the Employee Ownership Plan and
401(k) Partnership to include a savings plan component under section 401(k) of
the Internal Revenue Code (the 401(k) plan). The 401(k) plan allows employees to
make pre-tax contributions to specified investment options. At the discretion of
the Board of Directors, the Company can make matching contributions to the
401(k) plan. The matching contributions vest ratably over a five-year period.
The Company contributed $3.7, $5.0 and $5.0 to the Employee Ownership Plan and
the 401(k) plan for 1999, 1998 and 1997, respectively.
The Company granted 212,000 and 12,200 stock appreciation rights to key
employees in 1998 and 1996, respectively. The Company also issued 6,000 and
8,000 phantom stock options to non-employee members of the Board of Directors in
1998 and 1997, respectively.
Eight Income Taxes
Income before provision for income taxes is as follows:
1999 1998 1997
- ----------------------------------------------------------------------------
United States $ 183.1 $ 8.1 $ 162.5
International 28.6 33.4 47.7
- ----------------------------------------------------------------------------
Income before income taxes $ 211.7 $ 41.5 $ 210.2
============================================================================
Components of the provision (benefit) for income taxes are as follows:
1999 1998 1997
- ----------------------------------------------------------------------------
Current
Federal $ 39.4 $ (3.8) $ 10.0
State and local 3.7 1.1 3.2
International 34.5 17.4 22.0
- ----------------------------------------------------------------------------
Total current 77.6 14.7 35.2
- ----------------------------------------------------------------------------
Deferred
Federal 21.3 2.2 28.5
State and local 1.8 1.0 6.7
International (15.6) 5.7 6.3
- ----------------------------------------------------------------------------
Total deferred 7.5 8.9 41.5
- ----------------------------------------------------------------------------
Provision for income taxes $ 85.1 $ 23.6 $ 76.7
============================================================================
<PAGE>
A reconciliation between the statutory U.S. federal income tax rate and the
effective income tax rate is as follows:
1999 1998 1997
- ----------------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
International operations 1.3 2.1 (0.9)
State taxes, net 1.4 1.2 2.6
Other operating items 2.3 19.4 --
Other, net 0.2 (0.8) (0.2)
- ----------------------------------------------------------------------------
Effective tax rate 40.2% 56.9% 36.5%
============================================================================
Components of deferred tax assets and liabilities are as follows:
1999 1998
- -----------------------------------------------------------------------------
Deferred compensation and other employee benefits $ 72.8 $ 81.8
Accounts receivable and other allowances 44.8 48.1
Net operating loss carryforwards 30.9 51.4
Other, net 69.3 82.1
- -----------------------------------------------------------------------------
Gross deferred tax assets 217.8 263.4
Valuation allowance (23.5) (31.1)
- -----------------------------------------------------------------------------
Total net assets 194.3 232.3
- -----------------------------------------------------------------------------
Deferred promotion costs 1.7 3.2
Deferred compensation and other employee benefits 6.9 7.3
Other, net 18.4 47.0
- -----------------------------------------------------------------------------
Total net liabilities 27.0 57.5
- -----------------------------------------------------------------------------
Net deferred taxes $ 167.3 $ 174.8
=============================================================================
Balance sheet classifications of deferred tax assets and liabilities are as
follows:
1999 1998
- -----------------------------------------------------------------------------
Prepaid expenses and other current assets $ 83.4 $ 67.9
Other noncurrent assets 110.9 121.7
Other current liabilities 3.7 3.7
Other noncurrent liabilities 23.3 11.1
- -----------------------------------------------------------------------------
Net deferred taxes $ 167.3 $ 174.8
=============================================================================
The Company has concluded that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax assets.
<PAGE>
Net operating loss carryforwards of $94.0 at June 30, 1999, the majority of
which may be carried forward indefinitely, are available to reduce future tax of
certain foreign subsidiaries in a number of jurisdictions.
Deferred federal income taxes have not been provided on undistributed earnings
of foreign subsidiaries as any federal taxes payable would be substantially
offset by foreign tax credits.
Nine Debt
Competitive Advance and Revolving Credit Facility Agreement (the Credit
Agreement)
The Company is a party to the Credit Agreement, amended as of June 2, 1998, with
a syndicate of domestic and foreign banks. The Credit Agreement, which expires
on October 31, 2001, permits competitive advance and revolving credit borrowings
of up to $300.0 by the Company and its designated subsidiaries. Interest rates
are based on several pricing options that can vary based upon operating results
of the Company. The proceeds of the borrowings may be used for general corporate
purposes, including acquisitions, share repurchases and commercial paper backup.
The Credit Agreement contains certain restrictions on the incurrence of debt,
liens and guarantees of indebtedness. The Company must also comply with certain
financial covenants, including a minimum level of consolidated tangible net
worth. Borrowings may be denominated in U.S. dollars and various foreign
currencies.
The Credit Agreement obligates the Company to pay a facility fee dependent on
levels of earnings of the Company and are paid regardless of use. Fees range
between 0.2% and 0.375% of the total commitment. Also, the Company must pay
administrative fees and a utilization fee of 0.05% of the loans outstanding when
borrowings exceed 50% of the committed amount. Fees are payable quarterly in
arrears.
At June 30, 1999 and 1998, there were no borrowings outstanding under the Credit
Agreement and the Company was in compliance with all covenants.
Lines of Credit
International lines of credit totaled $60.0 and $62.6 at June 30, 1999 and 1998,
respectively, of which no amounts were outstanding at June 30, 1999 and $8.5 was
outstanding at June 30, 1998. These lines of credit expire at various dates
throughout 2000. Borrowings during 1998 under these lines of credit were
included in other current liabilities and carrying amounts approximated fair
value. The weighted-average interest rate applicable to the borrowings in 1998
was 7.9%.
<PAGE>
Ten Capital Stock
The Company's capital stock consists of the following:
1999 1998
- -------------------------------------------------------------------------------
First preferred stock,
par value $1.00 per share; authorized 40,000 shares;
issued and outstanding 29,720 shares $ 3.0 $ 3.0
Second preferred stock,
par value $1.00 per share; authorized 120,000 shares;
issued and outstanding 103,720 shares 10.3 10.3
Third subordinated preferred stock,
par value $1.00 per share; authorized 230,000 shares;
issued and outstanding 155,022 shares 15.5 15.5
Preference stock,
par value $0.01 per share; authorized 25,000,000 shares;
issued and outstanding none -- --
- -------------------------------------------------------------------------------
Total preferred stock $ 28.8 $ 28.8
- -------------------------------------------------------------------------------
Class A nonvoting common stock,
par value $0.01 per share; authorized 200,000,000 shares;
issued and outstanding 119,428,472 shares $ 1.2 $ 1.2
Class B voting common stock,
par value $0.01 per share; authorized 25,000,000 shares;
issued and outstanding 21,716,057 shares 0.2 0.2
- -------------------------------------------------------------------------------
Total common stock $ 1.4 $ 1.4
- -------------------------------------------------------------------------------
Unamortized restricted stock $ (5.4) $ (13.6)
- -------------------------------------------------------------------------------
Common stock in treasury, at cost
Class A shares: 33,511,640 in 1999 and 33,982,205 in 1998 $(688.3) $(698.0)
===============================================================================
All shares of preferred stock have a preference in liquidation of $100.00 per
share. The difference between the aggregate par value and liquidation preference
has been appropriated from retained earnings and is shown as part of the value
of preferred stock. Further, all preferred stock is redeemable at any time at
the option of the Company at $105.00 per share plus accrued dividends. The terms
of the First preferred stock and the Second preferred stock provide for annual
cumulative dividends of $4.00 per share. The terms of the Third subordinated
preferred stock provide for annual cumulative dividends of $5.00 per share.
<PAGE>
Eleven Commitments and Contingencies
General Litigation
The Company is a defendant in several lawsuits and claims arising in the regular
course of business. Based on the opinions of management and counsel for the
Company in such matters, recoveries, if any, by plaintiffs and claimants would
not significantly affect the financial position of the Company or its results of
operations.
Sale and Leaseback
During 1999, the Company sold and leased back a portion of its operating
facility in the United Kingdom. The gain is being amortized on a straight-line
basis over the term of the lease as a reduction in lease expense.
Lease Obligations
The Company and its subsidiaries occupy certain facilities under lease
arrangements and lease certain equipment.
Rental expense and sublease income are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Rental expense $ 18.5 $ 25.6 $ 31.7
Sublease income (0.9) (6.0) (7.0)
- -------------------------------------------------------------------------------
Net rental expense $ 17.6 $ 19.6 $ 24.7
- -------------------------------------------------------------------------------
Future minimum rental commitments, net of sublease income, for noncancelable
operating leases are as follows:
Minimum Minimum
Rental Payments Sublease Income Net
- ---------------------------------------------------------------------------
2000 $16.7 $ 1.3 $15.4
2001 $13.1 $ 1.2 $11.9
2002 $11.6 $ 1.2 $10.4
2003 $11.0 $ 1.1 $ 9.9
2004 $10.0 $ 1.2 $ 8.8
Later years $88.5 $ 5.8 $82.7
- ---------------------------------------------------------------------------
<PAGE>
Twelve Segments
As of June 30, 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of a Business Enterprise and Related Information," which establishes
standards for reporting information about operating segments. Operating segments
are defined as components of an enterprise about which separate financial
information is evaluated regularly in deciding how to allocate resources and in
assessing performance by the company's chief operating decision maker, its chief
executive officer.
The Company's operating segments are as follows: Global Books and Home
Entertainment, U.S. Magazines and International Magazines. Each operating
segment is a strategic business unit that is managed separately. Prior year
information has been restated to conform to the segments described below. In
addition, the Company has allocated all corporate administrative costs to the
operating segments. Prior year segment operating profit has been restated to
reflect fully allocated corporate administrative costs.
The Company evaluates performance and allocates resources based on operating
income from continuing operations excluding other operating items. The
accounting policies of the segments are the same as those described in Note One.
Identifiable assets by segment are those assets that are used in the operations
of that business. Corporate assets consist primarily of cash and cash
equivalents, certain prepaid expenses and other current assets. Sales are
attributed to countries based on selling location. Long-lived assets are
principally composed of property, plant and equipment, net; intangible assets,
net; and prepaid pension benefits.
Operating Segments
Global Books and Home Entertainment publishes and markets Condensed Books,
series and general books, as well as music and video products.
U.S. Magazines publishes Reader's Digest magazine and several special interest
magazines in the United States. These magazines and other products are sold
through direct and retail marketing, including the activities of QSP.
International Magazines publishes Reader's Digest magazine in numerous editions
and languages outside the United States.
<PAGE>
Operating Segment Financial Information
1999 1998 1997
- -------------------------------------------------------------------------------
Revenues
Global Books and Home Entertainment $1,544.3 $1,680.2 $1,891.5
U.S. Magazines 664.3 656.3 625.5
International Magazines 323.6 354.7 379.5
- -------------------------------------------------------------------------------
Total revenues $2,532.2 $2,691.2 $2,896.5
===============================================================================
Operating profit (loss)
Global Books and Home Entertainment $ 80.8 $ 50.0 $ 161.2
U.S. Magazines 101.7 64.9 67.1
International Magazines (15.5) (14.7) (0.5)
- -------------------------------------------------------------------------------
Segment operating profit 167.0 100.2 227.8
Other operating items (37.9) (70.0) (35.0)
- -------------------------------------------------------------------------------
Total operating profit $ 129.1 $ 30.2 $ 192.8
===============================================================================
Identifiable assets
Global Books and Home Entertainment $ 684.3 $ 875.1 $ 916.4
U.S. Magazines 290.6 329.3 303.4
International Magazines 165.1 175.4 223.9
Corporate 570.5 184.2 200.1
- -------------------------------------------------------------------------------
Total identifiable assets $1,710.5 $1,564.0 $1,643.8
===============================================================================
Depreciation, amortization & asset
impairments
Global Books and Home Entertainment $ 24.5 $ 29.3 $ 28.9
U.S. Magazines 15.5 8.4 7.7
International Magazines 10.6 5.4 6.5
Corporate 15.9 3.1 3.6
- -------------------------------------------------------------------------------
Total depreciation, amortization &
asset impairments $ 66.5 $ 46.2 $ 46.7
===============================================================================
Capital expenditures
Global Books and Home Entertainment $ 11.1 $ 20.9 $ 79.9
U.S. Magazines 8.6 6.1 8.7
International Magazines 4.9 4.3 17.4
Corporate 1.7 2.8 4.6
- -------------------------------------------------------------------------------
Total capital expenditures $ 26.3 $ 34.1 $ 110.6
===============================================================================
<PAGE>
Information about geographic areas is as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Revenues
United States $1,159.0 $1,238.9 $1,293.9
International 1,378.3 1,459.4 1,612.0
Inter-area (5.1) (7.1) (9.4)
- -------------------------------------------------------------------------------
Total revenues $2,532.2 $2,691.2 $2,896.5
===============================================================================
Revenues inter-area
United States $ 1.5 $ 2.7 $ 2.9
International 3.6 4.4 6.5
- -------------------------------------------------------------------------------
Total revenues inter-area $ 5.1 $ 7.1 $ 9.4
===============================================================================
Long-lived assets
United States $ 282.6 $ 204.5 $ 230.3
International 136.7 263.2 292.6
- -------------------------------------------------------------------------------
Total long-lived assets $ 419.3 $ 467.7 $ 522.9
===============================================================================
Thirteen Subsequent Events (Unaudited)
On August 25, 1999, the Company agreed to purchase 100% of the stock of Books
Are Fun, Ltd. (BAF) for approximately $380.0 in cash. BAF sells books and gift
items by display marketing those products on-site at schools and businesses. The
acquisition, which is subject to customary closing conditions, including
regulatory approvals, is expected to close around October 1, 1999. The Company
expects to finance the acquisition through a combination of internal funds and
bank borrowings under its principal revolving credit facility. For the year
ended December 31, 1998, BAF had revenues of $178.0 and operating income of
$33.6.
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
The Reader's Digest Association, Inc.
We have audited the accompanying consolidated balance sheets of The Reader's
Digest Association, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Reader's Digest
Association, Inc. and subsidiaries at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note Six to the Consolidated Financial Statements, for the year
ended June 30, 1999, the Company changed its method for calculating the
market-related value of pension plan assets used in the determination of pension
expense.
/s/ KPMG LLP
KPMG LLP
New York, New York
August 17, 1999
<PAGE>
Report of Management
The Company has prepared the accompanying financial statements and other related
financial information contained in this annual report in conformity with
generally accepted accounting principles, applying certain estimates and
judgments as required.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at reasonable cost, that transactions and events
are recorded properly and that assets are safeguarded. The internal control
system is supported by written policies and procedures and by the careful
selection, training and supervision of qualified personnel, and is monitored by
an internal audit function.
The Company's financial statements have been audited by KPMG LLP, independent
auditors, as stated in their report, which is presented herein.
The Audit Committee of the Board of Directors, composed only of directors who
are not employed by the Company, meets periodically with management, internal
auditors and the independent auditors to review accounting, auditing, financial
reporting and other related matters. The internal auditors and independent
auditors have full and unrestricted access to the Audit Committee.
/s/ Thomas O. Ryder /s/ George S. Scimone
Thomas O. Ryder George S. Scimone
Chairman Senior Vice President
Chief Executive Officer Chief Financial Officer
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
In millions, except per share data 1999(1) 1998(2) 1997(3) 1996(4) 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues $ 2,532.2 $2,691.2 $2,896.5 $3,153.2 $3,120.1
Operating profit $ 129.1 $ 30.2 $ 192.8 $ 109.3 $ 391.9
Net income $ 151.9 $ 17.9 $ 133.5 $ 80.6 $ 264.0
Basic and diluted earnings per share $ 1.40/$1.39 $ 0.16 $ 1.24 $ 0.73 $ 2.35
Dividends per common share $ 0.375 $ 0.90 $ 1.80 $ 1.75 $ 1.55
- --------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Cash and cash equivalents, short-term investments
and marketable securities $ 437.2 $ 126.1 $ 102.4 $ 374.2 $ 532.1
Total assets $ 1,710.5 $1,564.0 $1,643.8 $1,904.1 $1,958.7
Stockholders' equity $ 381.5 $ 258.6 $ 346.0 $ 478.9 $ 640.8
Weighted-average common shares outstanding
(basic and dilutive) 107.3/108.0 106.5 106.7 107.9 112.0
Book value per common share $ 3.28 $ 2.14 $ 2.98 $ 4.18 $ 5.66
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Results for 1999 include the net effect of second and fourth quarter
charges (aggregate pre-tax charges of $37.9, or $0.26 per share).
(2) Results for 1998 include the effect of first quarter charges (aggregate
pre-tax charges of $70.0, or $0.49 per share).
(3) Results for 1997 include the effect of fourth quarter charges (aggregate
pre-tax charges of $35.0, or $0.21 per share).
(4) Results for 1996 include the effects of third quarter charges (aggregate
pre-tax charges of $245.0, or $1.57 per share) and fourth quarter savings
on the finalization of the Company's lease termination program in the
United Kingdom ($10.0, or $0.09 per share).
Selected Quarterly Financial Data and Dividend
and Market Information (Unaudited)
<TABLE>
<CAPTION>
Net Income (Loss) Stock Price Range High-Low
---------------------------- ---------------------------
In millions, except Operating Dividends Per Share Per Share
per share data Revenues Profit (Loss) Per Share(1) Amount Basic Diluted Class A Class B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
First Quarter $ 579.7 $ 16.6 $0.225 $ 27.8 $ 0.26 $ 0.26 $29.00-17.00 $29.25-18.44
Second Quarter(2) 817.0 67.9 0.050 86.5 0.80 0.80 $26.13-16.25 $25.38-16.00
Third Quarter 605.0 34.3 0.050 25.0 0.23 0.23 $36.25-24.75 $33.38-23.75
Fourth Quarter(2) 530.5 10.3 0.050 12.6 0.11 0.11 $40.94-28.13 $38.00-25.50
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,532.2 $129.1 $0.375 $151.9 $ 1.40 $ 1.39 $40.94-16.25 $38.00-16.00
- -----------------------------------------------------------------------------------------------------------------------------------
1998
First Quarter(3) $ 567.0 $(83.5) $0.225 $(56.4) $(0.53) $(0.53) $30.56-24.50 $29.25-23.94
Second Quarter 847.4 86.4 0.225 54.3 0.51 0.51 $31.50-20.88 $30.00-21.63
Third Quarter 647.6 21.7 0.225 14.6 0.13 0.13 $27.50-22.38 $27.88-23.50
Fourth Quarter 629.2 5.6 0.225 5.4 0.05 0.05 $29.19-24.50 $29.13-23.94
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,691.2 $ 30.2 $0.900 $ 17.9 $ 0.16 $ 0.16 $31.50-20.88 $30.00-21.63
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's Class A and Class B stock are listed on the New York Stock
Exchange under the symbols RDA and RDB, respectively. As of June 30, 1999, there
were approximately 1,930 holders of record of the Company's Class A stock and
256 holders of record of the Company's Class B stock.
(1) Cash dividends on common stock are declared and paid share and share
alike, on Class A and Class B stock.
(2) Results for 1999 include the net effect of second and fourth quarter
charges (aggregate pre-tax charges of $37.9, or $0.26 per share).
(3) Results for 1998 include the effect of first quarter charges (aggregate
pre-tax charges of $70.0, or $0.49 per share).
<PAGE>
