SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8 - K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 1, 1999
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-10434 13-1726769
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification No.)
incorporation or
organization)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(914) 238-1000
Page 1 of 49 pages
Item 2. Acquisition or Disposition of Assets.
As previously reported, in October 1999, pursuant to the
terms of the Stock Purchase Agreement dated as of August 25, 1999
by and among The Reader's Digest Association, Inc. ("Reader's
Digest"), Books Are Fun, Ltd. ("Books Are Fun") and the other
parties listed therein, Reader's Digest completed the acquisition
of all of the outstanding stock and other equity interests of
Books Are Fun from Earl Kaplan; Equity Group Investments, Inc.,
an investment firm controlled by Samuel Zell; and certain other
existing equity holders, for approximately $380 million in cash,
including the repayment of existing debt, and before any working
capital adjustments (the "Purchase Price"). The Purchase Price
was determined by negotiation among the parties and was financed
through a combination of cash on hand and $120 million in
borrowings by Reader's Digest under its principal revolving
credit facility with a syndicate of banks. The names of the
banks are not included in this document, but have been filed with
the Securities and Exchange Commission as part of Exhibit 10.19
to Reader's Digest's 1999 Annual Report on Form 10-K for the year
ended June 30, 1999. The acquisition includes the new Books Are
Fun principal operating facilities in Fairfield, Iowa, which
Reader's Digest intends to maintain.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Pursuant to the requirements of the Securities Exchange Act
of 1934, Reader's Digest hereby amends its Current Report on Form
8-K, dated October 7, 1999. The Financial Statements of Business
Acquired and Pro Forma Condensed Financial Information have been
amended to include:
Historical unaudited financial information of Books Are Fun
as of October 1, 1999 and for the nine-months ended October 1,
1999 and September 26, 1998.
Amended unaudited pro forma condensed financial information
of the combined entities of Reader's Digest and Books Are Fun for
the twelve-months ended June 30, 1999.
Unaudited pro forma condensed financial information of the
combined entities of Reader's Digest and Books Are Fun as of and
for the three-months ended September 30, 1999.
(a) Financial Statements of Business Acquired:
The following audited financial information of Books Are Fun
as of December 31, 1998 and the year then ended are included as
Exhibit 99.1 to this 8-K/A:
Report of Independent Auditors.
Balance Sheet.
Statement of Operations.
Statement of Stockholders' Equity (Deficit).
Statement of Cash Flows.
Notes to Financial Statements.
The following unaudited interim financial information of
Books Are Fun as of June 26, 1999 and for the six-months ended
June 26, 1999 and June 27, 1998 are included as Exhibit 99.2 to
this 8-K/A:
Balance Sheet.
Statements of Operations.
Statements of Cash Flows.
Notes to Financial Statements.
The following unaudited interim financial information of
Books Are Fun as of October 1, 1999 and for the nine-months ended
October 1, 1999 and September 26, 1998 are included as Exhibit
99.3 to this 8-K/A:
Balance Sheet.
Statements of Operations.
Statements of Cash Flows.
Notes to Financial Statements.
(b) Pro Forma Condensed Financial Information:
The following unaudited pro forma condensed financial
information of the combined entities of Reader's Digest and Books
Are Fun are included as exhibits to this 8-K/A:
Amended unaudited pro forma condensed financial information
of the combined entities of Reader's Digest and Books Are Fun for
the twelve-months ended June 30, 1999, included as Exhibit 99.4.
Condensed Statement of Income.
Notes to Unaudited Pro Forma Condensed Financial Information.
Unaudited pro forma condensed financial information of the
combined entities of Reader's Digest and Books Are Fun as of and
for the three-months ended September 30, 1999, included as
Exhibit 99.5.
Condensed Balance Sheet.
Condensed Statement of Income.
Notes to Unaudited Pro Forma Condensed Financial Information.
The unaudited pro forma condensed financial information is
based on the historical consolidated financial statements of
Reader's Digest and Books Are Fun for the respective periods.
Such historical information has been adjusted to give effect to
pro forma events that are (i) directly attributable to the
transaction, (ii) expected to have a continuing impact on the
combined results, and (iii) factually supportable. This
information should be read in conjunction with the separate
historical financial statements and accompanying notes of
Reader's Digest included in Reader's Digest's 1999 Annual Report
on Form 10-K filed with the Securities and Exchange Commission on
September 16, 1999 and Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 filed on November 3,
1999.
The unaudited pro forma condensed information is presented
for illustrative purposes only and is not necessarily indicative
of the operating results or financial position that would have
occurred if the transactions had been consummated at the dates
indicated, nor is it necessarily indicative of future operating
results or financial position of the combined companies.
The pro forma financial information was prepared using the
purchase method of accounting with Reader's Digest treated as the
acquirer. The purchase accounting adjustments made for pro forma
purposes are preliminary and have been made solely for purposes
of developing pro forma financial information. Reader's Digest
is in the process of determining the fair value of certain assets
and liabilities. The allocation of the excess purchase price to
identified intangibles and goodwill is subject to change pending
completion of the analysis. The impact of these changes could be
significant.
(c) Exhibits
Exhibit No. Description
2.1 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, filed as
Exhibit 10.28 to the registrant's 1999 Annual
Report on Form 10-K for the year ended June
30, 1999.
23.1 Consent of Ernst and Young LLP.
99.1 Books Are Fun, Ltd. audited financial results and other
information as of and for the year ended December 31,
1998.
99.2 Books Are Fun, Ltd. unaudited financial
results and other information as of June 26,
1999 and for the six-months ended June 26,
1999 and June 27, 1998.
99.3 Books Are Fun, Ltd. unaudited financial
results and other information as of October
1, 1999 and for the nine-months ended October
1, 1999 and September 26, 1998.
99.4 Amended Reader's Digest Association, Inc.,
unaudited pro forma condensed financial
results for the twelve-months ended June 30,
1999.
99.5 Reader's Digest Association, Inc., unaudited
pro forma condensed financial results as of
and for the three-months ended September 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
(Registrant)
Date: November 9, 1999
/s/GEORGE S. SCIMONE
George S. Scimone
Senior Vice President and Chief
Financial Officer
(and authorized signatory)
EXHIBIT INDEX
Exhibit No. Description
2.1 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, filed as Exhibit 10.28 to the
registrant's 1999 Annual Report on Form 10-K for
the year ended June 30, 1999.
23.1 Consent of Ernst and Young LLP.
99.1 Books Are Fun, Ltd. audited financial results
and other information as of and for the year ended
December 31, 1998.
99.2 Books Are Fun, Ltd. unaudited financial
results and other information as of June 26, 1999
and for the six-months ended June 26, 1999 and
June 27, 1998.
99.3 Books Are Fun, Ltd. unaudited financial
results and other information as of October 1,
1999 and for the nine-months ended October 1, 1999
and September 26, 1998.
99.4 Amended Reader's Digest Association, Inc.,
unaudited pro forma condensed financial results
for the twelve-months ended June 30, 1999.
99.5 Reader's Digest Association, Inc., unaudited
pro forma condensed financial results as of and
for the three-months ended September 30, 1999.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8, Nos. 33-37434, 33-56883 and 333-57789) of
The Reader's Digest Association, Inc. of our report dated January
25, 1999, with respect to the financial statements of Books Are
Fun, Ltd. included in this Current Report on Form 8-K/A of The
Reader's Digest Association, Inc. dated November 9, 1999.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Des Moines, Iowa
November 9, 1999
Books Are Fun, Ltd.
Index to Financial Statements
Financial Statements of Books Are Fun, Ltd.
Report of Independent Auditors 2
Balance Sheet as of December 31, 1998 3
Statement of Operations for the year ended December 31, 1998 5
Statement of Stockholders' Equity (Deficit) for the year
ended December 31, 1998 6
Statement of Cash Flows for the year ended December 31, 1998 7
Notes to Financial Statements 8
Report of Independent Auditors
The Board of Directors
Books Are Fun, Ltd.
We have audited the accompanying balance sheet of Books Are Fun,
Ltd. as of December 31, 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows for
the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Books Are Fun, Ltd. at December 31, 1998, and the results of
its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Des Moines, Iowa
January 25, 1999
Books Are Fun, Ltd.
Balance Sheet
December 31, 1998
Assets (Note 3)
Current assets:
Cash and cash equivalents $ 4,451,431
Accounts receivable, less allowance for doubtful
accounts of $659,000 5,183,126
Inventories 36,930,786
Deferred income taxes (Note 7) 580,000
Prepaid expenses and other current assets 730,779
Total current assets 47,876,122
Property and equipment, at cost:
Land 206,734
Building and improvements 1,803,230
Furniture, fixtures and equipment 2,994,442
Construction in progress (Note 4) 1,766,764
6,771,170
Less accumulated depreciation (1,510,475)
5,260,695
Deferred financing costs, less accumulated
amortization of $397,356 1,088,183
Deferred income taxes (Note 7) 2,473,000
Other assets 10,282
Total assets $56,708,282
Books Are Fun, Ltd.
Balance Sheet (continued)
December 31, 1998
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $14,065,294
Accrued expenses 7,348,011
Income taxes payable 5,486,644
Current portion of long-term debt (Note 3) 10,050,000
Total current liabilities 36,949,949
Long-term debt, less current portion (Notes 2 and 3) 82,850,000
Commitments (Note 4)
Redeemable common and preferred stock purchase
warrants (Note 5) 3,743,600
Stockholders' equity (deficit) (Notes 2, 3, 6 and 8):
Participating preferred stock, stated at fair value
at issuance date, $.01 par value; 100,000 shares
authorized, 54,294.874 shares issued
and outstanding, aggregate preference value of
approximately $64,015,000 60,081,632
Common stock, $.01 par value; 3,000,000 shares
authorized, 906,740 shares issued and outstanding 9,607
Non-voting common stock, $.01 par value; 250,000
shares authorized,154,444 shares issued
and outstanding 1,544
Additional paid-in capital 5,803,862
Accumulated other comprehensive loss - foreign
currency translation adjustment (493,651)
Retained earnings (deficit) (132,237,721)
Total stockholders' equity (deficit) (66,835,267)
Total liabilities and stockholders' equity (deficit) $ 56,708,282
See accompanying notes.
Books Are Fun, Ltd.
Statement of Operations
Year ended December 31, 1998
Net sales $178,017,433
Cost of sales 80,262,051
Gross profit 97,755,382
Selling, general and administrative expenses 63,614,491
Stock option expense (Note 8) 546,891
Operating income 33,594,000
Interest expense (9,127,829)
Interest income 120,280
Income before income taxes and extraordinary item 24,586,451
Income tax expense (Note 7) 9,842,000
Income before extraordinary item 14,744,451
Extraordinary loss on debt refinancing, net of
income tax benefit of $742,000 (Note 3) (1,189,095)
Net income 13,555,356
Less:
Preferred stock dividends (Note 6) (6,021,000)
Accretion of redeemable warrants (Note 5) (2,160,295)
Net income applicable to common stockholders $5,374,061
See accompanying notes.
Books Are Fun, Ltd.
Statement of Stockholders' Equity (Deficit)
Year ended December 31, 1998
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other Retained
Preferred Common Additional Comprehensive Earnings
Stock Stock Paid-In Loss (Deficit) Total
Capital
Balance at January 1, 1998
(Note 2) $60,081,632 $ - $5,267,582 $(151,845) $(143,632,782) $(78,435,413)
Effect of stock split (Note 6) - 10,611 (10,611) - - -
Recognition of stock option
compensation (Note 8) - - 546,891 - - 546,891
Accretion of redeemable
warrants (Note 5) - - - - (2,160,295) (2,160,295)
Comprehensive income (loss):
Net income for 1998 - - - - 13,555,356 13,555,356
Adjustment from foreign currency
translation - - - (341,806) - (341,806)
Total comprehensive income 13,213,550
Balance at December 31, 1998 $60,081,632 $10,611 $5,803,86 $(493,651) $(132,237,721) $(66,835,267)
</TABLE>
See accompanying notes.
Books Are Fun, Ltd.
Statement of Cash Flows
Year ended December 31, 1998
Operating activities
Net income $13,555,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred financing costs written off 247,013
Depreciation and amortization 780,754
Deferred income taxes 129,000
Noncash stock option expense 546,891
Amortization of debt discount 123,684
Changes in operating assets and liabilities:
Increase in accounts receivable (538,359)
Increase in inventories (12,933,131)
Increase in prepaid expenses and other assets (442,722)
Increase in accounts payable 1,305,867
Increase in accrued expenses 6,866,285
Net cash provided by operating activities 9,640,638
Investing activities
Purchases of property and equipment (2,610,785)
Proceeds from sale of property and equipment 10,509
Net cash used by investing activities (2,600,276)
Financing activities
Proceeds from issuance of long-term debt 48,000,000
Payments for deferred financing costs (226,387)
Payments of long-term debt (56,721,369)
Net cash used by financing activities (8,947,756)
Effect of exchange rate changes on cash (223,711)
Net decrease in cash and cash equivalents (2,131,105)
Cash and cash equivalents at beginning of year 6,582,536
Cash and cash equivalents at end of year $ 4,451,431
Supplemental disclosures
Interest paid $ 9,676,911
Income taxes paid 3,909,883
Noncash financing activities - accretion of 2,160,295
redeemable warrants
See accompanying notes.
Books Are Fun, Ltd.
Notes to Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies
Organization
Books Are Fun, Ltd. (the "Company", formerly Reading's Fun,
Ltd./Books Are Fun, Ltd.) is a display marketer of non-fiction
and children's books through independent sales representatives
throughout the United States and Canada. The Company purchases
from numerous publishers from around the world, none of which is
individually a material supplier to the Company.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable
Concentrations of credit risk with respect to trade receivables
are limited due to the number of accounts and their geographic
dispersion. The Company performs initial and periodic credit
evaluations and generally does not require collateral.
Inventories
Inventories are stated at the lower of average cost or market.
Property and Equipment
Depreciation is provided by the straight-line method over the
estimated useful lives of depreciable assets.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the
related loans ranging from 6 to 8 years.
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company follows the liability method of accounting for income
taxes, under which deferred income tax assets and liabilities are
determined based on the difference between financial reporting
and income tax bases of assets and liabilities using enacted
marginal tax rates. Deferred income tax expense or benefit is
based on the changes in the asset or liability from period to
period.
Foreign Currency Translation
The Company has operations in Canada and the United Kingdom, and
as a result has foreign branch financial statements denominated
in Canadian dollars and British pounds. Foreign currency
denominated assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates
prevailing throughout the year. Gains and losses from foreign
currency transactions, which have been immaterial, are included
in net income for the year. The effects of exchange rate
fluctuations on translating foreign currency denominated
financial statements into U. S. dollars are accumulated as part
of the foreign currency translation adjustment in stockholders'
equity.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was approximately $228,000 in 1998.
Comprehensive Income
As of January 1, 1998, the Company adopted FASB Statement No.
130, Reporting Comprehensive Income. Statement 130 establishes
new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had
no impact on the Company's net income or stockholders' equity.
Statement 130 requires the exchange rate effects of translating
foreign currency denominated financial statements, which prior to
adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
2. Recapitalization
On May 1, 1997, the Company, its shareholders and optionholders,
and certain new investors entered into a Recapitalization and
Stock Purchase Agreement and various related transactions (the
"Recapitalization"). Pursuant to the Recapitalization, the
Company borrowed funds under a new senior credit facility (see
Note 3), which were used to pay certain distributions to
stockholders and to partially redeem common stock and options
from existing holders for cash and a subordinated note for $5
million. Following the redemption, the stockholders of the
Company partially exchanged shares of common stock for shares of
new participating preferred stock, and the new investors
purchased certain common and preferred shares directly from
existing shareholders. Proceeds from the new senior credit
facility were also used to repay substantially all of the
Company's previously outstanding long-term debt and to pay
transaction fees and expenses related to the Recapitalization.
Subsequent to the Recapitalization, the new investors owned 50%
of the outstanding common and preferred stock.
The transaction was accounted for as a recapitalization and,
accordingly, did not impact the historical basis of the Company's
assets or liabilities. The Company recorded the aggregate
redemption cost of approximately $97.7 million, including fees
and expenses, as a charge to 1997 compensation expense for $17.1
million (representing the fair value of redeemed options) and the
balance of $80.6 million was charged to stockholders' equity.
Preferred stock issued pursuant to the Recapitalization was
recorded at its fair value of $60 million resulting in an
equivalent charge to retained earnings.
3. Long-Term Debt
Long-term debt at December 31, 1998 consists of the following:
Senior Term Loan A, payable in increasing quarterly
installments through May 2003;
interest at defined rate options (6.91% and 7.04% at $70,050,000
December 31, 1998).
Senior Term Loan B, payable in increasing quarterly
installments through May 2004;
interest at defined rate options (7.4% and 7.54% at 22,850,000
December 31, 1998).
92,900,000
Less amounts due within one year (10,050,000)
Long-term debt, less current portion $82,850,000
3. Long-Term Debt (continued)
In October 1998, the Company amended its existing senior bank
credit facility increasing the amount available under the term
facility to $94.375 million ($71.5 million under Term Loan A and
$22.875 million under Term Loan B) and the amount available under
the revolving facility to $50 million. Interest on the term and
revolving facilities is determined at the Company's option of
either a defined base rate plus a margin ranging from 0% to 1.50%
or a defined LIBOR plus a margin ranging from 1.0 to 3.0%. The
applicable margin percentage is determined based upon the
Company's leverage ratio. The senior bank credit facility is
secured by all of the assets of the Company and by a pledge of
substantially all common and preferred stock.
The senior Term Loan A is payable in graduated quarterly
installments increasing from $1,450,000 in 1998 to $5,400,000 in
2002 with the balance due March 2003. The senior Term Loan B is
payable in quarterly installments of $25,000 through March 2003,
quarterly installments of $5,600,000 payable in June through
December 2003, and a final payment of $5,625,000 due March 2004.
The revolving facility matures May 2003 and has no scheduled
interim payments. Maximum borrowings under the revolving facility
are limited to the lesser of $50 million or a defined borrowing
base (approximately $32.3 million at December 31, 1998) based on
accounts receivable and inventories plus certain defined amounts.
The revolving loan requires a fee of 0.5% per annum of the
average unused balance, adjustable to 0.375% upon meeting a
specified leverage ratio. The Company is required to make
prepayments on the term and revolving loans under certain other
circumstances, including certain sales of assets or issuance of
debt or equity securities. The agreement contains various
restrictive covenants including requirements to meet certain
financial covenants and restrictions on the payment of dividends.
Proceeds from the amended bank financing in 1998 were used to
repay all of the Company's former senior subordinated notes and
subordinated note to related parties. As a result of the
subordinated debt repayment, the Company paid prepayment premiums
of $300,000 and wrote off existing unamortized deferred financing
costs of approximately $247,000 and unamortized debt discount of
$1,384,000, resulting in an extraordinary loss of $1,189,095 (net
of related income tax benefit of $742,000).
The aggregate future maturities of long-term debt as of
December 31, 1998 are as follows:
1999 $10,050,000
2000 15,100,000
2001 18,750,000
2002 21,150,000
2003 22,225,000
Thereafter 5,625,000
$92,900,000
4. Commitments
The Company leases office space and equipment under operating
lease agreements with expiration dates through August 2003.
Rental expense for all operating leases was approximately
$312,000 in 1998, including $82,000 for aircraft rental with a
company controlled by a stockholder. Generally, management
expects that leases will be renewed or replaced by other leases
in the normal course of operations.
The Company has a management agreement with an affiliate of
certain stockholders which provides for a management fee of
$150,000 annually and certain transaction fees for possible
future investment banking services. Management fee expense in
1998 was $150,000.
The Company anticipates capital expenditures of approximately
$10,000,000 in connection with the construction of a new
corporate headquarters facility, of which approximately
$1,767,000 had been incurred at December 31, 1998 and was
included in construction in progress.
5. Redeemable Common and Preferred Stock Purchase Warrants
At December 31, 1998, warrants were outstanding for the purchase
of 20,186 and 1,032.783 shares of the Company's non-voting common
stock and preferred stock, respectively. Both the common and
preferred stock warrants are exercisable at any time prior to May
1, 2007, at no cost to the warrant holder. The number of warrant
shares is adjustable under certain circumstances, including the
issuance of certain additional equity securities.
Each holder of the warrants may require the Company to redeem all
or any portion of the warrants at fair value beginning May 2002
or earlier at the time of certain defined events. The carrying
value of the warrants is required to be accreted to the estimated
fair value redemption price over the period until the redemption
date. In 1998, one of the defined triggering events occurred (the
repayment of subordinated debt - see Note 3), therefore the
warrant holders may now put the warrants to the Company under the
mandatory redemption at any time. Accordingly, the carrying value
of the warrants was adjusted to the estimated fair value
redemption price with an equivalent charge ($2,160,295) to
retained earnings.
6. Stockholders' Equity
In February 1998, the Company effected a 23,914-for-1 stock split
of its common stock and non-voting common stock, resulting in
1,061,184 aggregate common shares outstanding (previously 44.375
shares).
The Company's participating preferred stock has no voting rights
and provides for cumulative dividends at an annual rate of 10%,
and participates in 20% of any other dividends. No dividends have
been declared or paid. Aggregate cumulative preferred dividends
in arrears at December 31, 1998 were approximately $9,720,000
($179.02 per share), including $6,021,000 applicable to 1998.
Upon liquidation, holders of preferred stock are paid the
liquidation value, as defined, of all outstanding shares plus
accrued and unpaid dividends thereon, plus an amount equal to 20%
of all remaining assets available to the Company's common
shareholders. The holders of preferred stock may cause the
Company to repurchase all or any portion of the preferred stock
in the event of an IPO, which is solely within the control of the
Company. The repurchase price is determined based on the
liquidation value of the preferred shares plus 20% of the IPO
value of common equity. Any shares which are not repurchased in
such an event may, at the option of certain major shareholders,
be converted to common shares based on a defined conversion
value.
The Company's voting common stock has full voting rights. The
Company has also authorized 250,000 shares of non-voting common
stock. Holders of non-voting common stock are entitled to convert
their shares to common stock, upon the occurrence of certain
specified events.
The Company has reserved 521,207 shares of voting common stock
for issuance under options and conversion of non-voting common
stock. The Company has reserved 20,186 and 1,032.783 shares of
non-voting common stock and preferred stock, respectively, for
issuance under warrants (see Note 5), and 3,415.929 shares of
preferred stock for issuance under options (see Note 8).
7. Income Taxes
Components of income tax expense, including the amount relating
to the extraordinary loss, are as follows:
Current expense $8,971,000
Deferred expense 129,000
Total income tax expense $9,100,000
A reconciliation of income tax expense with the amount computed
by applying the statutory federal income tax rate to pretax
income or loss is as follows:
Amount based on federal statutory rate $7,929,000
State income taxes, net of federal effect 1,171,000
Total income tax expense $9,100,000
Components of the net deferred tax assets at December 31, 1998
are as follows:
Current Noncurrent
Deferred tax assets:
Accruals, reserves and allowances $580,000 $ -
Stock option expense - 2,629,000
Deferred tax liability:
Excess tax over book depreciation - (156,000)
Net deferred tax assets $580,000 $2,473,000
8. Stock Option Plans
Prior to 1997, the Company had stock option agreements with
certain key employees. The Company also has a stock option plan
(the "1997 Stock Option Plan") pursuant to which options may be
granted for up to 300,000 shares of common stock. Options are
granted at the discretion of the board of directors or its
committee, and must be exercised no later than ten years from the
date of the grant. In 1998, options for an aggregate of 148,055
shares were granted including 139,875 shares at an exercise price
of $100 per share and 8,180 shares at an exercise price of $1.
Options for the 139,875 shares vest and become exercisable on the
third anniversary of the grant date, with vesting for certain
defined amounts accelerated in the event of an IPO. Options for
25% of the 8,180 shares became vested and exercisable on April
30, 1998 with an additional 25% vesting at each December 31 from
1998 to 2000. Compensation expense under APB 25 of $546,891 was
recorded in 1998 in connection with the $1 options.
A summary of the Company's stock option activity is as follows:
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
Common Stock Preferred Stock
Weighted Weighted
Number of Average Number of Average
Shares Exercise Shares Exercise
Price Price
Outstanding at December 31, 1997
all exercisable) 2.79 $660.57 3,415.929 $1.40
Adjustment due to stock split (Note 6) 66,760.21 - - -
Restated balance 66,763 0.03 3,415.929 1.40
Granted in 1998 under 1997 Stock
Option Plan 148,055 94.53 - -
Outstanding at December 31, 1998 (70,853
common and all preferred are 214,818 65.16 3,415.929 1.40
exercisable)
</TABLE>
The grant date fair value for 1998 option grants was $20.66 and
$99.21 for the $100 and $1 options, respectively.
A summary of common stock options outstanding at December 31,
1998 is as follows:
Exercise Number of Shares
Price Outstanding Exercisable Expiration
Prior plan $ .03 66,763 66,763 None
1997 plan 1.00 8,180 4,090 2008
1997 plan 100.00 139,875 - 2008
214,818 70,853
Under FASB Statement No. 123 (FAS 123), certain pro forma
information is required as if the Company had accounted for
options under the alternative fair value method of FAS 123. The
Company used a Minimum Valuation model to determine the per share
fair value of the options at the grant date. The following
assumptions were used in the valuation:
Risk-free interest rate 4.6%
Expected dividend yield None
Expected volatility None
Expected life of option 5 years
For purposes of pro forma disclosures, the estimated fair value
of the options at the grant date is amortized to expense over the
vesting period of the options. Pro forma option compensation
expense for the period ended December 31, 1998 is not indicative
of what annual pro forma expense may be in the future. Pro forma
net income for 1998, assuming the alternative FAS 123 method were
used, would be approximately $13,003,000.
9. Year 2000 Risk (Unaudited)
The Company has completed an assessment of its information
systems and other operating systems and believes that they are
substantially Year 2000 compliant. The Year 2000 problem is the
result of certain computer programs being written using two
digits rather than four digits to define the applicable year. Any
of the Company's systems or equipment that have time-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could potentially result in system or
equipment failure or miscalculations.
While the Company believes that it is substantially Year 2000
compliant and, accordingly, the Year 2000 issue should not pose
significant operational issues, nevertheless, if any necessary
modifications or conversions are not completed timely, the Year
2000 issue could have a material impact on the operations of the
Company. Furthermore, the Company is unable to control whether
its customers and suppliers will be Year 2000 compliant. To the
extent that sales representatives would be unable to order
product or suppliers would be unable to produce or ship product,
it could adversely affect the Company's operations.
Books Are Fun, Ltd.
Index to Unaudited Interim Financial Statements
Unaudited Interim Financial Statements of Books Are Fun,
Ltd.
Balance Sheet as of June 26, 1999 2
Statements of Operations for the Six-Months ended
June 26, 1999 and June 27, 1998 4
Statements of Cash Flows for the Six-Months ended
June 26, 1999 and June 27, 1998 5
Notes to Financial Statements 6
Books Are Fun, Ltd.
Balance Sheet
June 26, 1999 (unaudited)
Assets
Current assets:
Cash and cash equivalents $1,909,781
Accounts receivable, less allowance for doubtful 3,578,598
accounts of $874,114
Inventories 32,203,411
Deferred income taxes (Note 5) 511,000
Prepaid expenses and other current assets 2,014,531
Total current assets 40,217,321
Property and equipment, at cost:
Land 206,734
Building and improvements 1,808,080
Furniture, fixtures and equipment 3,300,934
Construction in progress (Note 3) 8,321,219
13,636,967
Less accumulated depreciation (1,819,452)
11,817,515
Deferred financing costs, less accumulated amortization 1,112,611
of $193,024
Deferred income taxes (Note 5) 2,554,000
Other assets 10,321
Total assets $55,711,768
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 13,175,472
Accrued expenses 6,040,989
Income taxes payable 2,072,568
Current portion of long-term debt (Note 2) 10,900,000
Total current liabilities 32,189,029
Long-term debt, less current portion (Note 2) 80,125,000
Commitments (Note 3)
Redeemable common and preferred stock purchase warrants 3,743,600
(Note 4)
Stockholders' equity (deficit) (Note 4):
Participating preferred stock, stated at fair value at
issuance date, $.01 par value; 100,000 shares 60,081,632
authorized 54,294.874 shares issued and outstanding
Common stock, $.01 par value; 3,000,000 shares
authorized, 906,740 shares issued and outstanding 9,067
Non-voting common stock, $.01 par value; 250,000 shares
authorized, 154,444 shares issued and outstanding 1,544
Additional paid-in capital 5,898,516
Accumulated other comprehensive loss - foreign currency (173,494)
translation adjustment
Retained earnings (deficit) (126,163,126)
Total stockholders' equity (deficit) (60,345,861)
Total liabilities and stockholders' equity (deficit) $ 55,711,768
See accompanying notes.
Books Are Fun, Ltd.
Statements of Operations
For the Six-Months ended (unaudited)
June 26, 1999 June 27, 1998
Net sales $86,216,684 $66,148,639
Cost of sales 40,607,312 31,095,967
Gross profit 45,609,372 35,052,672
Selling, general and administrative 32,133,149 24,798,437
expenses
Stock option expense 94,655 200,000
Operating income 13,381,568 10,054,235
Interest expense (3,153,335) (4,546,251)
Interest income 64,363 68,445
Income before income taxes and 10,292,596 5,576,429
extraordinary item
Income tax expense (Note 5) 4,218,000 2,346,000
Net Income 6,074,596 3,230,429
Less:
Preferred stock dividends (Note 4) (2,913,548) (2,930,008)
Net income applicable to common
Stockholders $ 3,161,048 $ 300,421
See accompanying notes.
Books Are Fun, Ltd.
Statements of Cash Flows
For the Six-Months ended (unaudited)
June 26, June 27,
1999 1998
Operating activities
Net income $6,074,596 $3,230,429
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 454,599 370,334
Deferred income taxes (12,000) 260,000
Noncash stock option expense 94,655 200,000
Amortization of debt discount 0 82,456
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,604,528 2,328,361
Decrease/(Increase) in inventories 4,727,375 (561,320)
Increase in prepaid expenses and other assets (1,282,811) (1,639,995)
Decrease in accounts payable (889,819) (5,417,331)
Decrease in accrued expenses (4,721,098) (2,326,041)
Net cash provided by operating activities 6,050,025 (3,473,107)
Investing activities
Purchases of property and equipment (7,036,827) (370,563)
Net cash used by investing activities (7,036,827) (370,563)
Financing activities
Proceeds from issuance of long-term debt 9,000,000 9,000,000
Payments of long-term debt (10,875,000) (9,051,963)
Net cash used by financing activities (1,875,000) (51,963)
Effect of exchange rate changes on cash 320,152 (137,897)
Net decrease in cash and cash equivalents (2,541,650) (4,033,530)
Cash and cash equivalents at beginning of year 4,451,431 6,582,536
Cash and cash equivalents at end of year $1,909,781 $2,549,006
Supplemental disclosures
Interest paid $1,986,359 $4,477,327
Income taxes paid 7,645,076 2,297,883
See accompanying notes.
Books Are Fun, Ltd.
Notes to Financial Statements
Six Months ended June 26, 1999 and June 27, 1998 (unaudited)
1. Summary of Significant Accounting Policies
Organization
Books Are Fun, Ltd. (the "Company") is a display marketer of non-
fiction and children's books. The Company sells through
independent sales representatives throughout the United States
and Canada. The Company purchases from numerous publishers
worldwide, none of whom are material suppliers to the Company.
Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month
period ended June 26, 1999 are not necessarily indicative of the results
that may be expected for the full 1999 fiscal year. For further information,
refer to the Company's financial statements and footnotes thereto for the
year ended December 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable
Concentrations of credit risk with respect to trade receivables
are limited due to the number of accounts and their geographic
dispersion. The Company performs initial and periodic credit
evaluations and generally does not require collateral.
Inventories
Inventories are stated at the lower of weighted average cost or
market.
Property and Equipment
Depreciation is provided by the straight-line method over the
estimated useful lives of depreciable assets.
Books Are Fun, Ltd.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Deferred Financing Costs
Deferred financing costs are amortized over the term of the
related loans ranging from 6 to 8 years.
Income Taxes
The Company follows the liability method of accounting for income
taxes, under which deferred income tax assets and liabilities are
determined based on the difference between financial reporting
and income tax bases of assets and liabilities using enacted
marginal tax rates. Deferred income tax expense or benefit is
based on the changes in the asset or liability from period to
period.
Foreign Currency Translation
The Company has operations in Canada and the United Kingdom, and
as a result has foreign branch financial statements denominated
in Canadian dollars and British pounds. Foreign currency
denominated assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates
prevailing throughout the year. Gains and losses from foreign
currency transactions, which have been immaterial, are included
in net income for the year. The effects of exchange rate
fluctuations on translating foreign currency denominated
financial statements into U. S. dollars are accumulated as part
of the foreign currency translation adjustment in stockholders'
equity.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was approximately $260,955 and $112,895 for the six
months ending June 26, 1999 and June 27, 1998.
2. Long-Term Debt
Long-term debt at June 26, 1999 consists of the following:
Senior Term Loan A, payable in increasing quarterly
installments through May 2003; interest at defined $68,200,000
rate options.
Senior Term Loan B, payable in increasing quarterly
installments through May 2004; interest at defined 22,825,000
rate options.
91,025,000
Less amounts due within one year (10,900,000)
Long-term debt, less current portion $80,125,000
3. Commitments
The Company leases office space and equipment under operating
lease agreements with expiration dates through August 2003.
Rental expense for all operating leases was approximately
$147,464 and $152,558 for the six months ending June 26, 1999 and
June 27, 1998. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of
operations.
The Company anticipates capital expenditures of approximately
$10,000,000 in connection with the construction of a new
corporate headquarters facility, of which approximately
$8,321,219 had been incurred as of June 26, 1999 and was included
in construction in progress.
4. Stockholders' Equity
The Company's participating preferred stock has no voting rights
and provides for cumulative dividends at an annual rate of 10%,
and participates in 20% of any other dividends. No dividends have
been declared or paid. Unpaid preferred dividends for the six
months ending June 26, 1999 and June 27, 1998 were approximately
$2,913,548 and $2,930,008 respectively. Upon liquidation, holders
of preferred stock are paid the liquidation value, as defined, of
all outstanding shares plus accrued and unpaid dividends thereon,
plus an amount equal to 20% of all remaining assets available to
the Company's common shareholders.
The Company's voting common stock has full voting rights. The
Company has also authorized 250,000 shares of non-voting common
stock. Holders of non-voting common stock are entitled to convert
their shares to common stock, upon the occurrence of certain
specified events.
5. Income Taxes
Components of income tax expense for the six months ending June
26, 1999 and June 27, 1998 are as follows:
Current expense $4,207,000 $2,088,000
Deferred expense 11,000 258,000
Total income tax expense $4,218,000 $2,346,000
Components of net deferred tax assets as of June 26, 1999:
Deferred tax assets:
Current accruals, reserves, allowances $ 511,000
Non-current accruals, reserves, allowances 2,717,000
Deferred tax liabilities:
Excess of tax over book depreciation (non 163,000
current)
Net deferred tax assets $3,065,000
6. Comprehensive Income (Loss)
Comprehensive Income (Loss) was $320,157 and $(137,897) for the
six-months ending June 26, 1999 and June 27, 1998, respectively.
Books Are Fun, Ltd.
Index to Unaudited Interim Financial Statements
Unaudited Interim Financial Statements of Books Are Fun, Ltd.
Balance Sheet as of October 1, 1999 2
Statements of Operations for the Nine-Months ended
October 1, 1999 and September 26, 1998 4
Statements of Cash Flows for the Nine-Months ended
October 1, 1999 and September 26, 1998 5
Notes to Financial Statements 6
Books Are Fun, Ltd.
Balance Sheet
October 1, 1999 (unaudited)
Current assets:
Cash and cash equivalents $ 21,600,099
Accounts receivable, less allowance for
doubtful accounts of $1,042,864 5,103,398
Inventories 65,107,838
Deferred income taxes (Note 5) 328,000
Prepaid expenses and other current assets 1,382,175
Total current assets 93,521,510
Property and equipment, at cost:
Land 206,734
Building and improvements 1,809,833
Furniture, fixtures and equipment 3,462,334
Construction in progress (Note 3) 10,858,415
16,337,316
Less accumulated depreciation (1,988,983)
14,348,333
Deferred financing costs, less accumulated
amortization of $265,585 1,040,050
Deferred income taxes (Note 5) 2,462,000
Other assets 80,446
Total assets $111,452,339
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 27,344,682
Accrued expenses 6,754,620
Income taxes payable 2,403,228
Current portion of long-term debt (Note 2) 10,900,000
Revolving line of credit 45,000,000
Total current liabilities 92,402,530
Long-term debt, less current portion (Note 2) 74,675,000
Commitments (Note 3)
Redeemable common and preferred stock purchase
warrants (Note 4) 3,743,600
Stockholders' equity (deficit) (Note 4):
Participating preferred stock, stated at fair value
at issuance date, $.01 par value; 100,000 shares
authorized, 54,294,874 shares issued and 60,081,632
outstanding
Common stock, $.01 par value; 3,000,000 shares
authorized, 906,740 shares issued and outstanding 9,067
Non-voting common stock, $.01 par value; 250,000
shares authorized, 154,444 shares issued and 1,544
outstanding
Additional paid-in capital 5,945,170
Accumulated other comprehensive loss - foreign
currency translation adjustment (257,366)
Retained earnings (deficit) (125,148,838)
Total stockholders' equity (deficit) (59,368,791)
Total liabilities and stockholders'
equity (deficit) $ 111,452,339
See accompanying notes.
Books Are Fun, Ltd.
Statements of Operations
For the Nine-Months ended (unaudited)
October 1, September 26,
1999 1998
Net sales $117,618,673 $ 86,377,542
Cost of sales 54,572,524 39,266,695
Gross profit 63,046,149 47,110,847
Selling, general and
administrative expenses 46,134,728 34,424,097
Stock option expense 141,982 200,000
Operating income 16,769,439 12,486,750
Interest expense (4,942,737) (6,936,597)
Interest income 88,182 82,862
Income before income taxes and 11,914,884 5,633,015
extraordinary item
Income tax expense (Note 5) 4,826,000 3,149,000
Net Income $7,088,884 $2,484,015
See accompanying notes.
Books Are Fun, Ltd.
Statements of Cash Flows
For the Nine-Months ended (unaudited)
October 1, September 26,
1999 1998
Operating activities:
Net income $ 7,088,884 $ 2,484,015
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation and amortization 699,221 564,650
Deferred income taxes 263,000 (130,000)
Noncash stock option expense 141,984 200,000
Amortization of debt discount --- 123,684
Changes in operating assets and liabilities:
Accounts receivable 98,793 1,054,034
Inventories (28,177,052) (40,370,421)
Other assets (892,478) (583,677)
Accounts payable 13,279,391 18,773,027
Accrued expenses (3,695,872) (4,839)
Net cash used by operating activities (11,194,129) (17,889,527)
Investing activities:
Purchases of property and equipment (9,568,484) (676,085)
Net cash used by investing activities (9,568,484) (676,085)
Financing activities:
Proceeds from issuance of long-term debt 54,000,000 25,000,000
Payments of long-term debt (16,325,000) (9,355,451)
Net cash provided by financing activities 37,675,000 15,644,549
Effect of exchange rate changes on cash 236,281 (279,749)
Net decrease in cash and cash equivalents (17,148,668) (3,200,812)
Cash and cash equivalents at beginning of year 4,451,431 6,582,536
Cash and cash equivalents at end of year $ 21,600,099 $ 3,381,724
See accompanying notes.
Books Are Fun, Ltd.
Notes to Financial Statements
Nine-Months ended October 1, 1999 and September 26, 1998
(unaudited)
1. Summary of Significant Accounting Policies
Organization
Books Are Fun, Ltd. (the "Company") is a display marketer of non-
fiction and children's books. The Company sells through
independent sales representatives throughout the United States
and Canada. The Company purchases from numerous publishers
worldwide, none of whom are material suppliers to the Company.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for the fair presentation
have been included. Operating results for the nine month period ended
October 1, 1999 are not necessarily indicative of the results that may
be expected for the full 1999 fiscal year. For further information, refer
to the Company's financial statements and footnotes thereto for the year
ended December 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable
Concentrations of credit risk with respect to trade receivables
are limited due to the number of accounts and their geographic
dispersion. The Company performs initial and periodic credit
evaluations and generally does not require collateral.
Inventories
Inventories are stated at the lower of weighted average cost or
market.
Property and Equipment
Depreciation is provided by the straight-line method over the
estimated useful lives of depreciable assets.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the
related loans ranging from 6 to 8 years.
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company follows the liability method of accounting for income
taxes, under which deferred income tax assets and liabilities are
determined based on the difference between financial reporting
and income tax bases of assets and liabilities using enacted
marginal tax rates. Deferred income tax expense or benefit is
based on the changes in the asset or liability from period to
period.
Foreign Currency Translation
The Company has operations in Canada and the United Kingdom, and
as a result has foreign branch financial statements denominated
in Canadian dollars and British pounds. Foreign currency
denominated assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates
prevailing throughout the year. Gains and losses from foreign
currency transactions, which have been immaterial, are included
in net income for the year. The effects of exchange rate
fluctuations on translating foreign currency denominated
financial statements into U. S. dollars are accumulated as part
of the foreign currency translation adjustment in stockholders'
equity.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was approximately $414,601 and $194,436 for the nine-
months ending October 1, 1999 and September 26, 1998.
2. Long-Term Debt
Long-term debt at October 1, 1999 consists of the following:
Senior Term Loan A, payable in increasing
quarterly installments through May 2003;
interest at defined rate options. $62,800,000
Senior Term Loan B, payable in increasing 22,775,000
quarterly installments through May 2004;
interest at defined rate options.
Revolving Loan, due May 2003: interest at a 45,000,000
defined rate.
130,575,000
Less amounts due within one year (55,900,000)
Long-term debt, less current portion $ 74,675,000
3. Commitments
The Company leases office space and equipment under operating
lease agreements with expiration dates through August 2003.
Rental expense for all operating leases was approximately $83,793
and $79,751 for the nine-months ending October 1, 1999 and
September 26, 1998, respectively. Generally, management expects
that leases will be renewed or replaced by other leases in the
normal course of operations.
The Company anticipates capital expenditures of approximately
$11,000,000 in connection with the construction of a new
corporate headquarters facility, of which approximately
$10,858,415 had been incurred as of October 1, 1999 and was
included in construction in progress.
4. Stockholders' Equity
The Company's participating preferred stock has no voting rights
and provides for cumulative dividends at an annual rate of 10%,
and participates in 20% of any other dividends. No dividends have
been declared or paid. Unpaid preferred dividends for the nine-
months ending October 1, 1999 and September 26, 1998 were
approximately $4,493,777 and $4,411,473, respectively. Upon
liquidation, holders of preferred stock are paid the liquidation
value, as defined, of all outstanding shares plus accrued and
unpaid dividends thereon, plus an amount equal to 20% of all
remaining assets available to the Company's common shareholders.
The Company's voting common stock has full voting rights. The
Company has also authorized 250,000 shares of non-voting common
stock. Holders of non-voting common stock are entitled to convert
their shares to common stock, upon the occurrence of certain
specified events.
5. Income Taxes
Components of income tax expense for the nine-months ending
October 1, 1999 and September 26, 1998 are as follows:
Current expense $5,090,000 $2,459,000
Deferred (benefit) expense (264,000) 690,000
Total income tax expense $4,826,000 $3,149,000
5. Income Taxes (continued)
Components of net deferred tax assets as of October 1, 1999 are
as follows:
Deferred tax assets:
Current accruals, reserves, allowances $ 328,000
Non-current accruals, reserves, allowances 2,622,000
Deferred tax liabilities:
Excess of tax over book depreciation 160,000
(noncurrent)
Net deferred tax assets $2,790,000
6. Comprehensive Income (Loss)
Comprehensive income (loss) was $236,285 and $(279,750) for the nine-
months ending October 1, 1999 and September 26, 1998, respectively.
The Reader's Digest Association, Inc.
Index to Unaudited Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Financial Statements of The
Reader's Digest Association, Inc. and Books Are Fun, Ltd.
Pro Forma Condensed Statement of Income for the
Twelve-Months ended June 30, 1999 2
Notes to Unaudited Pro Forma Condensed Financial
Information 3
The Reader's Digest Association, Inc.
Unaudited Pro Forma Condensed Statement of Income
For the Twelve-Months Ended June 30, 1999
(in millions except per share data)
[CAPTION]
<TABLE>
Historical Information
<S> <C> <C> <C> <C> <C>
Reader's Books Are
Digest Fun Reader's Digest
June 30, June 26, Pro Forma Pro Forma
1999 1999 Adjustments Condensed
Revenues $2,532.2 198.1 (1.9) (A) $2,728.4
Product expenses 963.5 89.8 (1.9) (A) 1,051.4
Promotion, marketing and
administrative expenses 1,439.6 71.4 16.6 (B) 1,527.6
Operating profit 129.1 36.9 (16.6) 149.4
Other expense (income), net (82.6) 7.6 14.1 (C) (60.9)
Income before provision for
income taxes 211.7 29.3 (30.7) 210.3
Provision for income taxes 85.1 11.7 (5.3) (D) 91.5
Income from continuing operations 126.6 17.6 (25.4) 118.8
Basic earnings per share
Weighted-average common shares 107.3 107.3
Pro forma basic earnings per share $ 1.16 $ 1.10
Diluted earnings per share
Adjusted weighted-average common
shares 108.0 108.0
Pro forma diluted earnings $ 1.15 $ 1.09
per share
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
The Reader's Digest Association, Inc.
Notes to Unaudited Pro Forma Condensed Financial Information
For the Twelve-Months Ended June 30, 1999
(in millions except per share data)
Financial information for The Reader's Digest Association,
Inc. (Reader's Digest) is for the twelve-months ended June 30,
1999 and was derived from Reader's Digest's 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission on
September 16, 1999. Unaudited financial information for Books
Are Fun, Ltd. (Books Are Fun) is for the twelve-months ended June
26, 1999. Such information was obtained by combining the
entity's financial data from the unaudited interim period as of
June 26, 1999 with audited fiscal year financial data as of
December 31, 1998 and subtracting financial data from the
unaudited interim period as of June 27, 1998.
Pro Forma Condensed Statement of Income Notes:
The adjustments to the unaudited pro forma condensed statement of
income for the twelve-months ended June 30, 1999 have been
calculated assuming that the acquisition took place on July 1,
1998, and are as follows:
(A) To eliminate the related revenues and product expenses of
sales of Reader's Digest to Books Are Fun.
(B) To reflect:
The increase in amortization expense for the excess purchase
price over the net assets acquired on a straight-line basis over
20 years.
The elimination of expenses of Books Are Fun that are not
expected to have a continuing impact on the combined results.
(C) To reflect:
The increase in interest expense of Reader's Digest from
borrowings used to finance the acquisition, reduced by interest
expense from debt of Books Are Fun not assumed, and lower
interest rates applied to working capital borrowing requirements
of Books Are Fun.
Interest income of the combined entities assuming reduced
cash on hand for Reader's Digest subsequent to the acquisition.
(D) To reflect the income tax effect of the pro forma
adjustments. Reader's Digest does not expect the excess
purchase price to be deductible for tax purposes.
The Reader's Digest Association, Inc.
Index to Unaudited Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Financial Statements of The
Reader's Digest Association, Inc. and Books Are Fun, Ltd.
Pro Forma Condensed Balance Sheet as of September 30, 1999 2
Pro Forma Condensed Statement of Income for the Three-Months
ended September 30, 1999 3
Notes to Unaudited Pro Forma Condensed Financial Information 4
The Reader's Digest Association, Inc.
Unaudited Pro Forma Condensed Balance Sheet
September 30, 1999
(in millions)
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C>
Reader's
Digest
Reader's Books Are Pro Pro
Digest Fun Forma Forma
Sept 30, 1999 Oct 1, 1999 Adjustments Condensed
Assets
Current assets
Cash and cash equivalents $430.6 $21.6 (296.9) (A) $ 155.3
Receivables, net 364.6 5.1 (0.6) (B)(D) 369.1 369.1
Inventories, net 101.0 65.1 - 166.1
Prepaid expenses & other
current assets 336.9 1.7 - 338.6
Total current assets 1,233.1 93.5 (297.5) 1,029.1
Marketable securities 215.3 - - 215.3
Property, plant and
equipment, net 142.6 14.3 - 156.9
Intangibles, net 64.9 - 345.9 (C) 410.8
Other noncurrent assets 318.1 3.6 (3.7) (D) 318.0
Total assets $1,974.0 $111.4 $44.7 $2,130.1
Liabilities and stockholders'equity
Current Liabilities
Notes payable current $ - $ 10.9 $(10.9) (D) $ -
Accounts payable 126.7 27.3 (0.6) (B) 153.4
Accrued expenses 390.3 9.2 0.2 (A)(D) 399.7
Unearned revenue 337.6 - - 337.6
Other current liabilities 115.4 45.0 75.0 (A)(D) 235.4
Total current liabilities 970.0 92.4 63.7 1,126.1
Notes payable noncurrent - 74.7 (74.7) (D) -
Other noncurrent liabilities 456.5 - - 456.5
Total liabilities 1,426.5 167.1 (11.0) 1,582.6
Redeemable warrants - 3.7 (3.7) (E) -
Stockholders' equity
Capital stock 26.2 60.1 (60.1) (E) 26.2
Paid-in capital 221.5 5.9 (5.9) (E) 221.5
Retained earnings (deficit) 978.3 (125.1) 125.1 (E) 978.3
Accumulated other
comprehensive income (loss) 83.0 (0.3) 0.3 (E) 83.0
Treasury stock, at cost (761.5) - - (761.5)
Total stockholders' equity 547.5 (59.4) 59.4 547.5
Total liabilities &
stockholders' equity $1,974.0 $111.4 $44.7 $2,130.1
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
The Reader's Digest Association, Inc.
Unaudited Pro Forma Condensed Statement of Income
For the Three-Months Ended September 30, 1999
(in millions except per share data)
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
Historical Information Reader's
Digest
Reader's Books Are Pro Pro
Digest Fun Forma Forma
Sept 30, 1999 Oct 1, 1999 Adjustments Condensed
Revenues $ 519.2 $ 31.4 $ (0.5) (F) $ 550.1
Product expenses 182.6 14.0 (0.1) (F) 196.5
Promotion, marketing and
administrative expenses 297.8 14.0 4.2 (G) 316.0
Operating profit 38.8 3.4 (4.6) 37.6
Other expense (income), net (7.0) 1.8 3.3 (H) (1.9)
Income before provision for income
taxes 45.8 1.6 (7.9) 39.5
Provision for income taxes 17.2 0.6 (1.3) 16.5
Income from continuing
operations $ 28.6 $ 1.0 $(6.6) $ 23.0
Basic earnings per share
Weighted-average common
shares 107.4 107.4
Pro forma basic earnings
per share $ 0.26 $ 0.21
Diluted earnings per share
Adjusted weighted-average
common shares 108.5 108.5
Pro forma diluted earnings
per share $ 0.26 $ 0.21
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
The Reader's Digest Association, Inc.
Notes to Unaudited Pro Forma Condensed Financial Information
As of and for the Three-Months Ended September 30, 1999
(in millions except per share data)
Financial information for The Reader's Digest Association,
Inc. (Reader's Digest) is stated as of and for the three-months
ended September 30, 1999 and was derived from Reader's Digest's
Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 3, 1999. Unaudited financial
information for Books Are Fun, Ltd. (Books Are Fun) is stated as
of and for the three-months ended October 1, 1999. Such
information was obtained by subtracting the entity's financial
data from the unaudited interim period as of October 1, 1999 from
the unaudited interim period as of June 26, 1999.
Pro Forma Condensed Balance Sheet Notes:
The adjustments to the unaudited pro forma condensed balance
sheet as of September 30, 1999 have been calculated assuming the
acquisition took place on September 30, 1999, and are as follows:
(A) To reflect the settlement of the purchase price and expenses
incurred in connection with the acquisition. The purchase price
was settled partially in cash with the remaining portion financed
through borrowings by Reader's Digest under its principal
revolving credit facility. Expenses were accrued as of September
30, 1999.
(B) To eliminate receivables and payables between Reader's
Digest and Books Are Fun.
(C) To reflect the excess of the purchase price ($416.9) over
the estimated fair value of net assets acquired ($71.0).
(D) To eliminate balances of Books Are Fun that are excluded
from the net assets acquired in accordance with the Stock
Purchase Agreement dated August 25, 1999, referred to in Exhibit
2.1.
(E) To reflect the elimination of redeemable warrants and
stockholders' equity accounts of Books Are Fun.
Pro Forma Condensed Statement of Income Notes:
The adjustments to the unaudited pro forma condensed
statement of income for the three-month ended September 30, 1999
have been calculated assuming that the acquisition took place on
July 1, 1998, and are as follows:
(F) To eliminate the related revenues and product expenses of
sales of Reader's Digest to Books Are Fun.
(G) To reflect:
The increase in amortization expense for the excess purchase
price over the net assets acquired on a straight-line basis over
20 years.
The elimination of expenses of Books Are Fun that are not
expected to have a continuing impact on the combined results.
(H) To reflect:
The increase in interest expense of Reader's Digest from
borrowings used to finance the acquisition, reduced by interest
expense from debt of Books Are Fun not assumed, and lower
interest rates applied to working capital borrowing requirements
of Books Are Fun.
Interest income of the combined entities assuming reduced
cash on hand for Reader's Digest subsequent to the acquisition.
(I) To reflect the income tax effect of the pro forma
adjustments. Reader's Digest does not expect the excess
purchase price to be deductible for tax purposes.