================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
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 Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
Pleasantville, New York 10570-7000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(914) 238-1000
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Page 1 of 36 pages.
<PAGE>
ITEM 5. ACQUISITION OR DISPOSITION OF ASSETS.
On October 1, 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 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.
(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:
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 financial information of Books Are Fun as of June 26,
1999 and June 27, 1998 and the interim period then ended are included as Exhibit
99.2 to this 8-K:
Balance Sheet.
Statements of Operations.
Statements of Cash Flows.
-2-
<PAGE>
Notes to Financial Statements.
(B) PRO FORMA FINANCIAL INFORMATION:
The unaudited pro forma condensed financial information is based on the
historical consolidated financial statements of Reader's Digest as of June 30,
1999 and Books Are Fun as of June 26, 1999. 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 the company's 1999 annual report on Form
10-K filed with the Securities and Exchange Commission on September 16, 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 and the related determination of lives is subject to
change pending completion of the analysis. The impact of these changes could be
significant.
The following unaudited pro forma financial information of the combined entities
of Reader's Digest and Books Are Fun as of June 30, 1999 and the year then ended
are included as Exhibit 99.3 to this 8-K:
Condensed Balance Sheet.
Condensed Statement of Income.
(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 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.
-3-
<PAGE>
99.2 Books Are Fun, Ltd. unaudited financial results and other
information as of and for the interim periods ending June 26, 1999
and June 27, 1999.
99.3 Reader's Digest Association, Inc. unaudited pro forma condensed
financial results as of and for the year ended June 30, 1999.
-4-
<PAGE>
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: October 7, 1999
/s/ George S. Scimone
-----------------------------------------
George S. Scimone
Senior Vice President and
Chief Financial Officer
-5-
<PAGE>
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 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 and for the interim periods ending June 26, 1999
and June 27, 1999.
99.3 Reader's Digest Association, Inc. unaudited pro forma condensed
financial results as of and for the year ended June 30, 1999.
-6-
EXHIBIT 23.1
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 of The Reader's Digest Association, Inc. dated October 7, 1999.
Ernst & Young LLP
Des Moines, Iowa
October 6, 1999
EXHIBIT 99.1
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
1
<PAGE>
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.
ERNST & YOUNG LLP
Des Moines, Iowa
January 25, 1999
2
<PAGE>
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
====================
3
<PAGE>
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 9,067
Non-voting common stock, $.01 par value; 250,000 shares
authorized, 154,444 shares issued and outstanding 1,544
Additional paid-in capital 5,803,862
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.
4
<PAGE>
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.
5
<PAGE>
BOOKS ARE FUN, LTD.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED
ADDITIONAL OTHER RETAINED
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS
STOCK STOCK CAPITAL LOSS (DEFICIT) TOTAL
----------------------------------------------------------------------------------------
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 - 10,611 (10,611) - - -
6)
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 $5,803,862 $(493,651) $(132,237,721) $(66,835,267)
========================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
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
redeemable warrants 2,160,295
See accompanying notes.
7
<PAGE>
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.
8
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
9
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31,
1998). $70,050,000
Senior Term Loan B, payable in increasing quarterly
installments through May 2004; interest at defined
rate options (7.4% and 7.54% at December 31,
1998). 22,850,000
--------------------
92,900,000
Less amounts due within one year (10,050,000)
====================
Long-term debt, less current portion $82,850,000
====================
10
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
=================
11
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
12
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
================
13
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
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.
14
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
<S> <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 exercisable) 214,818 65.16 3,415.929 1.40
============ ============
</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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
================== =================
</TABLE>
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.
15
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
16
EXHIBIT 99.2
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
1
<PAGE>
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
accounts of $874,114 3,578,598
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 of $193,024 1,112,611
Deferred income taxes (Note 5) 2,554,000
Other assets 10,321
===================
Total assets $55,711,768
===================
2
<PAGE>
BOOKS ARE FUN, LTD.
BALANCE SHEET (CONTINUED)
June 26, 1999 (unaudited)
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 (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 outstanding 60,081,632
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 translation adjustment (173,494)
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.
3
<PAGE>
BOOKS ARE FUN, LTD.
STATEMENTS OF OPERATIONS
Six months ended (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
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 expenses 32,133,149 24,798,437
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 extraordinary item 10,292,596 5,576,429
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
=========================================
</TABLE>
See accompanying notes.
4
<PAGE>
BOOKS ARE FUN, LTD.
STATEMENTS OF CASH FLOWS
Six months ended (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 26, 1999 JUNE 27, 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
</TABLE>
See accompanying notes.
5
<PAGE>
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 condensed financial statements have not been audited, but in
the opinion of management, have been prepared in conformity with generally
accepted accounting principles applying certain judgments and estimates which
include all adjustments considered necessary to present fairly such information.
Operating results for any interim period are not necessarily indicative of the
results for an entire year because of the seasonality of the Company's business.
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.
6
<PAGE>
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
rate options. $68,200,000
Senior Term Loan B, payable in increasing quarterly
installments through May 2004; interest at defined
rate options. 22,825,000
-------------------
91,025,000
Less amounts due within one year (10,900,000)
===================
Long-term debt, less current portion $80,125,000
===================
7
<PAGE>
BOOKS ARE FUN, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 current) 163,000
==================
Net deferred tax assets $3,065,000
==================
8
EXHIBIT 99.3
BOOKS ARE FUN, LTD.
INDEX TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Financial Statements of Reader's Digest and Books
Are Fun
Pro Forma Condensed Balance Sheet as of
June 30, 1999.............................................................2
Pro Forma Condensed Statement of Income
for the year ended June 30, 1999..........................................3
Notes to Pro Forma Unaudited Financial Information..........................4
1
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HISTORICAL INFORMATION
-------------------------------- READER'S DIGEST
READER'S DIGEST BOOKS ARE FUN PRO FORMA PRO FORMA
JUNE 30, 1999 JUNE 26, 1999 ADJUSTMENTS CONDENSED
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 413.4 $ 1.9 $ (283.7) (A) $ 131.6
Receivables, net 319.9 3.6 (0.3) (B) 323.2
Inventories, net 94.9 32.2 (0.3) (C) 126.8
Prepaid expenses and other current
assets 318.3 2.5 - 320.8
----------------------------------------------------- --------------
TOTAL CURRENT ASSETS 1,146.5 40.2 (284.3) 902.4
Property, plant and equipment, net 148.4 11.8 - 160.2
Intangibles, net 68.5 - 349.0 (D) 417.5
Other noncurrent assets 347.1 3.7 (3.9) (E) 346.9
----------------------------------------------------- ---------------
TOTAL ASSETS $1,710.5 $ 55.7 $ 60.8 $1,827.0
===================================================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable current $ - $ 10.9 $ (10.9) (E) $ -
Accounts payable 130.7 13.2 (0.3) (B) 143.6
Accrued expenses 408.2 8.1 (4.5) (E) 411.8
Unearned revenue 336.5 - - 336.5
Other current liabilities 110.9 - 100.0 (A) 210.9
---------------------------------------------------- ----------------
TOTAL CURRENT LIABILITIES 986.3 32.2 84.3 1,102.8
Notes payable noncurrent - 80.1 (80.1) (E) -
Postretirement and postemployment
benefits other than pensions 146.9 - - 146.9
Other noncurrent liabilities 195.8 - - 195.8
----------------------------------------------------- ----------------
TOTAL LIABILITIES 1,329.0 112.3 4.2 1,445.5
----------------------------------------------------- ----------------
Redeemable warrants - 3.7 (3.7) (F) -
Stockholders' equity
Capital stock 24.8 60.1 (60.1) (F) 24.8
Paid-in capital 146.2 5.9 (5.9) (F) 146.2
Retained earnings 955.4 (126.1) 126.1 (F) 955.4
Accumulated other comprehensive loss (56.6) (0.2) 0.2 (F) (56.6)
Treasury stock, at cost (688.3) - - (688.3)
------------------------------------------------------ ----------------
TOTAL STOCKHOLDERS' EQUITY 381.5 (60.3) 60.3 381.5
------------------------------------------------------ ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,710.5 $ 55.7 $ 60.8 $1,827.0
====================================================== ================
</TABLE>
2
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1999
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HISTORICAL INFORMATION
----------------------------------- READER'S DIGEST
READER'S DIGEST BOOKS ARE FUN PRO FORMA PRO FORMA
JUNE 30, 1999 JUNE 26, 1999 ADJUSTMENTS CONDENSED
- -------------------------------------------------------------------------------------------------------------------------
Revenues $ 2,532.2 $ 198.1 $ (1.9) (G) $ 2,728.4
Product expenses 963.5 89.8 (1.9) (G) 1,051.4
Promotion, marketing and administrative
expenses 1,439.6 71.4 10.8 (H) 1,521.8
--------------------------------------------------- ----------------
OPERATING PROFIT 129.1 36.9 (10.8) 155.2
Other expense (income), net (82.6) 7.6 14.1 (I) (60.9)
---------------------------------------------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 211.7 29.3 (24.9) 216.1
Provision for income taxes 85.1 11.7 (5.3) (J) 91.5
---------------------------------------------------- ----------------
INCOME FROM CONTINUING OPERATIONS $ 126.6 $ 17.6 $(19.6) $ 124.6
==================================================== ================
BASIC EARNINGS PER SHARE
Weighted-average common shares 107.3 107.3
===================== ================
PRO FORMA BASIC EARNINGS PER SHARE $ 1.16 $ 1.15
===================== ================
DILUTED EARNINGS PER SHARE
Adjusted weighted-average common shares 108.0 108.0
===================== ================
PRO FORMA DILUTED EARNINGS PER SHARE $ 1.15 $ 1.14
===================== ================
</TABLE>
3
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
FOR THE YEAR ENDED JUNE 30, 1999
(IN MILLIONS EXCEPT PER SHARE DATA)
Financial information for Reader's Digest is stated as of and for the year ended
June 30, 1999 and was derived from the company's 1999 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on September 16, 1999,
referred to as Exhibit 2.1. Unaudited financial information for Books Are Fun is
stated as of and for the year 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 BALANCE SHEET NOTES:
The adjustments to the unaudited pro forma condensed balance sheet as of June
30, 1999 have been calculated assuming the acquisition took place on June 30,
1999, and are as follows:
(A) To reflect the settlement of the purchase price and expenses incurred in
connection with the acquisition. The total amount was settled partially in
cash with the remaining portion financed through borrowings by Reader's
Digest under its principal revolving credit facility.
(B) To eliminate receivables and payables between Reader's Digest and Books Are
Fun.
(C) To reflect Books Are Fun's inventory in accordance with Reader's Digest's
accounting policy and eliminate gross profit on purchases from Reader's
Digest.
(D) To reflect the excess of the purchase price ($383.7) over the estimated
fair value of net assets acquired ($34.7).
(E) To eliminate balances of Books Are Fun that are excluded from net assets
acquired in accordance with the Stock Purchase Agreement dated August 25,
1999 referred to in Exhibit 2.1.
(F) 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
year ended June 30, 1999 have been calculated assuming that the acquisition took
place on July 1, 1998, and are as follows:
(G) To eliminate the related revenue and product expenses of sales of Reader's
Digest to Books Are Fun.
4
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
PRO FORMA CONDENSED STATEMENT OF INCOME NOTES (continued):
(H) To reflect the increase in amortization expense for the excess purchase
price over the net assets acquired on a straight-line basis over 30 years
and eliminate expenses of Books Are Fun that are not expected to have a
continuing impact on the combined results.
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 and the related determination of lives
is subject to change pending completion of the analysis. If the average
life of the intangible assets and goodwill were assessed to be 20 years,
the result would be an increase in pro forma amortization expense of $5.8
for the year ending June 30, 1999.
(I) To reflect:
o The increase in interest expense from borrowings used to finance the
acquisition reduced by interest expense from debt not assumed and lower
rates for working capital requirements of Books Are Fun.
o Interest income of the combined entities assuming reduced cash on hand
for Reader's Digest subsequent to the acquisition.
(J) 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.
5
