In our opinion, the accompanying carve-out balance sheet and the related carve-out statements of operations, changes in divisional equity and cash flows present fairly, in all material respects, the financial position of Parents, Child, Family Circle, Fitness, Baby, Expecting and Ser Padres (collectively, the "Gruner + Jahr Consumer Titles"), which are magazines of Gruner + Jahr USA Publishing, (a division of Gruner + Jahr Printing & Publishing Company) at December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the aud it 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The Gruner + Jahr Consumer Titles are part of the magazine publishing operations of Gruner + Jahr USA Publishing. Consequently, as discussed in Note 2, these financial statements have been derived from the consolidated financial statements and accounting records of Gruner + Jahr USA Publishing and reflect significant assumptions and allocations. Moreover, the Gruner + Jahr Consumer Titles rely on Gruner + Jahr USA Publishing for administrative, management and other services. The financial position, results of operations and cash flows of the Gruner + Jahr Consumer Titles could differ from those that would have resulted had the magazines operated autonomously or as an entity independent of Gruner + Jahr USA Publishing.
The accompanying notes are an integral part of these carve-out financial statements.
The accompanying notes are an integral part of these carve-out financial statements.
The accompanying notes are an integral part of these carve-out financial statements.
The accompanying notes are an integral part of these carve-out financial statements.
- Organization and Background
The seven magazine titles: Parents, Child, Family Circle, Fitness, Ser Padres, Baby and Expecting (collectively referred to as the "G+J Consumer Titles"), were published by Gruner + Jahr USA Publishing ("G+J Publishing"), a division of Gruner + Jahr Printing & Publishing Company, a Delaware Partnership (the "Partnership") through June 30, 2005. As of July 1, 2005, the G+J Consumer Titles were purchased by Meredith Corporation for $350 million in cash.
- Summary of Significant Accounting Policies
Basis of Presentation
The carve-out financial statements reflect the financial position, results of operations and cash flows of the G+J Consumer Titles as of and for the year ended December 31, 2004 as if they were a separate entity. As the G+J Consumer Titles consist solely of seven magazines and were part of G+J Publishing, a division of the Partnership, no separate financial statements were prepared in accordance with generally accepted accounting principles in the normal course of operations.
The carve-out financial statements include allocations of assets (including inventory), liabilities (including certain accrued expenses), and expenses (including legal, accounting, tax, employee benefits, insurance services, data services and other G+J Publishing corporate overhead) relating to the G+J Consumer Titles. The allocation methodologies have been described within the accompanying notes and management believes that these allocations are reasonable to present the financial position, results of operations and cash flows of the G+J Consumer Titles on a stand-alone basis. However, the financial position, results of operations and cash flows of the G+J Consumer Titles may differ from those that would have been achieved had the G+J Consumer Titles been a stand-alone entity during the period presented.
Intercompany accounts between G+J Publishing and the G+J Consumer Titles have been included in divisional equity. All significant accounts and transactions between the G+J Consumer Titles have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include the allocation of costs by G+J Publishing and the assessment of the collectibility of accounts receivable, use and recoverability of inventories, useful lives for amortization periods, and recoverability of goodwill, among others. Actual results could differ from those estimates.
Cash Management
G+J Publishing uses a centralized approach to cash management. Cash deposits from the G+J Consumer Titles are transferred to the Partnership on a daily basis. Payments of trade payables and other disbursements are processed through a centralized cash management system operated by the Partnership. Changes in divisional equity represent any required financing from the Partnership for working capital, acquisition or capital expenditure requirements. No interest has been credited or charged for these transactions.
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
Accounts Receivables
Credit is extended to customers based upon evaluation of each customer's credit worthiness and financial condition. The G+J Consumer Titles maintain an allowance for estimated losses based upon the aging of such receivables and specific collection issues that may be identified. Accounts are written off when deemed uncollectible.
Inventories
Inventories, consisting principally of paper held at printing companies, are stated at the lower of cost or market. Paper inventory cost is determined on a last-in, first-out ("LIFO") basis. Paper inventories are purchased on a bulk basis for several of G+J Publishing's publications and are not specifically identified by title. Accordingly, the inventories have been allocated by plant locations which correspond to the consumer titles that are printed at those plant locations. The reserve for obsolescence and the LIFO reserve was allocated based upon the proportion of inventory allocated to the G+J Consumer Titles to the total inventory held by G+J Publishing.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Additions, renewals and improvements are capitalized, and maintenance and repairs are expensed as incurred. Depreciation is provided for under the straight-line method over the estimated useful lives of related assets. The following useful lives have been assigned to fixed assets: machinery and equipment: 3 to 10 years; buildings and improvements: 15 to 33 years; furniture and fixtures: 10 years. The cost of leasehold improvements are amortized over the lesser of their useful lives or the term of the respective lease.
The G+J Consumer Titles occupied the majority of the building space leased by G+J Publishing and, as a result, buildings and leasehold improvements have been allocated in their entirety to the G+J Consumer Titles. All other fixed assets have been allocated on a specific identification basis to the G+J Consumer Titles.
Goodwill and Other Intangible Assets
Effective January 1, 2002, G+J Publishing adopted SFAS 141 and SFAS 142. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets.
The goodwill included in the carve-out financial statements relates principally to the historical acquisition of Family Circle and pursuant to SFAS 142 is no longer amortized. Goodwill of the G+J Consumer Titles was reviewed for impairment on a stand-alone basis and no impairment was identified at December 31, 2004.
Divisional Equity
Divisional equity consists of retained earnings of the G+J Consumer Titles, cash transfers to and from the Partnership in connection with required financing received from the Partnership, as well as amounts paid by G+J Publishing related to certain allocated charges.
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
Revenue
Revenue consists principally of advertising and magazine circulation sales (subscription and newsstand).
Advertising revenue, net of provisions for make good obligations due to advertisers for guaranteed circulation and agency discounts, is recognized at the "on sale" date of the publication containing the advertisement. Subscription revenue, net of agency commissions, is deferred and recognized on a pro rata basis as the issues are served over the terms of such subscriptions. Subscription revenue recognized during 2004 is net of agency commissions of $70.3 million. Sales of magazines intended for retail distribution on newsstands are recorded at the time such publications are available for sale by distributors to the public and are recorded net of estimated provisions for returns and retail display allowances.
Advertising Expenses
Total advertising expenses included in the Carve-out Statement of Operations were $38.5 million. The majority of the advertising expenses relate to direct-response advertising and consist of product promotional mailings, catalogues, telemarketing and subscription promotions. Advertising costs are expensed the first time the advertising takes place.
Allocation of Selling, General and Administrative Expenses
The financial statements include costs allocated to G+J Consumer Titles from G+J Publishing consisting of corporate overhead for services and administrative functions shared by all G+J Publishing titles, which include, but are not limited to, executive management costs, salaries and fringe benefits, rent, and telephone. These costs are allocated based upon operating expenses and headcount. These allocations may not reflect the actual financial resources or expenses that the G+J Consumer Titles might have incurred as a stand-alone entity. The allocated expenses totaled approximately $29.5 million and are included in selling, general and administrative expenses.
Promotional Costs
Circulation promotional costs incurred in connection with obtaining magazine subscribers are expensed as incurred.
Development Costs
Costs to develop new products or modify existing products, including magazines, are expensed as selling, general and administrative expenses as incurred.
Income Taxes
The G+J Consumer Titles were carved out of Gruner + Jahr Printing & Publishing Company, a partnership entity which is not taxable for federal purposes. Thus, the G+J Consumer Titles' taxable income is combined with all other income or loss of Partnership, which is included in the federal income tax returns of the partners in the Partnership. Although the Partnership is not subject to US federal income tax, it is obligated to pay income tax in certain state and local jurisdictions. For purposes of these carve-out financial statements, state and local income taxes have been determined on a separate basis as if the G+J Consumer Titles are a stand-alone partnership entity, and are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
liabilities, and are measured using the enacted tax rates that are expected to be in effect in the period in which these differences are expected to reverse. The principal components of deferred taxes relate to tax deductible goodwill as well as accelerated tax deductions attributable to depreciation and subscription expenses.
Any income tax assessments arising from state or local tax audits of the Partnership that are not specific to the G+J Consumer Titles were not allocated for purposes of the carve-out financial statements.
Foreign Exchange
The functional currency for the G+J Publishing's operations is the U.S. dollar. G+J Publishing enters into some foreign currency transactions in the normal course of business and such foreign currency transaction gains and losses are included in operations.
Fair Value of Financial Instruments
G+J Publishing's financial instruments primarily consist of trade receivables and payables for which current book values approximate fair market value.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an Amendment of APB No. 29" ("SFAS 153"). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have "commercial substance." This standard is effective for nonmonetary asset exchanges occurring after July 1, 2005. The adoption of this standard is not expected to impact the carve-out Financial Statements.
- Inventory
Inventory consists of the following:
| | | 2004 | |
| | | | |
Raw materials and supplies | $ | 12,923 | |
Work in progress | | 1,650 | |
| | | 14,573 | |
LIFO reserve | | 115 | |
Obsolescence reserve | | (72 | ) |
| | $ | 14,616 | |
During 2004, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 2004 purchases, the effect of which decreased cost of production by approximately $103.
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
- Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | 2004 | |
| | | | |
Machinery and equipment | $ | 8,794 | |
Building and improvements | | 6,132 | |
Software licenses | | 5,735 | |
Furniture and fixtures | | 6,000 | |
Construction in progress | | 530 | |
| | Gross PP&E | | 27,191 | |
| | | | |
Accumulated depreciation | | (18,763 | ) |
| | Net PP&E | $ | 8,428 | |
Depreciation expense for the year ended December 31, 2004 was $2,680.
- Divisional Equity
An analysis of the divisional equity activity is as follows:
| | | 2004 | |
| | | | |
Balance as of January 1, 2004 | $ | 117,886 | |
Net earnings | | 15,030 | |
Net cash distributed to the Partnership | | (49,028 | ) |
Allocated charges funded by G+J Publishing | | 29,506 | |
Balance as of December 31, 2004 | $ | 113,394 | |
The Partnership funds the working capital requirements of its magazines based upon a centralized cash management system. The divisional equity includes retained earnings of the G+J Consumer Titles, net cash transferred to the Partnership in connection with required financing received from the Partnership as well funding of certain allocated charges by G+J Publishing. The following is a summary of the allocated charges from G+J Publishing to the G+J Consumer Titles:
| | | 2004 | |
| | | | |
Salaries, benefit payments and related expenses | $ | 16,777 | |
General and administrative expenses | | 8,624 | |
Rent | | 3,721 | |
Other | | 384 | |
| | Allocated charges from G+J Publishing | $ | 29,506 | |
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
- Related Party Transactions
G+J Publishing provides the G+J Consumer Titles with certain general and administrative services, including marketing, public relations, research, production, accounting and legal services. The charges for marketing, public relations and research were $7,673, production were $3,271, accounting and legal were $2,364 and are included in selling, general and administrative expenses. The cost of financing activities and certain other corporate functions which did not benefit the G+J Consumer Titles, were absorbed by G+J Publishing.
- Goodwill
Goodwill relates to the historical acquisition of Family Circle and pursuant to the adoption of SFAS 142, is accordingly not being amortized.
| | | 2004 | |
| | | | |
Goodwill | $ | 265,335 | |
Less: Accumulated amortization | | (166,850 | ) |
| | $ | 98,485 | |
- Income Taxes
For the year ended December 31, 2004, the provision for income taxes consisted of state and local taxes that the G+J Consumer Titles would have been responsible for if it were a stand-alone Partnership entity. The provision is reflected without consideration of the Partnership's ability to offset the losses from its other magazines with the taxable income from the G+J Consumer Titles.
The Partnership pays state and local taxes predominantly in Michigan and New York City. The blended state and local tax rate applicable to the G+J Consumer Titles is based on the tax rates and apportionment ratios of the two jurisdictions.
- Other Revenue
Other revenue consists of the following:
| | | 2004 | |
| | | | |
On-line revenue | $ | 1,366 | |
List rental revenue | | 2,241 | |
Royalty revenue | | 858 | |
Reprint revenue | | 274 | |
Other | | 49 | |
| | Total other income | $ | 4,788 | |
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Gruner + Jahr Consumer Titles
Notes to Carve-out Financial Statements
December 31, 2004
(amounts in thousands unless otherwise indicated)
- Employee Benefit Plans
G+J Publishing maintains a defined contribution savings and investment retirement plan (the "Plan"). Substantially all employees of the G+J Consumer Titles are eligible to participate in the Plan sponsored by G+J Publishing, under which annual contributions may be made by G+J Publishing for the benefit of all eligible employees. In certain cases, employees may also make contributions to the Plan, which, and subject to certain limitations, may be matched by G+J Publishing, up to certain specified percentages. Employees are generally eligible to participate in the Plan upon joining G+J Publishing and receive matching contributions after six months of employment. Effective January 1, 2004, G+J Publishing eliminated the vesting schedule for the employer contribution, with employees becoming immediately fully vested in their contributions matched by G+J Publishing. Expense recognized by the G+J Consumer Titles for the Plan for 2004 was approximately $506.
- Leases
The G+J Consumer Titles has noncancellable operating leases for office facilities and for machinery and equipment with terms ranging from one to seven years. Minimum future lease payments, net of sublease proceeds, under operating leases at December 31, 2004 are:
Years Ending December 31, | | Operating
Leases | |
| | | | |
2005 | $ | 5,975 | |
2006 | | 5,974 | |
2007 | | 5,719 | |
2008 | | 5,765 | |
2009 | | 5,785 | |
Thereafter | | 9,153 | |
| | $ | 38,371 | |
Total rental expense, approximated $7,458 for the year ended December 31, 2004.
- Commitments and Contingencies
