THE BERRETT-KOEHLER GROUP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS * * * * * DECEMBER 31, 2011 AND 2010

2 To the Board of Directors and Stockholders of The Berrett-Koehler Group, Inc. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have audited the accompanying consolidated balance sheets of The Berrett-Koehler Group, Inc. and its wholly-owned subsidiary (collectively, the Company ) as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company s management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with U.S. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Berret-Koehler Group and its wholly-owned subsidiary as of December 31, 2011 and 2010, and the results of their operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. May 29, 2012 San Francisco, CA

3 CONSOLIDATED BALANCE SHEETS December 31, A S S E T S Current assets: Cash and cash equivalents $ 10,822 $ 2,686 Accounts receivable, net 1,127, ,056 Inventories - work-in-process 84, ,973 Inventories - finished goods, net 1,513,023 1,780,865 Prepublication costs of producing inventories, current 521, ,621 Deferred tax asset 61,000 52,900 Other current assets 82,379 32,898 Total current assets 3,400,348 3,516,999 Non-current assets: Furniture, equipment and leasehold improvements, net 46,588 39,872 Prepublication costs of producing inventories, net 673, ,342 Deposits and other assets 183, ,793 Total non-current assets 903, ,007 Total assets $ 4,304,089 $ 4,370,006 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to related parties, current portion $ - $ 35,198 Line of credit 299, ,353 Accounts payable 146, ,659 Accounts payable to related parties 216, ,935 Accrued liabilities 390, , Royalties payable 1,140, ,561 Preferred stock dividends payable 10,027 10,027 Total current liabilities 2,202,601 2,458,177 Long-term liabilities: Royalties payable reserve 214, ,337 Deferred tax liability 10,000 10,000 Deferred rent 16,953 12,715 Total long-term liabilities 240, ,052 Total liabilities 2,443,589 2,743,229 Commitments and contingencies (Note 12) Stockholders' equity: Convertible preferred stock, Series A, $0.001 par value, 50,000 shares authorized, 26,739 and 26,739 shares issued and outstanding; liquidation value of $277,387 and $277, , ,900 Convertible preferred stock, Series A, dividends (165,177) (145,123) Common stock, $0.001 par value, 10 million shares authorized, 893,160 and 893,160 shares issued and outstanding 2,071,981 2,071,981 Less: Treasury stock (18,724 and15,804 shares of common stock, at cost) (162,921) (134,600) Accumulated deficit (113,283) (395,381) Total stockholders' equity 1,860,500 1,626,777 Total liabilities and stockholders' equity $ 4,304,089 $ 4,370,006 See accompanying notes to consolidated financial statements. 2

4 CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, Revenues: Net sales $ 5,796,509 $ 5,795,828 Subsidiary rights 784, ,394 Digital sales 961, ,328 Other revenues 22,907 39,290 Cost of sales: 7,565,876 7,022,840 Direct cost of goods sold 1,600,444 1,549,611 Amortization of prepublication costs of producing inventories 589, ,685 Royalties 1,238,093 1,081,303 Inventory write-off and other cost of sales 330, ,211 3,758,910 3,493,810 Gross profit 3,806,966 3,529,030 Operating expenses: Editorial 201, ,792 Marketing 816, ,271 International sales and business development 340,593 - Production 22,910 25,799 Finance and operations 1,318,234 1,187,585 Distribution 585, ,238 Depreciation and amortization 29,586 28,740 3,315,388 3,050,425 Operating income 491, ,605 Other income (expense): Interest expense (37,199) (53,737) Income before provision for income taxes 454, ,868 Provision for income taxes 172, ,922 Net income $ 282,098 $ 231,946 See accompanying notes to consolidated financial statements. 3

5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Preferred Stock - Series A Treasury Stock Accumulated Shares Amount Shares Amount Dividends Shares Amount Deficit Total Balance at December 31, ,584 $ 2,066,964 26,739 $ 229,900 $ (124,567) (11,886) $ (100,472) $ (627,327) $ 1,444,498 Shares issued to ESOP 576 5, ,017 Shares repurchased from ESOP participants (3,918) (34,128) - (34,128) Preferred stock dividends (Note 8) (20,556) (20,556) Net income , ,946 Balance at December 31, ,160 2,071,981 26, ,900 (145,123) (15,804) (134,600) (395,381) 1,626,777 Shares repurchased from ESOP participants (2,920) (28,321) - (28,321) Preferred stock dividends (Note 8) (20,054) (20,054) Net income , ,098 Balance at December 31, ,160 $ 2,071,981 26,739 $ 229,900 $ (165,177) (18,724) $ (162,921) $ (113,283) $ 1,860,500 See accompanying notes to consolidated financial statements. 4

6 CONSOLIDATED STATEMENTS OF CASH FLOWS Operating activities: Net income $ 282,098 $ 231,946 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 617, ,425 Deferred taxes (12,776) (12,700) Deferred rent 4,238 9,889 Changes in other operating items: Year ended December 31, Accounts receivable (143,773) 152,219 Inventories 346, ,559 Prepublication costs of producing inventories, net (641,604) (591,164) Other current assets (57,581) (45,009) Accounts payable and other liabilities (74,675) 156,435 Royalties payable 174,200 80,716 Cash provided by operating activities 494, ,316 Investing activities: Capital expenditures for furniture and equipment (34,395) (26,247) Cash used for investing activities (34,395) (26,247) Financing activities: Proceeds from (repayment of) line of credit, net (368,205) (374,765) Repayments of notes payable to related parties (35,198) (237,624) Repayments of notes payable to bank - (37,500) Purchase of treasury stock (28,321) (34,128) Dividends to preferred stockholders (20,054) (20,556) Cash used for financing activities (451,778) (704,573) Change in cash and cash equivalents 8,136 (43,504) Cash and cash equivalents at beginning of year 2,686 46,190 Cash and cash equivalents at end of year $ 10,822 $ 2,686 Supplemental disclosure of cash flow information: Cash paid for interest $ 38,301 $ 55,479 Cash paid for taxes $ 159,400 $ 42,474 Supplemental disclosure of non-cash activities: Issuance of common stock for ESOP contribution $ - $ 5,017 See accompanying notes to consolidated financial statements. 5

7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Organization, operations and summary of significant accounting policies: Organization The Berrett-Koehler Group, Inc. (BKG) is a holding company whose wholly owned subsidiary is Berrett-Koehler Publishers, Inc. (BKP) (collectively the Company ). The Company publishes resource materials (primarily hardcover books, paperback books, digital books, and other digital resources) in a range of areas, including business, economics, leadership, management, organizational change, human resource development, work and careers, personal development, self-help, current affairs, societal change, and sustainable development. The Company sells its products to customers primarily through domestic and international distributors, bookstores, internet sales, conference and meeting displays, promotions by authors, catalog marketers, direct corporate sales, direct mail and marketing to customers, other online and digital marketing, subsidiary rights sales, and other similar means. As discussed in Note 6, at December 31, 2011 the Company had a line of credit balance outstanding of $299,148, which is due on demand from the lender. If the lender were to call the loan, the Company would need to seek alternative financing or raise the necessary capital in order to settle its obligations. There is no assurance that the Company would be able to raise additional funds on acceptable terms, if at all, should the credit line not be renewed. A summary of significant accounting policies follows: Principles of consolidation The consolidated financial statements include the accounts of BKG and its whollyowned subsidiary. All material intercompany transactions and balances have been eliminated in consolidation. Revenue recognition Sales are recorded when merchandise is shipped. Nonrefundable advances received for subsidiary rights are generally recorded as revenue at the time the contract is signed, while ongoing rights revenue is generally recorded when the payments are received. Inventories Inventories are stated at the lower of cost (on the average cost basis) or market value and include finished books and work-in-process. 6

8 Prepublication costs of producing inventories Prepublication costs of producing inventories include certain expenditures for the development of print products, including editorial development of publications and design and production management. The prepublication costs are assigned to each individual publication by effort expended, based on management s assessment. These costs are incurred and capitalized prior to the commencement of printing and are then amortized on the straight-line method over a four year period commencing with publication. Amortization expense of $589,841 and $550,685 has been included in cost of sales in the accompanying consolidated statement of income for the years ended December 31, 2011 and 2010, respectively. Depreciation and amortization Furniture, equipment and leasehold improvements are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gains or losses are included in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the term of the lease. Deferred rent The Company s office lease contains predetermined fixed increases of the minimum rental rate over the term of the lease. The Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between rent expense and the amount paid as deferred rent. Shipping and handling costs Shipping and handling costs of $93,588 and $76,202 have been allocated to marketing, editorial, production, and finance and operation expense for 2011 and 2010, respectively. Advertising and promotion costs The Company expenses advertising and promotion costs as incurred. Statement of cash flows For purposes of the statement of cash flows, the Company considers all short-term interest-bearing investments with a maturity date at the time of purchase of three months or less to be cash equivalents. 7

9 Concentration of credit risk The Company performs ongoing credit evaluations of its distributors and customers and generally does not require collateral. BKG maintains reserves for potential credit losses and such losses have been within management's expectations. During the years ended December 31, 2011 and 2010, the Company had sales to one customer, Ingram Publisher Service, Inc. (IPS), that generated 52% and 55%, respectively, of its total revenue. The Company had accounts receivable due from one customer (IPS) that accounted for 58% and 61% of total accounts receivable at December 31, 2011 and 2010, respectively. The Company places its cash and temporary cash investments with high credit quality institutions. At times such investments may be in excess of FDIC insurance limits. The Company has never experienced any losses related to these balances. All of the Company s non-interest bearing cash balances were fully insured at December 31, 2011 and 2010 due to a temporary program in effect from December 31, 2010 through December 31, Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Company s non-interest bearing cash balances may again exceed federally insured limits. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to useful lives of equipment, inventory write-downs, publishing contracts and prepublication costs; fair value of financial instruments; and allowance for doubtful accounts. Actual results when ultimately realized could differ from those estimates. Fair value of financial instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, royalties payable and notes payable are reasonable estimates of the fair value of these financial instruments. Income taxes BKG and its subsidiary file a consolidated federal income tax return. The provisions for federal and state income taxes are based on the income of BKG and its subsidiary. The Company provides for deferred taxes for differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes, using enacted tax rates and laws that will be in effect when the differences are expected to reverse. 8

10 Reclassifications Certain amounts in the accompanying 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation. Such reclassifications had no effect on financial position or net income. NOTE 2 - Accounts receivable Accounts receivable are summarized as follows: December 31, Gross accounts receivable $ 1,157,929 $ 1,014,056 Less - allowance for doubtful accounts 30,000 30,000 $ 1,127,829 $ 984,056 Accounts receivable are pledged as security for certain indebtedness (see Notes 6 and 7). NOTE 3 - Inventories: Inventories are summarized as follows: December 31, Finished books $ 1,513,023 $ 1,832,013 Work-in-process 84, ,973 Inventory reserve - (51,148) $ 1,597,176 $ 1,943,838 Inventories are pledged as security for certain indebtedness (see Notes 6 and 7). As of December 31, 2011, management has deemed that an inventory reserve was not considered necessary. 9

11 NOTE 4 - Furniture, equipment and leasehold improvements: Furniture, equipment and leasehold improvements are summarized as follows: December 31, Office furniture and equipment $ 68,752 $ 69,121 Computer equipment 319, ,246 Computer software 68,430 61,001 Leasehold improvements 14,941 14, , ,309 Less - accumulated depreciation and amortization 425, ,437 $ 46,588 $ 39,872 Depreciation expense was $29,586 and $28,740 for the years ended December 31, 2011 and 2010, respectively. Certain of the foregoing assets are pledged as security for certain indebtedness (see Notes 6 and 7). NOTE 5 - Prepublication costs of producing inventories: Prepublication costs of producing inventories are summarized as follows: December 31, Editorial costs $ 1,644,774 $ 1,553,540 Production costs 764, ,124 2,409,601 2,259,664 Less accumulated amortization 1,214,875 1,116,701 1,194,726 1,142,963 Less current portion 521, ,621 $ 673,584 $ 642,342 NOTE 6 - Line of credit and short-term borrowing arrangements: In July 2010, the Company entered into a Sixth Modification to Loan and Security Agreement with its lender, which modified certain terms of its loan arrangements. At December 31, 2011, the Company has a line of credit of up to a maximum of $2 million with a bank, based on certain calculations as defined by the agreement. The credit line bears an annual interest rate of 1.5% over the bank s base rate. The interest rate was 4.75% at both December 31, 2011 and The credit line is secured by all of the Company s assets, including accounts receivable and inventories, and is due on demand from the lender. 10

12 The borrowing arrangement contains certain restrictive covenants, as defined in the agreement, including a tangible net worth of not less than $800,000 plus 50% of positive aftertax net income, and a current ratio of not less than 1.1 to 1.0, among other requirements. Borrowings under this line of credit were $299,148 and $667,353 at December 31, 2011 and 2010, respectively. On April 1, 2009, the Company entered into notes payable to two printing companies (shareholders) in the amount of $200,000 each, with an annual interest rate of 7%. The notes are payable in monthly principal and interest installments of $8,955 per note until April 2011, are secured by certain assets of the Company and are subordinated to the Company s line of credit and long-term borrowings. The outstanding balance of the notes of $35,198 at December 31, 2010, was fully repaid in NOTE 7 - Long-term debt: On March 5, 2009, the Company entered into a Fifth Modification to Loan and Security Agreement with a lender, whereby the lender made available a term loan of $150,000, which proceeds were to be used for the purpose of making royalty payments. The note incurred annual interest at the rate of the lender s prime rate plus 1.75% (4.75% at December 31, 2010), and was payable in monthly installments of $12,500 plus interest until March The note was secured by certain assets of the Company and personally guaranteed by the Company s majority stockholder. The outstanding balance of the note was repaid in full during fiscal year NOTE 8 - Capital stock: On May 2, 2003, the Company amended and restated its Articles of Incorporation which authorized the Company to issue two classes of stock designated, respectively, common stock and preferred stock, with total authorized shares of 10,000,000 and 50,000, respectively. All of the preferred stock is designated Series A preferred stock. Preferred stock Each share of preferred stock is entitled to receive on July 1 of each year, in preference to holders of any other stock of the Company, cumulative cash dividends at the rate of 7.5% per annum of the original issue price, as defined, subject to adjustments for stock dividends, stock splits, and other similar transactions. Commencing on July 1, 2008, dividends are payable at a rate of the prime rate plus 3.25%, with a minimum rate of 7.5% and a maximum rate of 15%. The preferred stock is convertible, at the option of the holder, into common stock, and each preferred stockholder shall be entitled to one vote for each share of common stock into which such preferred stock is convertible. 11

13 Upon liquidation of the Company, the preferred stockholders are entitled to receive an amount equal to the original issuance price per share plus all accrued and unpaid dividends on such shares. The preferred stock has preference as to dividends and liquidation value upon dissolution or winding up of the Company. Liquidation value (including dividends payable) of the preferred stock at both December 31, 2011 and 2010 was $277,387. Treasury stock During 2011, the Company repurchased a total of 2,920 shares of common stock from six terminated employees and the president of the Company at cost of $9.70 per share. During 2010, the Company repurchased 3,918 shares of common stock from five terminated employees at a cost of $8.71 per share. NOTE 9-401(k) profit-sharing plan: The Company has a 401(k) profit-sharing plan that is available to eligible employees. Employer contributions to the plan are at the discretion of the Board of Directors. There were no employer contributions for 2011 and NOTE 10 - Employee stock ownership plan: The Company established an employee stock ownership plan (ESOP) effective January 1, The ESOP was designed to qualify for preferred tax treatment under Section 401 (a) of the Internal Revenue Code and to enable participating employees to share in the growth and prosperity of the Company. Under the ESOP, an Employee Stock Ownership Trust holds the investments of the Plan. Employer contributions to the ESOP are at the discretion of the Board of Directors. The Company recorded a contribution to the ESOP of $98,000 and $50,000 for the years 2011 and 2010, respectively. NOTE 11 - Income taxes: Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of the Company s assets and liabilities. A deferred tax asset is recognized for temporary differences that may result in deductible amounts in future years and for carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 12

14 Deferred tax assets and liabilities are comprised of the following: December 31, Current deferred tax assets: Accrued liabilities $ 48,000 $ 44,100 Allowance for doubtful accounts 13,000 8,800 61,000 52,900 Non-current deferred tax assets (liabilities): Furniture, equipment and leasehold improvements (18,000) (11,000) Other 8,000 1,000 (10,000) (10,000) Valuation allowance for deferred taxes - - Net deferred tax asset $ 51,000 $ 42,900 At December 31, 2011, the Company has foreign tax credits available of approximately $178,000, of which $14,000 are included in other current assets and approximately $164,000 are included in other assets on the accompanying balance sheet, and expire over a period from 2014 to The Company has determined that there is no need for a valuation allowance at December 31, 2011 or The provision (benefit) for income taxes for the years ended December 31, 2011 and 2010 is as follows: Year ended December 31, Current $ 180,381 $ 205,622 Deferred (8,100) (12,700) 172, ,922 Change in valuation allowance - - Net income tax provision $ 172,281 $ 192,922 Effective January 1, 2009, the Company adopted Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainties in Income Taxes an interpretation of FASB No. 109, as codified in FASB ASC , Income Taxes. Upon adoption of FIN 48 and at December 31, 2010, the Company did not have any unrecognized tax benefits. The Company s policy is to recognize interest and penalties related to income tax matters in income tax expense. No taxrelated interest and penalties have been expensed in the accompanying statement of income during 2011 and 2010 or accrued as a liability in the accompanying balance sheet at December 31, 2011 and

15 NOTE 12 - Commitments and contingencies: In July 2003, the Company s office facility lease was amended to extend the lease term to July 31, In September 2009 the Company entered into a second amendment to this lease agreement, which extended the lease term to September 30, Under the terms of the amended lease, rent is adjusted annually for increases in building operating costs. Total rent expense under the operating lease was $173,376 and $171,475 for the years ended December 31, 2011 and 2010, respectively. Minimum future rental payments for years subsequent to December 31, 2011 are as follows: $167, ; $173, ; and $133, NOTE 13 - Subsequent events: The Company has evaluated its financial statements for subsequent events after December 31, 2011 through May 29, No subsequent events have taken place requiring disclosure. 14