UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004Commission file number: 1-10434
The Reader's Digest Association, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pleasantville, New York 10570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 238-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of registrant's voting and non-voting equity held by
non-affiliates of registrant, as of December 31, 2003, the last business day of
the registrant's most recently completed second fiscal quarter, was
approximately $1,455,978,000 based on the closing price of registrant's Common
Stock on the New York Stock Exchange--Composite Transactions on such date.
At July 31, 2004, 99,557,636 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders of The Reader's Digest Association, Inc. for
the fiscal year ended June 30, 2004. Certain information therein is
incorporated by reference into Part I and Part II hereof.
Proxy Statement for the Annual Meeting of Stockholders of The Reader's Digest
Association, Inc. to be held on November 19, 2004. Certain information
therein is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
ITEM 1.BUSINESS.............................................................. 1
Reportable Segments........................................................ 1
Books and Home Entertainment and Reiman Books.............................. 2
Select Editions.......................................................... 2
Series Books............................................................. 2
General Books............................................................ 3
Reiman Books............................................................. 3
Music.................................................................... 3
Video.................................................................... 4
Production and Fulfillment............................................... 4
Reader's Digest Magazine, Special Interest Magazines and Reiman Magazines.. 5
Circulation and Advertising.............................................. 6
Reader's Digest and Reiman Magazine Editorial............................ 7
Internet Initiatives..................................................... 7
Reiman's Complementary Businesses........................................ 7
Custom Publishing........................................................ 8
Production and Fulfillment............................................... 8
Consumer Business Services................................................. 9
Books Are Fun, Ltd....................................................... 9
QSP...................................................................... 9
Reader's Digest Trade Publishing.........................................10
Financial Services Marketing Alliances...................................10
Gifts.com and Good Catalog Company.......................................11
Marketing..................................................................11
Information Technology and Customer Database Enhancement...................12
Competition and Trademarks.................................................13
Employees..................................................................13
Executive Officers.........................................................13
Available Information......................................................15
ITEM 2.PROPERTIES............................................................16
ITEM 3.LEGAL PROCEEDINGS.....................................................17
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................17
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.....................18
ITEM 6.SELECTED FINANCIAL DATA...............................................18
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION....................................18
TABLE OF CONTENTS
(Continued)
Page
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.........................................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................20
ITEM 9A. CONTROLS AND PROCEDURES.............................................20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................21
ITEM 11. EXECUTIVE COMPENSATION..............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................21
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................21
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.........................................................22
SIGNATURES...................................................................26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................27
Unless the context otherwise requires, references in this Annual Report on
Form 10-K to "Reader's Digest," "we," "us," and "our" are to The Reader's
Digest Association, Inc. and its subsidiaries.
PART I
ITEM 1. BUSINESS
We are a global leader in publishing and direct marketing, and we create
and deliver products that inform, enrich, entertain and inspire, including
magazines, books, recorded music collections and home videos.
We are a Delaware corporation, originally incorporated in New York in 1926
and then reincorporated in Delaware in 1951. The mailing address of our
principal executive offices is Pleasantville, New York 10570, and our telephone
number is (914) 238-1000.
We are best known for publishing our flagship, Reader's Digest magazine.
DeWitt and Lila Acheson Wallace founded Reader's Digest magazine in 1922. Today,
Reader's Digest has a worldwide circulation of about 19 million and over 85
million readers each month. Reader's Digest is published in 49 editions and 20
languages.
Reportable Segments
Our internal management organization reflects three reportable segments:
Reader's Digest North America, Consumer Business Services and Reader's Digest
International.
Reader's Digest North America
This segment comprises our operations in the United States and Canada
that:
- Publish and market (primarily through direct marketing) Reader's Digest
magazine and several special interest magazines;
- Publish and market (primarily through direct marketing) the magazines and
books of, and operate the complementary businesses of, Reiman Media Group,
Inc., which we acquired on May 20, 2002; and
- Publish and market (primarily through direct marketing) Books and Home
Entertainment products, which include Select Editions, series and general
books, and music and video products related to some or all of the
following affinities: reading, home and health, and entertainment.
Consumer Business Services
This segment comprises our operations that:
- Sell books and gift items by display marketing products on-site through
independent sales representatives at schools and businesses through Books
Are Fun, Ltd. in the United States and Canada;
- Sell our magazines and other publishers' magazines and other products
through youth fundraising campaigns of QSP, Inc. in the United States
and Quality Service Programs Inc. in Canada (QSP Canada);
- Publish and market (primarily through retail and direct marketing
channels, as well as through Books Are Fun, Ltd. and QSP, Inc.) Books and
Home Entertainment products of Young Families and Children's Publishing;
- Promote our financial services marketing alliances in the United States
and Canada; and
- Sold gifts and other merchandise through Gifts.com, Inc. (including Good
Catalog Company), which ceased operations in 2002.
Reader's Digest International
This segment comprises our operations outside of the United States and
Canada that:
- Publish and market (primarily through direct marketing) Books and Home
Entertainment products (described above), Reader's Digest magazine in
numerous editions and languages and several special interest magazines,
and include the results of financial services marketing alliances; and
- Establish and develop the operations of other new business development
initiatives, including entering new markets, developing new products,
acquiring customers through new channels and expanding U.S. businesses
such as Books Are Fun and Young Families into markets overseas.
Financial information about each of our operating segments is included in
Note 14 to our consolidated financial statements, which are incorporated by
reference into this report.
Books and Home Entertainment and Reiman Books
Our Books and Home Entertainment products consist of Reader's Digest
Select Editions, series books, general books, recorded music collections and
series, and home video products and series. We market these products principally
by direct mail through our Reader's Digest North America and Reader's Digest
International reportable segments. Consumer Business Services also sells
Reader's Digest Books and Home Entertainment products by display marketing those
products on-site, at schools and businesses through Books Are Fun and through
the youth fundraising campaigns of QSP, Inc. For more information about how we
market our Books and Home Entertainment products, please refer to the section of
this report captioned "Marketing."
Select Editions
Reader's Digest Select Editions, which were formerly called "Condensed
Books" in many markets, are a continuing series of condensed versions of current
popular fiction. A condensed work reduces the length of an existing text, while
retaining the author's style, integrity and purpose. We publish Select Editions
in 14 languages and sell them in the United States, Canada and 27 other
countries. We generally publish six volumes of Select Editions a year. Some of
our international subsidiaries publish four or five volumes a year.
International editions of Select Editions generally include some material
from the U.S. edition or from other international editions, translated and
edited as appropriate. International editions also include some condensed
versions of locally published works. Each local editorial staff determines
whether existing Select Editions selections are appropriate for their local
market.
Series Books
We market two types of series books--reading series and illustrated
series. These book series may be either open-ended and continuing or
closed-ended, consisting of a limited number of volumes. We publish reading
series books in four languages and sell them in the United States, Canada and 10
other countries. Our reading series include The World's Best Reading, which
consists of full-length editions of classic works of literature. We publish six
volumes of The World's Best Reading each year in the United States, Canada and
two other countries and in two languages. We publish illustrated series, which
are generally closed-ended, in eight languages and sell them in the United
States, Canada and 15 other countries.
General Books
Our general books consist primarily of reference books, cookbooks,
"how-to" and "do-it-yourself" books, and children's books, some of which we
publish in series. We also publish books on subjects such as history, travel,
religion, health, nature, home, computers and puzzles. We publish general books
in 20 languages and sell them in the United States, Canada and 36 other
countries.
New general books are usually original Reader's Digest books, but may also
be books acquired from other publishers. During the development period for an
original Reader's Digest book, we conduct extensive research and prepare an
appropriate marketing strategy for the book.
We sell most copies of a general book through initial bulk promotional
mailings. We also sell substantial additional copies through subsequent
promotions, through catalog sales and through the use of sales inserts in
mailings for other Reader's Digest products. We also distribute our general
books for retail sale in stores through independent distributors and through
Books Are Fun and QSP.
Reiman Books
Reiman leverages its magazine brand equity, reader loyalty and editorial
capability by publishing and marketing books that complement its magazines.
Reiman principally markets annual editions of books created primarily from
magazine content from the prior year. In fiscal 2004, Reiman published and sold
4.3 million books. Reiman has nine established annual book programs that are
marketed on a continuity basis, with customers agreeing to receive future
editions of the books unless they respond to an annual prepublication notice. In
fiscal 2004, Reiman launched three additional annual book programs. Annual books
constitute about 90% of unit volume, of which about 63% are renewals. Reiman
markets most of its books through solo direct mail in which Reiman sends a
promotion featuring one book to names from its customer database and outside
lists. Reiman sells its books by offering a free preview period during which the
customer agrees to examine the book before purchasing it. If they do not wish to
purchase the book, they can return it without further obligation.
Music
Our music collections, released on compact discs and cassettes in the
United States and 30 other countries, span a broad range of musical styles,
ranging from classical to pop, and from local folk to "relaxation" music. We
offer both international and local repertoires, which reflect our customers'
tastes and expectations. In most markets, we also sell music series in various
musical genres.
We license existing recordings from major record companies and sponsor our
own recordings with the world's most renowned orchestras and with international
and local artists. We also continue to acquire rights to master recordings. Our
music vault consists of approximately 10,000 selections, which we use in our
music collections around the world. We have digitized a major part of these
selections for online access. We also license our selections to third parties
for retail sales or for movie synchronization.
We are a member of the Recording Industry Association of America in the
United States, and we have been recognized with 51 gold, platinum and
multi-platinum certificates. In several other countries, we are a member of the
International Federation of the Phonographic Industry.
Video
Our single sales and series home video products reflect the core interests
of our global customers--travel, natural history, history and children's
animated programs. We market a range of video products through direct response
channels in the United States and 24 other countries. In some countries, we also
sell our home video products through retail outlets.
We are working with award-winning production companies in the United
States, Europe and Australia to create original programs with very high
editorial and production standards--programs that are intended to stand out in a
competitive marketplace. Most of our original documentary programs are also
being licensed to broadcasters worldwide. We are creating an archive of valuable
footage for potential use in future productions and are creating multi-lingual
DVDs of our programs for our customers in markets worldwide.
Production and Fulfillment
We hire independent contractors to print and bind the various editions of
Select Editions. We have an exclusive agreement through 2005 with a printing
company for printing the English-language Select Editions distributed in the
United States and Canada. The majority of all other U.S. book products produced
by Reader's Digest are printed by several independent contractors. We usually
hire independent contractors to produce and manufacture our music and video
products.
Paper is the principal raw material necessary for production of our Select
Editions, series books and general books. Our exclusive agreement with a major
supplier to supply paper for Select Editions globally expires in December 2006.
We purchase paper for series books and general books for each printing. We
believe that our existing contractual arrangements and other available sources
of paper provide us with an adequate supply of paper at competitive prices. We
use independent contractors in arranging for us to acquire some of the necessary
raw materials to manufacture music and video products.
We hire independent contractors to handle our fulfillment, warehousing,
customer service and payment processing. We have an agreement with a single
independent contractor to handle order and payment processing for most of our
U.S. Books and Home Entertainment business. That agreement expires in 2006. The
printers or suppliers of our products generally package and deliver those
products directly to the postal service. For information about postal rates and
postal services, please refer to the section of this report captioned
"Marketing."
Our European operations use several manufacturing companies for the
production of books. The majority of our Home Entertainment products are
produced throughout Europe by three major manufacturers.
It is our direct marketing policy that a customer may return any book or
home entertainment product to us, either before or after payment, and receive a
refund of amounts paid. We believe that our returned goods policy is essential
to our reputation and that it elicits a greater number of orders. Many of those
orders are not returned because a high number of consumers are satisfied with
our products.
Sales of books and home entertainment products are seasonal. In the direct
marketing industry as a whole, more consumers respond in the fall and winter
months than during the rest of the year. Also, sales are typically higher during
the pre-Christmas season than in spring and summer.
Reader's Digest Magazine, Special Interest Magazines and Reiman Magazines
Reader's Digest magazine is a monthly, general interest magazine
consisting of original articles, previously published articles in condensed
form, and a condensed version of a previously published or soon-to-be published
full-length book. Reader's Digest also contains monthly humor columns, such as
"Laughter, The Best Medicine(R)," "Life in These United States(R)," and "All In
A Day's Work(R)," and other regular features, including "Quotable Quotes(R),"
"Word Power(R)," "Only in America," "Everyday Heroes," "That's Outrageous!(R),"
and "RD Living." The international editions of Reader's Digest include similar
features.
We publish Reader's Digest in the United States and Canada. Globally,
Reader's Digest is published in 49 editions and 20 languages. We license
independent contractors to publish Reader's Digest in India, Italy, Korea,
Denmark, South Africa and Indonesia. These magazines are sold primarily through
direct marketing. In addition, we sell Reader's Digest and other publishers'
magazines and products in the United States and in Canada through youth
fundraising campaigns of our subsidiaries, QSP, Inc. in the United States and
Quality Service Programs, Inc. in Canada.
We publish Reader's Digest in several editions in the United States,
including an English-language edition, a Spanish-language edition entitled
Selecciones, and Reader's Digest Large Print for Easier Reading. We license
independent contractors to publish a braille edition and a recorded edition in
the United States.
Reiman publishes 13 bi-monthly magazines in the United States and Canada,
including Backyard Living, which was launched in the third quarter of fiscal
2004.
We publish several special interest magazines that we believe are
consistent with our image, editorial philosophy and market expertise. In the
United States, we publish The Family Handyman(R) and American Woodworker(R). The
Family Handyman provides instructions and guidance for "do-it-yourself" home
improvement projects. American Woodworker(R) provides information, instruction
and guidance for professional and serious amateur woodworkers.
Internationally, we publish Moneywise, a magazine devoted to helping
families manage their finances, in the United Kingdom. We also publish Receptar,
a leading Czech do-it-yourself and gardening monthly magazine, Krizovky, a Czech
entertainment puzzle magazine and The Family Handyman in Australia. In the
second quarter of fiscal 2004, we launched Our Canada, a new bi-monthly general
interest magazine with principally reader-contributed content.
We promote our special interest magazines to our Reader's Digest customer
list. We also promote other products to each magazine's customer list, as
appropriate. This strategy helps us to expand the customer base for all of our
products. Reiman markets its magazines principally through direct mail and
cross-promotion of titles within its magazine group. Reiman markets products to
its customer database of approximately 40 million current and former customers,
combined with selective rental of outside customer lists. Through reader
involvement, Reiman seeks to identify and address customer interest in existing
and new publications. New magazine ideas and titles, also created using
reader-submitted editorial content are test-marketed to subscribers of existing
magazines and selected outside lists. This has enabled Reiman to more accurately
measure the potential for new products and launch new magazines at relatively
low start-up costs. Reiman does not use cash-prize sweepstakes in connection
with its marketing.
We also publish other limited-edition special interest publications in the
United States and internationally. These include a special homeowners' edition
of The Family Handyman that is used by real estate brokers in the United States
and special holiday-themed editions of Reader's Digest in Mexico. In addition,
we publish a series of monthly check-out counter magazines branded as RD
Specials that consist primarily of repurposed content from our books and
magazines relating to the topics of home, health and food.
Circulation and Advertising
The following table shows circulation and advertising information for our
portfolio of magazines in our reportable segments (this includes both Reader's
Digest magazine and our special interest magazines):
Advertising
Pages
Reportable Segment Circulation Carried
Reader's Digest North America
Reader's Digest magazine - U.S. and Canada(1) .... 11,238,050 2,867
Reiman magazines(2) .............................. 11,465,000 --
Special interest magazines ....................... 2,502,557 1,571
Reader's Digest International
Reader's Digest magazine(1) ...................... 8,037,004 7,828
Special interest magazines ....................... 235,035 720
(1) In Canada and international markets, Reader's Digest magazine detailed
in these captions is published in multiple editions and languages.
Circulation for these editions constitutes a rate base.
(2) Reiman's magazines do not have a guaranteed circulation rate base and
are not audited by the Audit Bureau of Circulation. The amount indicated
in the table above represents their average circulation for the year for
all of their publications.
Approximately 70% of total U.S. fiscal 2004 and fiscal 2003 revenues for
Reader's Digest were generated by circulation revenues and 30% by advertising
revenues. Circulation levels of each of Reiman's titles fluctuate throughout the
year. The overall circulation level is managed in total to maximize the
profitability of the entire portfolio, which may cause year-over-year increases
or decreases in the average circulation for individual titles. Reiman's
magazines do not accept on-page advertising and rely on subscriptions for almost
all revenue. "Savings Packs" of coupons are poly-bagged with the food magazines.
We have determined that the U.S. edition of Reader's Digest has the
largest paid circulation of any U.S. magazine, other than those automatically
distributed to all members of the American Association of Retired Persons. Our
determination is based on the most recent audit report issued by the Audit
Bureau of Circulation, Inc., a not-for-profit organization that monitors
circulation in the United States and Canada. Approximately 95% of the U.S. paid
circulation of Reader's Digest consists of subscriptions. The balance consists
of single copy sales at newsstands and in supermarkets and similar retail
establishments. We sell our special interest magazines by subscription and at
newsstands.
We maintain the circulation rate base for Reader's Digest through annual
subscription renewals and new subscriptions. In fiscal 2004, we sold
approximately 3.6 million new subscriptions in the United States and
approximately 1.8 million new international Reader's Digest subscriptions to
maintain the current circulation rate base. We sell new subscriptions in the
United States through a variety of direct response marketing techniques, and we
sell new subscriptions in international markets primarily by direct mail. We
sell the largest percentage of subscriptions between July and January of each
fiscal year. Subscribers to Reader's Digest may cancel their subscriptions at
any time and we will refund the unused balance of the subscription price. For
additional information regarding direct marketing of subscriptions, please refer
to the section of this report captioned "Marketing."
We believe that many international editions of Reader's Digest have the
largest paid circulation for monthly magazines both in the individual countries
and in the regions in which they are published. For most international editions
of Reader's Digest, subscriptions comprise approximately 90% of circulation. The
balance is attributable to newsstand and other retail sales. Approximately 80%
of total international fiscal 2004 revenues for Reader's Digest were generated
by circulation revenues and 20% by advertising revenues.
The U.S. editions and the larger international editions of Reader's Digest
offer advertisers different regional editions, major market editions and
demographic editions. These editions, which usually contain the same editorial
material, permit advertisers to concentrate their advertising in specific
markets or to target specific audiences. Reader's Digest sells advertising
principally through an internal advertising sales force. We sell advertisements
in multiple Reader's Digest editions worldwide and offer discounts for placing
advertisements in more than one edition.
Reader's Digest and Reiman Magazine Editorial
Reader's Digest is a reader-driven, family magazine. Its editorial content
is, therefore, crucial to the loyal subscriber base that constitutes the
cornerstone of our operations. The editorial mission of Reader's Digest is to
inform, enrich, entertain and inspire. The articles, book section and features
included in Reader's Digest cover a broad range of contemporary issues and
reflect an awareness of traditional values.
A substantial portion of the selections in Reader's Digest are original
articles written by freelance writers or staff writers. The balance is selected
from existing published sources and is condensed or excerpted by Reader's Digest
editors. We employ a professional staff to research and fact-check all published
pieces.
The international editions of Reader's Digest contain content and follow
editorial procedures similar to the U.S. editions. Each international edition
has a local editorial staff responsible for the editorial content of the
edition. The mix of locally generated editorial material, material taken from
the U.S. edition and material taken from other international editions varies
greatly among editions. In general, our larger international editions, for
example, those in France, Germany, Mexico and the United Kingdom, carry more
original or locally adapted material than do smaller editions.
Reiman's editorial philosophy includes the following core principles: (1)
concentration on positive aspects of people and their lifestyles; (2)
encouragement of reader involvement; (3) maintenance of low editorial costs; and
(4) emphasis on product quality. As a result, about 85-90% of the editorial
content of Reiman's magazines is contributed by readers.
Internet Initiatives
We have created our rd.com website to extend the experience of reading
Reader's Digest through audio, graphic, text and video enhancements, interactive
discussions and reader involvement, and additional content relating to Reader's
Digest. We are also utilizing rd.com to market our products through e-mail and
the Internet, as well as to communicate with and service our customers online.
For more information about rd.com, please refer to the section of this report
captioned "Marketing."
Reiman's Complementary Businesses
Reiman operates four businesses that complement its core magazine and book
publishing operations:
Country Store: sells a broad selection of products, including Reiman
books, calendars, collectors' items, memorabilia, small kitchen
appliances, gardening tools, and other country lifestyle products, through
a catalog that is distributed to those who request and to those who have
purchased in the past.
World Wide Country Tours: offers motorcoach and riverbarge tours to
experience the lives of people in various parts of the United States and
the world. World Wide Country Tours utilizes direct marketing through
Reiman magazines and its own stand-alone brochures to attract potential
travelers.
Reiman Advertising & Promotion: offers to subscribers Savings Packs
of coupons and promotional advertising in conjunction with recipes and
other information. Its customers are primarily food and consumer product
companies, which purchase advertising space in the Savings Packs.
Homemaker Schools: provides cooking school demonstrations by
professional home economists in small- and medium-size communities
throughout the United States. Revenues are generated from fees paid by
local news media that sponsor individual shows and from portions of fees
that Reiman Advertising & Promotion receives from national sponsors of the
Homemaker Schools.
Custom Publishing
In January 2002, we signed a five-year agreement with McMurry Publishing,
Inc. and The Ritz-Carlton Hotel Company, LLC to publish the in-room magazine for
Ritz-Carlton hotels, which is distributed in more than 50 Ritz-Carlton
properties worldwide.
Production and Fulfillment
We hire independent contractors to print all editions of Reader's Digest
and our special interest magazines. We have an exclusive contract with a U.S.
printer to print the U.S. editions of Reader's Digest. The contract is scheduled
to expire in December 2010. We are currently negotiating contracts with two
printers to print our Reiman magazines. These magazines are currently being
printed by those printers under substantially the terms of the proposed
contracts. We believe that, generally, there is an adequate supply of
alternative printing services available to us at competitive prices should the
need arise. Nevertheless, significant short-term disruption could occur. We have
contingency plans to minimize recovery time should our current contract printers
be unable to meet our production requirements.
Lightweight coated and uncoated paper are the principal raw materials used
in the production of Reader's Digest and special interest magazines. Our global
contract for supply of paper for Reader's Digest magazine expires in June 2005.
Our contract for the paper requirements of Reiman magazines also expires in June
2005. We believe those supply contracts provide an adequate supply of paper for
our needs and that, in any event, alternative sources are available at
competitive prices. A variety of factors affect paper prices, including demand,
capacity, pulp supply and general economic conditions.
We have agreements with a single independent contractor to handle order
and payment processing for Reader's Digest, the U.S. special interest magazines
and the Reiman magazines. The agreement for Reader's Digest expires in 2006 and
the agreement for the Reiman magazines and the U.S. special interest magazines
expires in 2005. The same contractor also handles these matters for most of our
U.S. Books and Home Entertainment operations.
We deliver subscription copies of the U.S. edition of Reader's Digest, the
special interest magazines and the Reiman magazines through the United States
Postal Service as "periodicals" class mail. Subscription copies of international
editions of Reader's Digest are delivered through the postal service in each
country of publication. For additional information about postal rates and
service, please refer to the section of this report captioned "Marketing."
In the United States, a distribution network handles newsstand and other
retail distribution. We have also contracted in each country with a newsstand
magazine distributor for the distribution of Reader's Digest.
In Europe, we have several multi-country agreements with independent
contractors as well as in-country independent contractors to handle our
fulfillment, warehousing, customer service, and payment and order processing. We
have two primary printing companies for printing Reader's Digest magazine in
Europe.
Consumer Business Services
Books Are Fun, Ltd.
Our Books Are Fun, Ltd. subsidiary sells premium-quality books and gift
items, including Reader's Digest books and home entertainment products, at
discount prices by display marketing those products on-site at schools and
businesses in all 50 states of the United States and across Canada using book
fairs and other displays. Book categories sold by Books Are Fun include
best-selling novels, cookbooks, children's books and education, sports, hobby,
nature, travel and self-help titles. Non-book categories include music, videos
and gift items, such as jewelry and art. Books Are Fun's products are sold by
over 1,000 independent sales representatives, who service approximately 70,000
schools, 15,000 large corporations and institutions, 14,000 daycare centers and
50,000 small businesses. Since many individuals purchase these products for gift
giving, Books Are Fun's sales cycle is largely seasonal, reflecting substantial
volume in the second quarter of our fiscal year.
Books Are Fun purchases book titles, gifts and other products from over
250 publishers and vendors worldwide. Many of its top titles are purchased in
quantities exceeding 100,000 copies on a non-returnable basis, affording Books
Are Fun substantial purchasing power. All products are test-marketed by the
purchase of a modest number of units in advance of purchasing larger quantities.
Books Are Fun uses an extensive network of independent public warehousing
facilities and carriers to store and transport products.
The Books Are Fun business model is being rolled out in a number of
international markets. Commercial operations are under way in France, Mexico and
Spain, and the concept is in market testing and early development phases in
Italy and Germany.
QSP
QSP markets and sells subscriptions to Reader's Digest, the Reiman
magazines, the special interest magazines and other publishers' magazines in the
United States, as well as music and video products, books, food and gifts. QSP
works directly with schools and youth groups on fundraising campaigns in which
participants sell those products. QSP derives its revenues through services
rendered in connection with fundraising events. A substantial majority of QSP's
sales occurs during the first half of our fiscal year, which coincides with the
fall school semester. QSP currently has approximately 460 sales representatives.
In May 2000, QSP entered into a licensing agreement with World's Finest
Chocolate, Inc. that provides for QSP's commitment to purchase annual minimum
amounts of World's Finest Chocolate products and the exclusive right to sell
those products for fundraising purposes through 2010. In September 2002, QSP
entered into an amendment to the licensing agreement. The amendment extended the
term of the initial agreement by ten years, reduced the annual minimum purchase
requirements, adjusted pricing favorably to QSP and permits QSP to sell World's
Finest Chocolate products through channels other than fundraising under
specified circumstances.
Quality Service Programs, Inc., our Canadian subsidiary, conducts
operations substantially similar to those conducted by QSP in the United
States.
In the United States, operations at QSP, Inc. are supplemented by
eFundraising.com, which uses the Internet to enhance fundraising activities.
eFundraising.com uses proprietary software that enables e-mail messages to be
sent on behalf of students about their school or youth group's fundraising
activities to family and friends. The e-mail directs the recipients to the
school or youth group's website, where they may purchase magazine subscriptions
and a variety of gift and food products. eFundraising.com also provides
fundraising products, mainly scratch cards and chocolate, to organizations
conducting fundraisers.
Several hundred other publishers make magazine subscriptions available to
QSP at competitive discounted prices. QSP also obtains music products from a
large music publisher. A substantial portion of QSP's chocolate food products
are obtained from World's Finest Chocolate. QSP engages an independent
contractor to process gift, food, magazine, music and book orders.
Reader's Digest Trade Publishing
This division sells books and products for both children and adults and is
comprised of two divisions: Reader's Digest Children's Publishing and Adult
Trade Publishing. Reader's Digest Children's Publishing produces books, games
and other products under the Reader's Digest Children's Publishing imprint for
children up to age 12. Its products are sold through retail channels as well as
through Reader's Digest (including display marketing and catalogs) and other
channels, including the Internet. The products represent such popular brands as
Barbie, Disney (classic Disney and Pixar characters), Nickelodeon, Hasbro,
Fisher-Price, and NASCAR. The book products have been translated into 29
languages and are marketed in the United States, Canada, Europe, South America,
Australia and Asia.
Our Adult Trade Publishing group originates books in many illustrated
reference categories including, gardening, crafts, do-it-yourself, history, and
family reference. These books are sold through retail channels, catalogs, book
clubs, Books Are Fun, QSP, on TV, and through Reader's Digest's domestic and
international divisions.
Reader's Digest Young Families sells products for children up to age 8,
primarily through direct mail and telemarketing. The division's products include
interactive books, such as Sesame Street ABCs, and videos, such as The Country
Mouse and the City Mouse. Young Families sells its products principally in the
United States.
Financial Services Marketing Alliances
Insurance. Reader's Digest and its subsidiaries have formed alliances with
several leading insurance companies under which the insurers market a variety of
insurance products to our customers in the United States and other countries.
Our alliance partners include American International Group, Inc., GE Financial
Assurance Company, Genworth, Physicians Mutual Insurance Company, Liberty
Mutual, PacifiCare Health Systems, Allianz, AXA and Manulife Financial. The
products, which include life, personal accident, auto, health, homeowners,
long-term care insurance, and hospital indemnity and hospital cash products, are
marketed and sold through a combination of direct mail, telemarketing,
advertising in our magazines, the Internet and other marketing channels. The
insurer underwrites and administers the products, provides customer and claims
services, and covers marketing costs. Reader's Digest provides expertise in
research and test design, database management and targeting, and promotion
creation and production.
Credit Products. Reader's Digest pursues alliances to provide a range of
credit products to our customer base. In August 1999, we signed an agreement
with Bank One Corporation to market a Reader's Digest-branded credit card to our
customers in the United States. Under the agreement, Bank One launched a
Reader's Digest Platinum MasterCard in April 2000. Subsequently, Bank One has
launched credit cards using The Family Handyman brand and Reiman's Taste of Home
and Birds & Blooms brands. Bank One administers all of the credit cards.
Internationally, we are partnering to market loan products with GE Capital
Assurance Company and its subsidiaries in France and MBNA in the United Kingdom.
Gifts.com and Good Catalog Company
Gifts.com, Inc. comprised the Good Catalog Company division, a catalog
marketer of home, garden and gift-related products, and the gifts.com
division, an online and catalog gift shopping service. We owned an 80.1%
interest in Gifts.com, Inc. Operations at Gifts.com, Inc. ceased in December
2002.
Marketing
We sell magazine subscriptions, Select Editions, series books, general
books, music and video products, and certain other products principally through
direct mail solicitations to households on our customer lists, as well as to
customer lists rented or purchased from third parties. Our books and home
entertainment products and product offers and many international magazine
subscription offers are often accompanied by sweepstakes entries and, in some
cases, premium merchandise offers.
As part of our growth strategy and our strategy to decrease our reliance
on sweepstakes marketing, we are increasing distribution of our products through
direct-response channels other than direct mail. These other distribution
channels include direct-response television, package inserts, telemarketing, the
Internet, display marketing and other direct sales, and catalogs. Reader's
Digest magazine obtains the vast majority of its new subscribers in the United
States from non-sweepstakes sources. Moreover, with the acquisition of our
Reiman operations, we have significantly reduced our reliance on large cash
prize sweepstakes marketing throughout the remainder of our direct marketing
businesses.
We are adapting the editorial content and the marketing methods of our
magazines and books and home entertainment products to new technologies. Our
website--rd.com--links to our many international and domestic web sites, and our
multiple online stores, for shopping and information about our products. In
fiscal 2004, rd.com, including changeone.com, had over 14.5 million visitors
from around the world. We are using rd.com and our local international websites
to market subscriptions to our products. We are also utilizing electronic direct
marketing to offer magazine subscriptions through one-click e-mail.
To promote the sale of our books and home entertainment products in the
United States, we usually offer a sweepstakes in our promotional mailings.
Prizes totaled about $3.0 million for the 2004 edition of the sweepstakes.
Generally, each of our international subsidiaries sponsors its own sweepstakes.
The mechanics of the sweepstakes vary from jurisdiction to jurisdiction,
depending upon local law.
From time to time, we are involved in legal, regulatory and investigative
proceedings concerning our sweepstakes and other direct marketing practices.
Also from time to time jurisdictions in which we do business consider more
restrictive laws or regulations governing sweepstakes or direct marketing. In
February 2004, we received a letter from the U.S. Federal Trade Commission
("FTC") inquiring whether our business practices comply with regulations
regarding telemarketing and the National Do Not Call Registry, as well as
regulations regarding so-called negative option plans and unordered merchandise.
The FTC letter states that the inquiry follows consumer complaints to the FTC.
The letter makes no specific assertion of any wrongdoing by us. Our marketing
practices are reviewed by counsel in advance and are designed to comply with
applicable regulations. In August 2004, we were advised by the FTC that the FTC
had officially closed its inquiry. Although some of these proceedings may have
negatively affected our direct marketing business, we do not believe that these
proceedings or proposed laws and regulations will have a material adverse effect
on our direct marketing business.
In 2001, we entered into a voluntary comprehensive agreement with
attorneys general for 32 states (and subsequently with three additional states)
and the District of Columbia regarding standards for direct mail sweepstakes
promotions. Pursuant to the agreement, we are promoting consumer education and
have adopted standards for promotions in the United States similar to those
agreed to by other direct marketing and publishing companies.
We are subject to postal rate increases, which affect our product
deliveries, promotional mailings and billings. Postage is one of the largest
expenses in our promotional and billing activities. In the past, we have had
sufficient advance notice of most increases in postal rates so that we could
factor the higher rates into our pricing strategies and operating plans. Higher
postal rates or other delivery charges usually increase the total cost to the
customer, which may have a negative effect on sales. As a result, we may
strategically determine the extent, if any, to which we will pass these cost
increases on to our customers.
We rely on postal delivery service for timely delivery of most of our
products and promotional mailings. In the United States and most international
markets, delivery service is generally satisfactory. Some international
jurisdictions, however, experience periodic work stoppages in postal delivery
service or less than adequate postal efficiency.
In some states in the United States and in some international
jurisdictions, some or all of our products are subject to sales tax or value
added tax. Taxes, like delivery costs, are generally stated separately on bills,
where permitted by applicable law. Higher taxes increase the total cost to the
customer, which may have a negative effect on sales. In jurisdictions where
applicable tax must be included in the purchase price, we may be unable to fully
recover from customers the amount of any tax increase or new tax.
Information Technology and Customer Database Enhancement
The size and quality of our computerized customer database of current and
prospective customers in each country where we operate contributes significantly
to our business. We are constantly striving to improve our customer databases.
We believe that our U.S. database of over 70 million households--over half the
total number of households in the country--is one of the largest direct response
databases in the United States. Our international databases include a total of
approximately 49 million households.
We continue to make significant investments in our database management and
related information technology to improve our operating efficiencies, to
increase the level of service we provide to our customer base and to facilitate
globalization of our operations.
Some international jurisdictions, particularly in Europe, have data
protection laws or regulations prohibiting or limiting the exchange of
information of the type that we maintain. Some jurisdictions also prohibit the
retention of information, other than certain basic facts, about noncurrent
customers. Although these regulations may hinder our ability to collect, retain
and use customer information, we believe that current laws and regulations do
not prevent us from engaging in activities necessary to operate our current
businesses.
Competition and Trademarks
Although Reader's Digest is a unique and well-established institution in
the magazine publishing industry, it competes with other magazines for
subscribers and with magazines and all other media, including television, radio
and the Internet, for advertising. We believe that the extensive and
longstanding international operations of Reader's Digest provide us with a
significant advantage over competitors seeking to establish a global
publication.
We own numerous trademarks that we use in our businesses worldwide. Two of
our most important trademarks are "Reader's Digest" and the "Pegasus" logo. In
addition, our significant trademarks include "QSP", "Books Are Fun" and the
names of many of our magazines, features and other products. We believe that the
name recognition, reputation and image that we have developed in each of our
markets significantly enhance customer response to our direct marketing sales
promotions. For these reasons, trademarks are important to our business, and we
aggressively defend our trademarks.
We believe that our company names, image and reputation, as well as the
quality of our customer databases, provide a significant competitive advantage
over many other direct marketers. However, our Books and Home Entertainment
businesses and Books Are Fun compete with companies selling similar products at
retail as well as by direct marketing through various channels, including
display marketing and the Internet. Because tests show that consumers' responses
to direct marketing promotions can be adversely affected by the overall volume
of direct marketing promotions, we also compete with all other direct marketers,
regardless of whether their products are similar to our products. Our Books and
Home Entertainment businesses compete principally on the basis of direct
marketing customer service, product popularity and price.
Reader's Digest magazine and our special interest magazines compete with
other magazines of similar respective genres for readers and advertising and our
Reiman magazines compete for readers in their respective genres. QSP competes
with other sellers of products similar to those sold by QSP, whether through
fundraising services, direct marketing or retail. Nearly all of our products are
in competition with other products and services that compete for a potential
purchaser's leisure activity time and disposable income.
Employees
As of June 30, 2004, we employed about 4,300 people worldwide. We employed
about 2,400 in the United States and about 1,900 in our international
subsidiaries. Our relationship with our employees is generally satisfactory.
Executive Officers
The following is information about our executive officers.
Name and Age Positions With Reader's Digest and Recent
Business Experience
Thomas O. Ryder (60) Mr. Ryder has been Chairman of the Board and Chief
Executive Officer and a Director of Reader's
Digest since he joined Reader's Digest in April
1998.
Michael A. Brennan (57) Mr. Brennan has been President, Latin
America and Asia-Pacific and a Senior Vice
President of Reader's Digest since March 2002.
He was Vice President and General Manager,
Developing Markets before March 2002.
Mr. Brennan joined Reader's Digest in January
1990.
Name and Age Positions With Reader's Digest and Recent
Business Experience
Michael A. Brizel (47) Mr. Brizel has been Senior Vice President
and General Counsel of Reader's Digest
since July 2002. Before July 2002, he was
Vice President and General Counsel of
Reader's Digest. Mr. Brizel joined
Reader's Digest in July 1989.
Richard E. Clark (40) Mr. Clark has been Vice President,
Investor Relations and Global
Communications, since March 2002, having
served as Vice President, Investor
Relations, since he joined Reader's Digest
in March 2000. Before March 2000, Mr.
Clark was Vice President, Finance and
Investor Relations, of Viacom
International Incorporated.
Giovanni di Vaio (50) Mr. di Vaio became Vice President, Human
Resources International of Reader's Digest
and a chief human resources officer with
responsibility for international
operations, as well as global compensation
and benefits, leadership and management
development, in January 2004. Prior to
January 2004, he was Vice President,
International Human Resources. Mr. di
Vaio joined Reader's Digest in May 1999.
Clifford H.R. DuPree (53) Mr. DuPree has been Vice President,
Corporate Secretary and Associate General
Counsel of Reader's Digest since July
1998. He joined Reader's Digest in May 1992.
Thomas D. Gardner (46) Mr. Gardner has been President, Reader's
Digest International, since February 2003
and has been a Senior Vice President of
Reader's Digest since July 1998. He was
also President, North America Books and
Home Entertainment, from January 2001 to
February 2003 and was Senior Vice
President, U.S. New Business Development,
of Reader's Digest prior to January 2001.
Mr. Gardner joined Reader's Digest in
February 1992.
Michael S. Geltzeiler (45) Mr. Geltzeiler joined Reader's Digest as
Senior Vice President and Chief Financial
Officer in September 2001. Mr. Geltzeiler was
previously Senior Vice President and Chief
Financial Officer of ACNielsen Corporation
(market research, information and analysis),
a subsidiary of VNU NV, from March 2001 to
September 2001 and Senior Vice President and
Controller before March 2001.
Francoise Hanonik (44) Ms. Hanonik has been Vice President, Human
Resources North America of Reader's Digest
and a chief human resources officer
with responsibility for North American operations,
as well as global talent review and organization,
since January 2004. From January 2000 to January
2004, she was Vice President, Human Resources.
Prior to joining Reader's Digest in January 2000,
she was Vice President, Human Resources of
ACNielsen Corporation.
Albert L. Perruzza (57) Mr. Perruzza has been Senior Vice President, Global
Operations and Business Redesign, since February
2002. He was Senior Vice President, Global
Operations, of Reader's Digest before February 2002
and was Vice President, Database Management
Operations, before October 1999. Mr. Perruzza
joined Reader's Digest in 1972.
Name and Age Positions With Reader's Digest and Recent
Business Experience
Robert E. Raymond (47) Mr. Raymond has been President, Consumer
Business Services, and a Senior Vice
President of Reader's Digest since
February 2003. He was Senior Vice
President, Strategic Acquisitions and
Alliances, of Reader's Digest before
February 2003. Mr. Raymond joined
Reader's Digest in 1993.
Gary S. Rich (43) Mr. Rich has been President, Global QSP,
and a Senior Vice President since February 2002.
He was Senior Vice President, Human Resources of
Reader's Digest from August 1998, when he joined
Reader's Digest, to February 2002.
Eric W. Schrier (52) Mr. Schrier has been President, Reader's
Digest North America, since February
2003. He has also been Senior Vice
President and Global Editor-in-Chief since
joining Reader's Digest in January 2000
and served as President, U.S. Magazines,
from February 2002 to February 2003.
Before January 2000, he was President and
Chief Executive Officer of Time Inc Health
(health publishing).
Jeffrey S. Spar (39) Mr. Spar has been Senior Vice President and
Chief Information Officer of Reader's Digest since
July 2002 and was Vice President and Chief
Information Officer from November 1998, when he
joined Reader's Digest, to July 2002.
Our By-Laws state that officers serve at the pleasure of our board of
directors. We elect our officers annually and they serve until their successors
are elected and qualified.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements and other documents with the U.S.
Securities and Exchange Commission (the "SEC"). The public may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
We make available free of charge on or through our Internet
website--http://www.rd.com--our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Copies of the following Reader's Digest documents are also available on
our website.
Corporate Governance Guidelines
Audit Committee Charter
Compensation and Nominating Committee Charter
Corporate Governance Committee Charter
Finance Committee Charter
Ethical, Legal and Business Conduct Policies
In addition, we are required to post on our website any waiver of our
Ethical, Legal and Business Conduct Policies for executive officers and
Directors.
Information contained on our website and the SEC's website is not a part
of this report.
Copies of any of the information referred to above are also available in
print to any stockholder who requests. Requests for printed or electronic
copies should be addressed to The Reader's Digest Association, Inc.,
Attention: Investor Relations, Reader's Digest Road, Pleasantville, NY
10570-7000 or via e-mail to: carlos_jimenez@rd.com.
ITEM 2. PROPERTIES
Our headquarters and principal operating facility is situated on
approximately 114 acres in Westchester County, New York. We acquired much of
this property in 1940. The table below shows our headquarters and other
properties that we own or lease.
Location Area (sq. ft.) Principal uses
Westchester County, NY 694,000 owned Executive, administrative, editorial
and operational offices; data
processing; other facilities
Greendale, WI 164,800 owned Executive, administrative,
editorial and operational offices;
data processing; other facilities
Fairfield, IA 105,393 owned Executive, administrative and
operational offices; data
processing; other facilities
New York, NY 99,200 leased Editorial offices; advertising
sales offices
Various U.S. cities 58,366 leased Editorial offices, advertising
sales offices; other facilities
International 402,625 owned Executive, administrative and
402,661 leased editorial offices; warehouse
facilities
The real properties that we own in Westchester County, New York,
Greendale, Wisconsin and Fairfield, Iowa are subject to mortgages securing our
borrowings under our $385.0 million Amended and Restated Term Loan Agreement,
dated as of May 24, 2004, and our $192.5 million Amended and Restated Five-Year
Revolving Credit and Advance Facility Agreement, dated as of May 20, 2002, as
amended.
In January 2004, we announced our intention to pursue the sale and partial
leaseback of our headquarters in Westchester County, New York.
We believe that our current facilities, together with expansions and
upgrades of facilities presently underway or planned, are adequate to meet our
present and reasonably foreseeable needs. We also believe that adequate space
will be available to replace any leased facilities whose leases expire in the
near future.
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are defendants in various lawsuits and claims
arising in the regular course of business. Based on the opinions of management
and counsel for these matters, we believe that recoveries, if any, by plaintiffs
and claimants would not materially affect our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended June 30, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The information contained under the caption "Selected Quarterly Financial
Data and Dividend and Market Information" in Exhibit 13 to this report is
incorporated into this Item by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected Quarterly Financial
Data and Dividend and Market Information" and "Selected Financial Data" in
Exhibit 13 to this report is incorporated into this Item by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information contained under the caption "Management's Discussion and
Analysis" in Exhibit 13 to this report is incorporated into this Item by
reference.
This report contains or incorporates by reference "forward-looking
statements" within the meaning of the U.S. federal securities laws.
Forward-looking statements include any statements that address future results or
occurrences. These forward-looking statements inherently involve risks and
uncertainties that could cause actual future results and occurrences to differ
materially from the forward-looking statements. Some of these risks and
uncertainties include factors relating to:
- - the effects of potentially more restrictive privacy and other
governmental regulation relating to our marketing methods;
- - the effects of modified and varied promotions;
- - our ability to identify customer trends;
- - our ability to continue to create and acquire a broadly appealing mix of
new products;
- - our ability to attract and retain new and younger magazine subscribers
and product customers in view of the maturing of an important portion of
our customer base;
- - our ability to attract and retain subscribers and customers in an
economically efficient manner;
- - the effects of selective adjustments in pricing;
- - our ability to expand and more effectively utilize our customer database;
- - our ability to expand into new international markets and to introduce
new product lines into new and existing markets;
- - our ability to expand into new channels of distribution;
- - our ability to negotiate and implement productive acquisitions,
strategic alliances and joint ventures;
- - our ability to successfully integrate newly acquired and newly formed
businesses (including the Reiman business);
- - the strength of relationships of newly acquired and newly formed
businesses (including the Reiman business) with their employees, suppliers
and customers;
- - the accuracy of the basis of forecasts relating to newly acquired and
newly formed businesses (including the Reiman business);
- - our ability to achieve financial savings related to restructuring
programs;
- - our ability to contain and reduce costs, especially through global
efficiencies;
- - the cost and effectiveness of our re-engineering of business processes
and operations;
- - the accuracy of our management's assessment of the current status of our
business;
- - the evolution of our organizational and structural capabilities;
- - our ability to respond to competitive pressures within and outside the
direct marketing and direct sales industries, including the Internet;
- - our ability to recruit, train and retain effective sales personnel;
- - the effects of worldwide paper and postage costs;
- - the effects of possible postal disruptions on deliveries of promotions,
products and payments;
- - the effects of foreign currency fluctuations;
- - the accuracy of our management's assessment of the future effective tax
rate and the effects of initiatives to reduce the rate;
- - the adequacy of our financial resources;
- - the effects of the terms of, and increased leverage resulting from
additional borrowings under, our credit facilities;
- - the effects of interest rate fluctuations;
- - the effects of downgrades of our credit ratings;
- - the effects of economic and political changes in the markets where we
compete;
- - the effects of weather in limiting access to consumers; and
- - the economic effects of terrorist activity and related events, especially
those limiting access to consumers and otherwise affecting the direct
marketing and direct sales industries.
We do not undertake to update any forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption "Management's Discussion and
Analysis" in the section entitled "Currency Risk Management" in Exhibit 13 to
this report is incorporated into this Item by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, together with the report of KPMG
LLP in Exhibit 13 to this report, are incorporated into this Item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, under the
supervision of our Chief Executive Officer and Chief Financial Officer, we
evaluated our disclosure controls and procedures (as defined in rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were sufficient to provide
reasonable assurances that the information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in
other factors that could significantly affect those internal controls subsequent
to the date of our evaluation thereof.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to our directors under the caption "Proposal 1:
Election of Directors" in the Proxy Statement for our Annual Meeting of
Stockholders to be held on November 19, 2004 is incorporated into this Item by
reference. Information with respect to our executive officers appears under the
caption "Executive Officers" in Item 1 of Part I of this report and is
incorporated into this Item by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation under the captions
"Executive Compensation," "Report of the Compensation and Nominating Committee"
and "Performance Graph" in the Proxy Statement for our Annual Meeting of
Stockholders to be held on November 19, 2004, is incorporated into this Item by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information with respect to securities authorized for issuance under
equity compensation plans under the caption "Equity Compensation Plan
Information" in the Proxy Statement for our Annual Meeting of Stockholders to be
held on November 19, 2004, is incorporated into this Item by reference.
Information with respect to security ownership of certain beneficial
owners and management under the caption "Equity Security Ownership" in the Proxy
Statement for our Annual Meeting of Stockholders to be held on November 19,
2004, is incorporated into this Item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions under the caption "Transactions with Management and Other Related
Parties" in the Proxy Statement for our Annual Meeting of Stockholders to be
held on November 19, 2004, is incorporated into this Item by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services under
the caption "Audit Committee Report" in the Proxy Statement for our Annual
Meeting of Stockholders to be held on November 19, 2004, is incorporated into
this Item by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 Financial Statements
An index of our Consolidated Financial Statements appears on page 28 of
this report.
2 Financial Statement Schedules
All schedules have been omitted since the information required to be
submitted has been included in the Consolidated Financial Statements or
Notes thereto or has been omitted as not applicable or not required.
3 Exhibits
3.1 Restated Certificate of Incorporation of The Reader's Digest
Association, Inc. filed with the State of Delaware on July 8, 2003,
filed as Exhibit 4.1 to our Registration Statement on Form S-3
(Registration No. 333-107278) filed on July 23, 2003, is incorporated
herein by reference.
3.2 Amended and Restated By-Laws of The Reader's Digest Association, Inc.,
effective December 13, 2002, filed as Exhibit 3.2 to Amendment No. 1 to
our Registration Statement on Form 8-A/A (Registration No. 001-10434)
filed on December 13, 2002, is incorporated herein by reference.*
10.1 The Reader's Digest Association, Inc. Management Incentive Compensation
Plan (Amendment and Restatement as of July 1, 1994), filed as Exhibit 10.1
to our Annual Report on Form 10-K for the year ended June 30, 1994, is
incorporated herein by reference.*
10.2 The Reader's Digest Association, Inc. 1989 Key Employee Long Term
Incentive Plan, as amended effective April 13, 2001, filed as Exhibit
10.29 to our Quarterly Report on Form 10-Q for the quarter ended March 31,
2001, is incorporated herein by reference.*
10.3 The Reader's Digest Association, Inc. Deferred Compensation Plan
(Amendment and Restatement as of July 8, 1994) filed as Exhibit 10.4 to
our Annual Report on Form 10-K for the year ended June 30, 1994, is
incorporated herein by reference.*
10.4 Excess Benefit Retirement Plan of The Reader's Digest Association, Inc.
(Amendment and Restatement as of July 1, 1994), filed as Exhibit 10.7 to
our Annual Report on Form 10-K for the year ended June 30, 1994, is
incorporated herein by reference.*
10.5 The Reader's Digest 1992 Executive Retirement Plan (Amendment and
Restatement as of October 10, 1996), filed as Exhibit 10.12 to our Annual
Report on Form 10-K for the year ended June 30, 1997, is incorporated
herein by reference.*
10.6 The Reader's Digest Association, Inc. Executive Cash Balance Retirement
Plan, filed as Exhibit 10.7 to our Annual Report on Form 10-K for the year
ended June 30, 2000, is incorporated herein by reference.*
*Denotes a management contract or compensatory plan.
10.7 Amendment No. 1 to The Reader's Digest Association, Inc. Management
Incentive Compensation Plan (effective as of April 11, 1996) filed as
Exhibit 10.1.1 to our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by reference.*
10.8 Amended and Restated Five-Year Revolving Credit and Competitive Advance
Facility Agreement dated as of May 20, 2002, among The Reader's Digest
Association, Inc., the Borrowing Subsidiaries, and the Lenders (as defined
therein), etc., filed as Exhibit 10.2 to our Current Report on Form 8-K
dated June 3, 2002, is incorporated herein by reference.
10.9 Amended and Restated Term Loan Agreement, dated as of May 21, 2004, among
The Reader's Digest Association, Inc., the Borrowing Subsidiaries, and the
Lenders (as defined therein), etc., filed as Exhibit 10.37 to our Current
Report on Form 8-K dated May 24, 2004, is incorporated herein by
reference.
10.10 The Reader's Digest Association, Inc. Deferred Compensation Plan for
Directors, amended and restated as of January 1, 2003 filed as Exhibit
10.10 to our Annual Report on Form 10-K for the year ended June 30, 2003,
is incorporated herein by reference.*
10.11 Employment Agreement dated as of April 28, 1998, between The Reader's
Digest Association, Inc. and Thomas O. Ryder, filed as Exhibit 10.33 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is
incorporated herein by reference.*
10.12 The Reader's Digest Association, Inc. 2001 Income Continuation Plan for
Senior Management, filed as Exhibit 10.21 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 2001, is incorporated herein by
reference.*
10.13 Termination Agreement dated as of April 23, 2001, between The Reader's
Digest Association, Inc. and Eric W. Schrier, filed as Exhibit 10.18 to
our Annual Report on Form 10-K for the year ended June 30, 2001, is
incorporated by reference.*
10.14 Termination Agreement dated as of December 18, 2001, between The Reader's
Digest Association, Inc. and Michael S. Geltzeiler filed as Exhibit 10.14
to our Annual Report on Form 10-K for the year ended June 30, 2003, is
incorporated herein by reference.*
10.15 Termination Agreement dated as of April 23, 2001, between The Reader's
Digest Association, Inc. and Thomas D. Gardner, filed as Exhibit 10.17 to
our Annual Report on Form 10-K for the year ended June 30, 2002, is
incorporated herein by reference.*
10.16 Termination Agreement dated as of April 23, 2001, between The Reader's
Digest Association, Inc. and Gary S. Rich filed as Exhibit 10.16 to our
Annual Report on Form 10-K for the year ended June 30, 2003, is
incorporated herein by reference.*
10.17 The Reader's Digest Association, Inc. Senior Management Incentive Plan,
filed as Exhibit 10.27 to our Annual Report on Form 10-K for the year
ended June 30, 1999, is incorporated herein by reference.*
*Denotes a management contract or compensatory plan.
10.18 Assurance of Voluntary Compliance or Discontinuance dated February 26,
2001, by and among the State Attorneys General and the registrant, filed
as Exhibit 99.2 to our Current Report on Form 8-K dated March 9, 2001, is
incorporated herein by reference.
10.19 Recapitalization Agreement, dated as of October 15, 2002, by and among
the DeWitt Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's
Digest Fund, Inc. and The Reader's Digest Association, Inc., filed as
Exhibit 2.1 to our Current Report on Form 8-K dated October 15, 2002, is
incorporated herein by reference.
10.20 The Reader's Digest Association, Inc. 1994 Key Employee Long Term
Incentive Plan, amended and restated as of September 18, 2002, filed as
Exhibit 10.24 to our Annual Report on Form 10-K for the year ended June
30, 2002, is incorporated herein by reference.*
10.21 The Reader's Digest Association, Inc. 2002 Key Employee Long Term
Incentive Plan, filed as Exhibit 10.25 to our Annual Report on Form 10-K
for the year ended June 30, 2002, is incorporated herein by reference.*
10.22 The Reader's Digest Association, Inc. Director Compensation Program,
amended and restated as of January 1, 2003 filed as Exhibit 10.23 to our
Annual Report on Form 10-K for the year ended June 30, 2003, is
incorporated herein by reference.*
10.23 Form of Indemnification Agreement between The Reader's Digest Association,
Inc. and individual directors and officers of The Reader's Digest
Association, Inc., filed as Exhibit 10.27 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, is incorporated herein by
reference.
10.24 Agreement by and among The Reader's Digest Association, Inc. and
Highfields Capital Management LP and related entities, dated as of June 4,
2003, filed as Exhibit 10.28 to our Current Report on Form 8-K dated June
4, 2003, is incorporated herein by reference.
10.25 Form of First Amendment, dated as of June 26, 2003, to the Term Loan
Agreement dated as of May 20, 2002, among The Reader's Digest Association,
Inc., the Borrowing Subsidiaries and the Lenders (as defined therein),
etc., filed as Exhibit 10.29 to our Current Report on Form 8-K dated June
26, 2003, is incorporated herein by reference.
10.26 Form of First Amendment, dated as of June 26, 2003, to the Amended and
Restated Five-Year Revolving Credit and Competitive Advance Facility
Agreement dated as of May 20, 2002, among The Reader's Digest Association,
Inc., the Borrowing Subsidiaries, and the Lenders (as defined therein),
etc., filed as Exhibit 10.30 to our Current Report on Form 8-K dated June
26, 2003, is incorporated herein by reference.
10.27 FlexNet Program summary description filed as Exhibit 10.28 to our Annual
Report on Form 10-K for the year ended June 30, 2003, is incorporated
herein by reference.*
10.28 Financial counseling plan summary description filed as Exhibit 10.29 to
our Annual Report on Form 10-K for the year ended June 30, 2003, is
incorporated herein by reference.*
10.29 Form of Second Amendment, dated as of January 27, 2004, to the Amended and
Restated Five-Year Revolving Credit and Competitive Advance Facility
Agreement dated as of May 20, 2002, among The Reader's Digest Association,
Inc., the Borrowing Subsidiaries, and the Lenders (as defined therein),
etc., filed as Exhibit 10.33 to our Current Report on Form 8-K dated March
3, 2004, is incorporated herein by reference.
10.30 Form of Third Amendment, dated as of February 12, 2004, to the Amended and
Restated Five-Year Revolving Credit and Competitive Advance Facility
Agreement dated as of May 20, 2002, among The Reader's Digest Association,
Inc., the Borrowing Subsidiaries, and the Lenders (as defined therein),
etc., filed as Exhibit 10.35 to our Current Report on Form 8-K dated March
3, 2004, is incorporated herein by reference.
10.31 Form of Amendment Agreement, dated as of May 24, 2004, among The Reader's
Digest Association, Inc., the Borrowing Subsidiaries, and the Lenders (as
defined therein), etc., filed as Exhibit 10.33 to our Current Report on
Form 8-K dated March 3, 2004, is incorporated herein by reference.
10.32 Form of Fourth Amendment, dated as of May 24, 2004, to the Amended and
Restated Five-Year Revolving Credit and Competitive Advance Facility
Agreement dated as of May 20, 2002, among The Reader's Digest Association,
Inc., the Borrowing Subsidiaries, and the Lenders (as defined therein),
etc., filed as Exhibit 10.38 to our Current Report on Form 8-K dated May
24, 2004, is incorporated herein by reference.
10.33 Amendment to Employment Agreement dated as of November 21, 2003, between
The Reader's Digest Association, Inc. and Thomas O. Ryder, filed as
Exhibit 10.31 to our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2003, is incorporated herein by reference.*
13 Financial statements to be included in our 2004 Annual Report to
Stockholders, together with the report thereon of KPMG LLP thereon
(furnished for the information of the Securities and Exchange Commission
only and not to be deemed filed as part of this Annual Report on Form
10-K, except for the portions thereof that are specifically incorporated
herein by reference).
*Denotes a management contract or compensatory plan.
21 Subsidiaries of The Reader's Digest Association, Inc.
23 Consent of KPMG LLP.
31.1 Certification of Chief Executive Officer of registrant pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer of registrant pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32 Certifications of Chief Executive Officer and Chief Financial Officer of
registrant pursuant to rule 13a-14(b)/15d-14(b) of the Securities Exchange
Act of 1934.
(b) Reports on Form 8-K
During the three months ended June 30, 2004, we filed the following
Current Reports on Form 8-K.
Current Report on Form 8-K dated April 29, 2004, Items 7, 9 and 12.
Current Report on Form 8-K dated May 24, 2004, Items 5, 7 and 9.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Reader's Digest Association, Inc.
By: /s/THOMAS O. RYDER
(Thomas O. Ryder)
Chairman and Chief Executive Officer
Date: September 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/THOMAS O. RYDER Chairman and Chief Executive September 8, 2004
Thomas O. Ryder Officer and a Director
/s/MICHAEL S. GELTZEILER Senior Vice President and Chief September 8, 2004
Michael S. Geltzeiler Financial Officer
/s/THOMAS D. BARRY Vice President and Corporate September 8, 2004
Thomas D. Barry Controller (chief accounting
officer)
/s/JONATHAN B. BULKELEY* Director September 8, 2004
Jonathan B. Bulkeley
/s/HERMAN CAIN* Director September 8, 2004
Herman Cain
/s/WALTER ISAACSON* Director September 8, 2004
Walter Isaacson
/s/WILLIAM E. MAYER* Director September 8, 2004
William E. Mayer
/s/JAMES E. PRESTON* Director September 8, 2004
James E. Preston
/s/LAWRENCE R. RICCIARDI* Director September 8, 2004
Lawrence R. Ricciardi
/s/WILLIAM J. WHITE * Director September 8, 2004
William J. White
/s/ED ZSCHAU* Director September 8, 2004
Ed Zschau
*By: /s/C.H.R. DUPREE
(C.H.R. DuPree)
Attorney in Fact
THE READER'S DIGEST ASSOCIATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management's Discussion and Analysis............................ *
Financial Statements:
Consolidated Statements of Income--For the Years Ended
June 30, 2004, 2003 and 2002............................ *
Consolidated Balance Sheets--June 30, 2004 and 2003....... *
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 2004, 2003 and 2002............................ *
Consolidated Statements of Changes in Stockholders' Equity
--For the Years Ended June 30, 2004, 2003 and 2002...... *
Notes to Consolidated Financial Statements...................... *
Independent Auditors' Report.................................... *
Report of Management............................................ *
Selected Financial Data......................................... *
Selected Quarterly Financial Data and Dividend and Market
Information (Unaudited)......................................... *
*This financial information is incorporated by reference to our 2004
Annual Report to Stockholders. For additional information, please refer to Item
8 of this report.