FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission 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 10570-7000
(Address of principal executive offices) (Zip Code)
(914) 238-1000
(Registrant's telephone number, including area code)
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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 [ ]
As of October 31, 2000, the following shares of the registrant's common stock
were outstanding:
Class A Nonvoting Common Stock, $0.01 par value:90,256,645 shares
Class B Voting Common Stock, $0.01 par value: 12,432,164 shares
Page 1 of 18
pages.
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THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
Index to Form 10-Q
September 30, 2000
Part I - Financial Information Page No.
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The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month periods ended September 30, 2000 and 1999 3
Consolidated Condensed Balance Sheets
as of September 30, 2000 and June 30, 2000 4
Consolidated Condensed Statements of Cash Flows
for the three-month periods ended September 30, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Part II - Other Information 16
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The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Income
Three-month periods ended September 30, 2000 and 1999
(In millions, except per share data)
(unaudited)
Three-month periods
ended
September 30,
2000 1999
Revenues $ 559.7 $ 519.2
Product, distribution and editorial expenses 210.5 192.4
Promotion, marketing and administrative expenses 304.9 288.0
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Operating profit 44.3 38.8
Other income, net 4.1 7.0
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Income before provision for income taxes 48.4 45.8
Provision for income taxes 18.4 17.2
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Net income $ 30.0 $ 28.6
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Basic and diluted earnings per share
Basic earnings per share
Weighted average common shares outstanding 102.9 107.4
Basic earnings per share $ 0.29 $ 0.26
====== ======
Diluted earnings per share
Adjusted weighted average common shares outstanding 104.2 108.5
Diluted earnings per share $ 0.28 $ 0.26
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Dividends per common share $ 0.05 $ 0.05
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See accompanying Notes to Consolidated Condensed Financial Statements.
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
As of September 30, 2000 and June 30, 2000
(In millions)
(unaudited)
September 30, June 30,
2000 2000
Assets
Cash and cash equivalents $ 51.7 $ 49.7
Receivables, net 432.1 285.3
Inventories, net 169.5 120.3
Prepaid and deferred promotion costs 127.1 115.5
Prepaid expenses and other current assets 215.8 201.7
-------- --------
Total current assets 996.2 772.5
Marketable securities 105.6 173.5
Property, plant and equipment, net 153.1 152.4
Intangible assets, net 432.9 438.8
Other noncurrent assets 298.7 221.6
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Total assets $ 1,986.5 $ 1,758.8
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Liabilities and stockholders' equity
Loans and notes payable $ 249.8 $ 89.4
Accounts payable 162.5 146.4
Accrued expenses 276.7 309.6
Income taxes payable 87.4 38.7
Unearned revenue 345.7 289.4
Other current liabilities 28.5 30.9
-------- --------
Total current liabilities 1,150.6 904.4
Other noncurrent liabilities 366.2 350.1
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Total liabilities 1,516.8 1,254.5
Capital stock 29.2 28.9
Paid-in capital 223.4 223.1
Retained earnings 1,131.1 1,106.6
Accumulated other comprehensive (loss) income (23.4) 31.0
Treasury stock, at cost (890.6) (885.3)
-------- --------
Total stockholders' equity 469.7 504.3
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Total liabilities and stockholders' equity $ 1,986.5 $ 1,758.8
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three-month periods ended September 30, 2000 and 1999
(In millions)
(unaudited)
Three-month periods ended
September 30,
2000 1999
Cash flows from operating activities
Net income $ 30.0 $ 28.6
Depreciation and amortization 11.5 8.9
Gains on the sales of a business, certain assets
and certain investments (3.9) (7.5)
Changes in assets and liabilities, net (156.0) (23.8)
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Net change in cash due to operating activities (118.4) 6.2
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Cash flows from investing activities
Proceeds from maturities and sales of short-term
investments and marketable securities 4.0 2.3
Purchases of investments and marketable securities (20.0) (3.9)
Proceeds from sales of a business and other
long-term investments, net 4.9 10.8
Proceeds from sales of property, plant and
equipment 0.3 2.2
Capital expenditures (10.6) (4.0)
Other, net (0.5) (0.8)
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Net change in cash due to investing activities (21.9) 6.6
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Cash flows from financing activities
Short-term borrowings, net 160.5 2.0
Dividends paid (5.5) (5.7)
Common stock repurchased (3.6) --
Other, net (1.7) 3.4
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Net change in cash due to financing activities 149.7 (0.3)
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Effect of exchange rate changes on cash (7.4) 4.7
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Net change in cash and cash equivalents 2.0 17.2
Cash and cash equivalents at beginning of period 49.7 413.4
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Cash and cash equivalents at end of period $ 51.7 $ 430.6
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See accompanying Notes to Consolidated Condensed Financial Statements.
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The Reader's Digest Association, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(In millions, except per share data)
(unaudited)
Unless indicated otherwise, references in Notes to Consolidated Condensed
Financial Statements to "we", "our" and "us" are to The Reader's Digest
Association, Inc. and its subsidiaries. All references to 2001 and 2000, unless
specifically identified, are to fiscal 2001 and fiscal 2000, respectively.
(1) Basis of Presentation and Use of Estimates
The accompanying consolidated condensed financial statements include the
accounts of The Reader's Digest Association, Inc. and its U.S. and international
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. These statements and accompanying notes have not
been audited but, in the opinion of management, have been prepared in conformity
with generally accepted accounting principles applying certain assumptions and
estimates, including all adjustments considered necessary to present such
information fairly. Although these estimates are based on management's knowledge
of current events and actions that we may undertake in the future, actual
results may ultimately differ from those estimates.
We report on a fiscal year beginning July 1. The three-month periods ended
September 30, 2000 and 1999 are the first fiscal quarters of 2001 and 2000,
respectively. Operating results for any interim period are not necessarily
indicative of the results for an entire year due to the seasonality of our
business.
Certain prior period amounts have been restated to conform to the current period
presentation. Customer service costs in 2000 have been reclassified to reflect
these costs as a component of product, distribution and editorial expenses
rather than promotion, marketing and administrative expenses.
(2) Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income less preferred stock
dividend requirements ($0.3 for each of the three-month periods ended September
30, 2000 and 1999) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed in the same manner
except that the weighted average number of common shares outstanding assumes the
exercise and conversion of certain stock options (1.3 million shares as of
September 30, 2000 and 1.1 million shares as of September 30, 1999.
For the three-month period ended September 30, 2000, basic and diluted earnings
per share were $0.29 and $0.28, respectively. For the three-month period ended
September 30, 1999, basic and diluted earnings per share were both $0.26.
(3) Revenues and Operating Profit by Operating Segments
Reportable segments are based on our method of internal reporting. The
accounting policies of our segments are the same as those described in Note 1 of
our consolidated financial statements included in our 2000 Annual Report to
Stockholders. In addition, we allocate all corporate administrative costs to
operating segments.
Three-month periods ended
September 30,
2000 1999
Revenues
Global Books and Home Entertainment $ 358.3 $ 319.7
U.S. Magazines 127.3 118.0
International Magazines 67.7 72.6
Other Businesses 6.4 8.9
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Total revenues $ 559.7 $ 519.2
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Three-month periods ended
September 30,
2000 1999
Operating Profit (Loss)
Global Books and Home Entertainment $ 54.1 $ 40.9
U.S. Magazines (2.1) 3.4
International Magazines (0.8) 0.8
Other Businesses (6.9) (6.3)
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Total operating profit $ 44.3 $ 38.8
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(4) Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income as reported in the balance sheet
as of September 30, 2000 and June 30, 2000, represents primarily unrealized
gains/losses on certain investments and foreign currency translation
adjustments. The components of comprehensive (loss) income, net of related tax,
for the three-month periods ended September 30, 2000 and 1999 were as follows:
Three-month periods ended
September 30,
2000 1999
Net income $ 30.0 $ 28.6
Change in:
Foreign currency translation adjustments (11.3) 5.7
Net unrealized (losses) gains on certain
investments, net of deferred taxes of $32.2
and $80.3, respectively (44.1) 133.9
Net unrealized gains on certain derivative
transactions, net of deferred taxes of $0.6 1.0 --
-------- -------
Total comprehensive (loss) income $ (24.4) $ 168.2
========= =======
Net unrealized (losses) gains on certain investments, net of related tax,
principally represent our investment in the voting common shares of LookSmart,
Ltd.
(5) Other Operating Items
Other operating items represent charges related primarily to the streamlining of
our organizational structure and the strategic repositioning of certain
businesses. The components of other operating items are described in further
detail below:
- Employee Retirement and Severance Benefits - For each reporting period, we
have identified employees who would be separated as a result of actions taken
to streamline the organizational structure through a combination of voluntary
and involuntary severance programs.
- Contract Terminations - These charges represent anticipated costs to
terminate contractual obligations in connection with streamlining activities.
- Impairment Losses - As a result of restructuring activities, we incurred
charges related to the carrying value of certain leasehold improvements,
computer hardware and software and, to a lesser extent, property, plant and
equipment no longer used in our operations.
Note 3 of our consolidated financial statements included in our 2000 Annual
Report to Stockholders describes the nature and magnitude of the charges that
were recorded in conjunction with these components for the past three fiscal
years. At June 30, 2000, we had accruals for other operating items of $19.7
primarily for employee retirement and severance benefits. During the
three-months ended September 30, 2000, we made payments totaling $4.3, of which
$3.0 related to employee retirement and severance benefits. At September 30,
2000, the remaining balance of accruals for other operating items, composed
primarily of employee retirement and severance benefits, was $15.4.
(6) Inventories
September 30, June 30,
2000 2000
Raw materials $ 12.9 $ 13.4
Work-in-progress 17.2 21.1
Finished goods 139.4 85.8
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Total inventories $ 169.5 $ 120.3
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(7) Investments
Available for Sale Marketable Securities
Marketable securities on the balance sheet primarily represents the fair market
value (based on quoted market prices) of our investments in LookSmart, Ltd. and
WebMD Corporation. These securities are accounted for and classified as
available-for-sale securities. As of September 30, 2000, the market value of the
remaining shares totaled $98.4 for LookSmart and $6.6 for WebMD. As of October
31, 2000, our investments in LookSmart and WebMD have a market value of $62.2
and $4.9, respectively.
Net unrealized gains on these investments, net of deferred taxes, is included in
accumulated other comprehensive (loss) income in stockholders' equity on the
balance sheet and amounted to $59.8 as of September 30, 2000. In September 2000,
we sold 200,000 shares of LookSmart and recorded a pre-tax gain of $2.6 in other
income, net on the income statement.
Investments, at Cost
In October 1999, we entered into an agreement with BrandDirect Marketing, Inc.,
an affinity, membership-based, direct marketing company, to acquire an 18%
equity interest in BrandDirect Marketing, Inc. In July 2000, we made an
additional payment of $20.0 in accordance with the agreement, thereby increasing
our investment in BrandDirect Marketing, Inc. to $50.0. The agreement also
permits us to acquire additional equity in BrandDirect Marketing, Inc. through
the exercise of warrants and other rights. The investment is being accounted for
using the cost method and is included in other noncurrent assets on the balance
sheet. In addition, we are working with BrandDirect Marketing, Inc. to develop
and market Reader's Digest-branded membership clubs.
We hold several other investments, at cost, totaling $13.7. These investments
are included in other noncurrent assets on the balance sheet.
Licensing Agreement
In May 2000, we entered into a long-term licensing agreement with World's Finest
Chocolate, Inc. The cost of entering into the agreement was assigned to
distribution rights, included in intangible assets on the balance sheet. These
rights are being amortized using the straight-line method over the initial
period of the agreement (10 years). Under the terms of the agreement, QSP, Inc.
(our wholly owned subsidiary) has a long-term commitment to purchase World's
Finest Chocolate, Inc. products and the exclusive right to sell those products
for fundraising purposes. Our purchase commitment is based on annual minimum
tonnage amounts.
(8) Derivative Instruments
On July 1, 2000, we adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133." These statements standardize the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. We are required to record all derivative
instruments on our balance sheet at fair value. Derivatives that are not
classified as hedges are adjusted to fair value through earnings. Changes in
fair value of the derivatives that we have designated and that qualify as
effective hedges are recorded in either other comprehensive income or earnings.
The ineffective portion of our derivatives that are classified as hedges is
immediately recognized in earnings. The cumulative effect of change in
accounting principles recorded on July 1, 2000 was not material to our results
of operations, financial position or cash flows.
Risk Management and Objectives
In the normal course of business we are exposed to market risk from the effect
of foreign exchange rate fluctuations on the U.S. dollar value of our foreign
subsidiaries' results of operations and financial condition. A significant
portion of our risk is associated with foreign exchange rate fluctuations of the
euro and British pound. We purchase foreign currency option and forward
contracts to minimize the effect of fluctuating foreign currencies on our
subsidiaries' earnings and specifically identifiable anticipated transactions.
In addition, we enter into forward contracts to minimize the effect of
fluctuating foreign currency exchange rates on certain foreign currency
denominated assets and liabilities. Generally, we purchase foreign currency
option and forward contracts over periods ranging up to 12 months. As a matter
of policy, we do not speculate in financial markets, and therefore we do not
hold financial instruments for trading purposes. We continually monitor foreign
currency risk and the use of derivative instruments.
Strategies and Description of Derivative Instruments
The following is a brief description of our derivative transactions.
- We enter into option contracts to hedge against the foreign currency risk
associated with intercompany royalty fees paid to us by our foreign
subsidiaries. The contract amounts of these options are based on forecasted
future revenues earned by our subsidiaries. These contracts are designated
and qualify for cash flow hedge accounting.
- Similarly, option contracts are used to economically hedge against foreign
currency risk associated with operating cash flows of our foreign
subsidiaries. The contract amounts of these options are based on forecasted
cash flows from operating profit recognized by our subsidiaries. These
contracts do not qualify for hedge accounting treatment.
- We utilize foreign currency forward contracts to economically hedge against
foreign currency risk associated with anticipated or forecasted transactions,
as well as foreign currency denominated loans due to and from our foreign
subsidiaries. These transactions do not qualify for hedge accounting
treatment under the new standards.
Quantitative Disclosures of Derivative Instruments
<PAGE>
Cash Flow Hedges -- Changes in the spot value of the foreign currencies
associated with option contracts designated and qualifying as cash flow hedges
of forecasted royalty payments amounting to $1.0 (net of taxes of $0.6) are
reported in accumulated other comprehensive (loss) income included in
stockholders' equity on the balance sheet. The gains and losses are deferred
until the underlying transaction is recognized in earnings. The ineffective
portion of the change in market value of these option contracts, specifically,
the time-value component of $0.7, was recognized as a loss in other income, net
on the income statement. The fair value of the option contracts of $1.7 is
included in prepaid expenses and other current assets on the balance sheet.
We anticipate that the net gains in accumulated other comprehensive (loss)
income relating to foreign currency option contracts existing at September 30,
2000 will be recognized as gain (loss) on foreign exchange during the
twelve-months ended September 30, 2001. As of September 30, 2000, the
approximate length of time over which we will hedge our exposure to the
variability in future cash flows associated with foreign currency royalty
payments is 12 months. No cash flow hedges were discontinued during the three-
months ended September 30, 2000.
Non-Hedging Derivatives - Changes in the spot value of the foreign currencies
and contract settlements associated with option and forward contracts amounting
to $9.8 are reported in gain (loss) on foreign exchange included in other
income, net on the income statement. This effect would generally be offset by
the translation of the assets, liabilities and future operating cash flows being
hedged. The fair value of the option and forward contracts of $13.4 is included
in prepaid expenses and other current assets on the balance sheet.
(9) Debt
As described in Note 10 of our consolidated financial statements included in our
2000 Annual Report to Stockholders, we are a party to a Competitive Advance and
Revolving Credit Facility Agreement (the Credit Agreement) that provides for
borrowings of up to $300.0 and expires on October 31, 2001. The Credit Agreement
contains covenants to maintain minimum levels of consolidated assets and net
worth and a maximum level of leverage. At September 30, 2000, we had borrowings
of $249.1 outstanding under the Credit Agreement and we were in compliance with
all covenants. This amount is included in loans and notes payable on the balance
sheet. It is our intent to repay the outstanding amount within the next fiscal
year.
(10) Share Exchange
In September 1999, we executed a share exchange with the DeWitt Wallace-Reader's
Digest Fund and the Lila Wallace-Reader's Digest Fund (the Funds). Under the
terms of the exchange, the Funds exchanged approximately 9.3 million shares of
Class B voting common stock (Class B) for approximately 8.0 million shares of
Class A nonvoting common stock (Class A), at an exchange ratio of 0.865 Class A
shares for each Class B share. As a result, we exchanged Class A treasury shares
at a cost of $164.9 and a market value of $239.9, for Class B shares, resulting
in additional paid-in capital of $75.0.
(11) Share Repurchase Authorization
In January 2000, we announced authorization to repurchase up to 5 million shares
or about 5 percent of our outstanding Class A stock. As of September 30, 2000,
we had purchased approximately 4.2 million shares totaling $140.2 (0.2 million
shares totaling $6.7 during the three-months ended September 30, 2000). In
October 2000, we announced authorization to repurchase an additional 5 million
shares of our outstanding Class A stock.
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Unless indicated otherwise, references in Management's Discussion and Analysis
to "we", "our" and "us" are to The Reader's Digest Association, Inc. and
Subsidiaries. All references to 2001 and 2000, unless specifically identified,
are to fiscal 2001 and fiscal 2000, respectively.
The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our consolidated results of
operations and financial condition and has been written excluding the effect of
fluctuations in foreign currency exchange rates. This discussion should be read
in conjunction with the Consolidated Condensed Financial Statements and related
notes.
Three-Month Period Ended September 30, 2000, Compared With Three-Month Period
Ended September 30, 1999
Results of Operations: Company-Wide
Revenues/Operating Profit
Revenues for the first quarter of 2001 increased 8% to $560, compared with $519
in the first quarter of 2000. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues increased 13%. The increase in revenues was
primarily attributable to the acquisition of Books Are Fun, Ltd. (BAF) in the
second quarter of 2000, increased sales at QSP, Inc. resulting from the addition
of the sales force of World's Finest Chocolate, Inc. and revenue growth in the
international markets of Global Books and Home Entertainment. We increased
mailings in Germany, France, Latin America, Asia and Russia, which increased
revenues in these markets. We also achieved higher response rates in certain
markets because of better-targeted mailings. On a global basis, revenue
increases were realized for all Global Books and Home Entertainment products,
especially series and general books. Worldwide advertising revenues increased
for Reader's Digest magazine. In the United States the average rate per page and
the number of advertising pages sold was higher, and in international markets
the number of advertising pages sold was higher. This revenue growth was
slightly offset by the loss of revenue from the sale of the subscription list
for American Health magazine, which ended publication with the October 2000
issue.
Operating profit for the first quarter of 2001 increased 14% to $44, compared
with $39 in the first quarter of 2000. Excluding the adverse effect of foreign
currency translation, operating profit increased 30%. Operating profit growth
was driven by the increases in revenues for Global Books and Home Entertainment
products. In addition, promotion costs were lower as a result of reduced mail
quantities and better-targeted mailings. Offsetting a portion of this increase
in operating profit were operating profit declines for U.S. Magazines and
International Magazines. For both U.S. Magazines and International Magazines,
investment spending was increased slightly to develop new marketing and
distribution channels and, for U.S. Magazines, we incurred costs related to the
World's Finest Chocolate, Inc. transaction and conversion to a new outsourced
fulfillment vendor.
Other Income, Net
Other income, net decreased 41% to $4 in the first quarter of 2001, compared
with $7 in the first quarter of 2000. This decrease was primarily because of a
gain from the sale of American Health magazine of $7 realized in the first
quarter of 2000, higher interest expense in the first quarter of 2001 as a
result of additional short-term debt and lower interest income from reduced cash
balances. These amounts were partially offset by gains from foreign exchange
hedging transactions and a gain on the sale of a small portion of our investment
in LookSmart, Ltd. during the current period.
Income Taxes
The effective tax rate for the first quarter of 2001 was 38.0%, compared with a
rate of 37.5% for the first quarter of 2000.
Net Income and Earnings Per Share
For the first quarter of 2001, net income was $30, or $0.28 per share on a
diluted-earnings basis ($0.29 per share for basic earnings per share). In the
prior year period, net income was $29, or $0.26 per share on both a basic- and
diluted-earnings basis.
Results of Operations: Operating Segments
Global Books and Home Entertainment
Revenues for Global Books and Home Entertainment increased 12% in the first
quarter of 2001 to $358, compared with $320 in the first quarter of 2000.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues increased 19%. The acquisition of BAF in the second quarter of 2000 and
revenue growth for all products sold internationally were the primary reasons
for the increase in revenues. The acquisition of BAF was a significant portion
of the revenue increase in the United States; however, revenues increased for
other products sold in the United States. Specifically, revenues increased for
Young Families products as a result of increased promotion, and for series
products because of higher payment rates and increased pricing. A shift in
promotion efforts from video to music products resulted in an increase in
revenues for music rather than video products.
The increase in revenue in international markets was mostly from general books,
video products and Select Editions. Revenue increases were especially high in
Germany, Mexico, Brazil, Russia, France and Australia. Revenue for general books
increased in certain markets because of improved response rates resulting from
better promotion techniques and stronger products, especially in Russia, France
and Mexico. Sales of video products were higher as a result of increased
promotion efforts, especially in Germany, and improved response rates in Mexico.
Revenues increased for Select Editions primarily in Australia, Brazil and
Germany as a result of improved membership in series products.
Operating profit for Global Books and Home Entertainment increased 32% in the
first quarter of 2001 to $54, compared with $41 in the first quarter of 2000.
Excluding the adverse effect of foreign currency translation, operating profit
increased 47%. Although profit improvements were realized in most markets, the
increase was primarily from improved profitability in the United States,
Germany, Australia and Brazil. Profit increases were realized for all products,
especially for series books, general books and music products. In the United
States, operating profit improved as a result of revenue growth and to a lesser
extent as a result of lower promotion costs as a result of reduced mail
quantities and better-targeted mailings. Significant improvement in operating
profit for the international markets cited above was driven by profits from
higher revenues for series, general books, video and music products and lower
promotion costs in certain markets.
U.S. Magazines
Revenues for U.S. Magazines increased 8% in the first quarter of 2001 to $127,
compared with $118 in the first quarter of 2000. The increase in revenues was
attributable to increased sales of QSP, Inc. as a result of the addition of the
sales force of World's Finest Chocolate, Inc. In May 2000, we entered into an
agreement to purchase products and acquire sales representatives of World's
Finest Chocolate, Inc. In addition, advertising revenues for Reader's Digest
magazine increased from more advertising pages sold and a higher average rate
per page. These increases in revenues were slightly offset by the loss of
revenue from the sale of the subscription list for American Health magazine,
which ended publication with the October 2000 issue, and by slightly lower
circulation revenues for Reader's Digest magazine.
Operating profit for U.S. Magazines decreased in the first quarter of 2001 to a
loss of $(2), compared with a profit of $3 in the first quarter of 2000. The
decrease was primarily the result of costs related to the transaction with
World's Finest Chocolate, Inc., investment in the development of new marketing
channels and conversion to a new outsourced fulfillment vendor.
International Magazines
Revenues for International Magazines decreased 7% in the first quarter of 2001
to $68, compared with $73 in the first quarter of 2000. Excluding the adverse
effect of changes in foreign currency exchange rates, revenues increased 1%.
Higher advertising revenues in Canada, Mexico, the United Kingdom and Asia and
increased newsstand sales, primarily in Latin America, were the principal
reasons for the increase. These increases were slightly offset by the decline in
circulation revenues of Reader's Digest magazine from certain strategic
reductions in local circulation rates and the sale of our Italian operations in
the fourth quarter of 2000.
Operating profit declined to a loss of $(1) in the first quarter of 2001 from an
operating profit of $1 in the first quarter of 2000, primarily as a result of
investment in new marketing channels and increased promotion from higher
mailings in a few markets. This decline was partially offset by the increases in
advertising revenues and newsstand sales, and by cost savings in paper and
printing costs from the use of global contracts to facilitate magazine
fulfillment.
Other Businesses
Revenues from Other Businesses decreased 28% to $6 in the first quarter of 2001,
compared with $9 in the first quarter of 2000, primarily from lower revenues of
gifts.com, Inc. as a result of reduced catalog promotions, partially offset by
additional revenues from expansion of our insurance alliances.
Operating losses from Other Businesses increased by 10% to $(7) in the first
quarter of 2001, compared with operating losses of $(6) in the first quarter of
2000, primarily from planned start-up costs for new businesses. These losses
were substantially offset by reduced marketing and development costs of
gifts.com, Inc. and higher profits from expansion of our insurance alliances.
Forward-Looking Information
Fiscal 2001 Results
We expect continued improvement in both revenues and operating profit. We
anticipate that our revenue growth rate for fiscal 2001 will approach the high
single or low double digits. We expect that year-over-year operating profit will
continue to increase in double digits, but at a somewhat slower rate than in
2000, based in part on our growing revenue base.
Liquidity and Capital Resources
Three-month
period ended
September 30, 2000
Cash and cash equivalents at June 30, 2000 $ 50
Net change in cash due to:
Operating activities (118)
Investing activities (22)
Financing activities 150
Effect of exchange rate changes on cash and cash
equivalents (8)
Net change in cash and cash equivalents 2
-----
Cash and cash equivalents at September 30, 2000 $ 52
=====
Cash and cash equivalents increased 4% to $52 at September 30, 2000, compared
with $50 at June 30, 2000. Short-term borrowings increased by $160 to $250 as of
September 30, 2000 to finance additional receivables from higher sales, as well
as additional inventory of BAF during the three-month period.
As described in Note 10 to our 2000 Annual Report, we are a party to a
Competitive Advance and Revolving Credit Facility Agreement (the Credit
Agreement) that expires on October 31, 2001 and provides for borrowings of up to
$300. The Credit Agreement contains covenants to maintain minimum levels of
consolidated assets and net worth and a maximum level of leverage. At September
30, 2000, we had borrowings of $249 outstanding under the Credit Agreement. It
is our intent to repay the outstanding amount within the next fiscal year.
In January 2000, we announced authorization to repurchase up to 5 million shares
or about 5 percent of our outstanding Class A nonvoting common stock (Class A).
As of September 30, 2000, we had purchased approximately 4.2 million shares
totaling $140 (0.2 million shares totaling $7 during the three-months ended
September 30, 2000). In October 2000, we announced authorization to repurchase
an additional 5 million shares of our outstanding Class A stock.
We believe that our liquidity, capital resources, cash flows and borrowing
capacity are sufficient to fund normal capital expenditures, working capital
requirements, the payment of dividends, the execution of our share repurchase
program and the implementation of our strategic initiatives.
Currency Risk Management
In the normal course of business, we are exposed to the effects of foreign
exchange rate fluctuations on the U.S. dollar value of our foreign subsidiaries'
results of operations and financial condition. We purchase foreign currency
option and forward contracts to minimize the effect of fluctuating foreign
currency exchange rates on our earnings and specifically identifiable
anticipated transactions. In addition, we enter into forward contracts to
minimize the effect of fluctuating foreign currency exchange rates on certain
foreign currency denominated assets and liabilities.
At September 30, 2000, our primary foreign currency market exposures included
the euro and the British pound. We estimate that the results of a uniform 10%
weakening and 10% strengthening in the value of the U.S. dollar relative to the
currencies in which the option and forward contracts are denominated, with all
other variables held constant, would have the following effect:
Effect of a 10% Effect of a 10%
Weakening Strengthening
of the U.S. of the U.S.
Dollar Dollar
Option Contracts $ (9.6) $ 13.3
Forward Contracts $ (12.8) $ 10.5
These estimates represent changes to the fair value of the option and forward
contracts on a stand-alone basis. Such changes would be substantially offset by
the related impact on the assets, liabilities and operating profits being
hedged. Also, this calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar. Changes in exchange rates not
only affect the U.S. dollar value of the fair value of these derivatives, but
also affect the underlying foreign subsidiaries' income. Our sensitivity
analysis as described above does not consider potential changes in local sales
levels, local currency prices, or the mitigating effects of option or forward
contracts.
Impact of the Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
(legacy currencies) and a single currency called the euro. The legacy currencies
are scheduled to remain legal tender as denominations of the euro during the
transition period from January 1, 1999 to December 31, 2001. Beginning January
1, 2002, euro-denominated bills and coins will be introduced and by July 1,
2002, legacy currencies will no longer be legal tender.
We performed an internal analysis regarding the business and systems issues
related to the euro conversion and developed a strategic plan to ensure that all
necessary modifications would be made on a timely basis. Our operations in
markets that have adopted the euro are able to accept payments and pay suppliers
in euros, and are able to indicate the euro equivalent of pricing on invoices.
During the transition period, we are monitoring customer and competitor reaction
to the euro and updating the strategic plan as needed.
To date, the transition to the euro has not significantly affected our marketing
strategy. In addition, we believe that the conversion to the euro will not have
a significant impact on the marketing strategy of our European operations in the
future. We do not anticipate the need to synchronize prices between markets in
the future, primarily because the editorial content of our products varies. In
addition, products are published in local languages and are sold principally
through direct mail rather than retail channels. These factors result in
products that tend to be unique to each market and do not easily lend themselves
to price comparisons across borders. The estimated costs to convert all affected
systems to the euro are not expected to have a material adverse effect on our
results of operations, financial position or cash flow.
*****
This report includes "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. Except as required by those laws, we have no obligation to update
publicly any forward-looking statements and we have no intention to update them.
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;
- effects of modified and varied promotions;
- ability to identify customer trends;
- ability to continue to create a broadly appealing mix of new products;
- ability to attract and retain new and younger magazine subscribers and
product customers in view of the maturing of an important portion of our
U.S. customer base;
- ability to attract and retain subscribers and customers in an economically
efficient manner;
- effect of selective adjustments in pricing;
- ability to expand and more effectively utilize our customer database;
- ability to expand into new international markets and to introduce new
product lines into new and existing markets;
- ability to expand into new channels of distribution;
- ability to negotiate and implement productive acquisitions, strategic
alliances and joint ventures;
- ability to integrate newly acquired and newly formed businesses
successfully;
- strength of relationships of newly acquired and newly formed businesses
with their employees, suppliers and customers;
- accuracy of the basis of forecasts relating to newly acquired and newly
formed businesses;
- ability to contain and reduce costs, especially through global
efficiencies;
- cost and effectiveness of re-engineering of business processes and
operations;
- accuracy of management's assessment of the current status of our
business;
- evolution of our organizational and structural capabilities;
- ability we have to respond to competitive pressures within and outside the
direct marketing industry, including the Internet;
- effect of worldwide paper and postage costs;
- effect of possible postal disruptions on deliveries;
- effect of foreign currency fluctuations;
- accuracy of management's assessment of the future effective tax rate and
the effect of initiatives to reduce the rate;
- effect of the transition to the euro;
- effect and pace of our stock repurchase program; and
- effect of general economic conditions.
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the three-months ended September 30, 2000, the company did not file
any reports on Form 8-K.
<PAGE>
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
-------------------------------------
(Registrant)
Date: November 6, 2000 By: /s/GEORGE S. SCIMONE
------------------------------
George S. Scimone
Senior Vice President and
Chief Financial Officer
(and authorized signatory)
<PAGE>
EXHIBIT INDEX
Exhibit Page
27 Financial Data Schedule
