Document/ExhibitDescriptionPagesSize 1: 10-K Reader's Digest Form 10K 2006 HTML 358K
2: EX-10.41 2006 Income Continuation Plan HTML 118K
3: EX-10.42 Executive Cash Balance Plan HTML 81K
4: EX-13 Reader's Digest Form 10-K 2006 Exhibit 13 HTML 1.08M
5: EX-21 Subsidiaries of the Reader's Digest Association, HTML 28K
Inc.
6: EX-23.1 Consent of Ernst & Young LLP HTML 9K
7: EX-23.2 Consent of Kpmg LLP HTML 9K
8: EX-24 Power of Attorney HTML 24K
9: EX-31.1 CEO Certificate HTML 14K
10: EX-31.2 CFO Certificate HTML 14K
11: EX-32 Certifications of Periodic Financial Report HTML 11K
(Exact
name of registrant as specified in its charter)
Delaware
13-1726769
(State
or other jurisdiction of
incorporation
or organization)
(I.R.S.
Employer
Identification
No.)
Pleasantville,
New York
10570-7000
(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:
Title
of each class
Name
of each exchange
on
which registered
Common
Stock
par
value $.01 per share
New
York Stock Exchange
Securities
registered pursuant to Section 12(g) of the Act: None
______________
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [
] No [X]
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 [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of registrant’s voting and non-voting equity held by
non-affiliates of registrant, as
of
December 30, 2005, the last business day of the registrant’s most recently
completed second fiscal quarter,
was
approximately $1,451,000,000 based on the closing price of registrant’s Common
Stock on the New York Stock Exchange--Composite Transactions on such
date.
Annual
Report to Stockholders of The Reader’s Digest Association, Inc. for the fiscal
year ended June 30, 2006. 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 17, 2006. Certain information therein
is incorporated by reference into Part III hereof.
The
Reader’s Digest Association, Inc. is a global leader in publishing and direct
marketing. We create and deliver products and content that inform, enrich,
entertain and inspire, including magazines, books, recorded music collections,
home videos and online websites.
Although
our company is best known for Reader’s
Digest magazine,
which is published in 50 editions and 21 languages with a monthly worldwide
circulation of approximately 18 million and a global readership of approximately
80 million, our flagship magazine is just one of twenty eight magazines we
publish. Of the other titles we publish, seven other titles have circulations
in
excess of 1 million. These magazines contribute to our expansive content of
food, home and garden, language, learning, travel and health.
Books
are
our largest-selling products. Our book topics are diverse, ranging from
gardening to computers to natural wonders. Our Consumer Business Services
segment is a leader in the display marketing and school and youth fundraising
industries.
We
are a
Delaware corporation, originally incorporated in New York in 1926, then
reincorporated in Delaware in 1951. We became a public company in 1990.
Reportable
Segments
Our
internal management organization reflects three reportable segments: Reader’s
Digest North America, Reader’s Digest International and Consumer Business
Services. For financial and further information about each of our reportable
segments, refer to Note 14 of our Notes to Consolidated Financial Statements
set
forth in Part II, “Item 8. Financial Statements and Supplemental Data” of this
report, which is incorporated by reference herein.
Reader’s
Digest North America
This
segment comprises our operations in the United States and Canada that primarily
publish and market magazines and books and home entertainment products. In
particular, Reader’s Digest North America publishes and primarily direct
markets:
·
Reader’s
Digest
magazine
·
Reiman
Media Group, Inc. (Reiman) magazines and
books
·
special
interest magazines
·
books
and home entertainment products related to the reading, home and
health, and entertainment affinities, including:
-
Reader’s
Digest Select Editions books
-
Reader’s
Digest Young Families products
-
series
and general books
-
music
and video products
-1-
In
addition to our direct marketing products, our Trade Publishing unit, including
Children’s Publishing, sells books and home entertainment products primarily
through retail marketing.
Complementing the Reader’s Digest North America businesses, on April 20, 2006 we
acquired Allrecipes.com,
a U.S
website for home cooks, and on May 1, 2006 we launched Taste of Home
Entertaining, a home party plan business.
In
fiscal
2006, Reader’s Digest North America contributed $939 million and $115 million to
our revenues and operating (loss) profit, respectively.
Reader’s
Digest International
This
segment comprises our operations outside of the United States and Canada that
primarily publish and market magazines and books and home entertainment
products. In particular, Reader’s Digest International publishes and primarily
direct markets:
·
Reader’s
Digest
magazine in numerous editions and
languages
·
books
and home entertainment products (described
above)
·
special
interest magazines
Part
of
the mission of Reader’s Digest International is to establish and develop new
business initiatives, including entering new geographic markets, developing
new
products, acquiring customers through new channels and expanding U.S. business
models into markets outside North America, including display marketing. During
2006, we launched new book businesses in Bulgaria, Kazakhstan, United Arab
Emirates, Serbia, Bosnia and Lithuania, and we launched new editions of
Reader’s
Digest in
Romania, Slovenia and Croatia.
In
fiscal
2006, Reader’s Digest International contributed $1,031 million and $78 million
to our revenues and operating (loss) profit, respectively.
Consumer
Business Services
This
segment comprises Books Are Fun, Ltd. (Books Are Fun), QSP, Inc. (QSP), and
Quality Service Programs, Inc. (QSP Canada).
Books
Are
Fun operates in the United States and Canada and works with independent sales
representatives who sell books and gift items by display marketing products
on-site at schools and businesses.
QSP
and
QSP Canada help schools and other youth groups launch, promote and organize
fundraising campaigns that sell our magazines, other publishers’ magazines and
food and gift products, such as World’s Finest Chocolate products.
In
fiscal
2006, Consumer Business Services contributed $446 million and $(3) million
to
our revenues and operating (loss) profit, respectively.
-2-
Product
Lines
Books
and Home Entertainment Products
Our
books
and home entertainment products consist of Reader’s Digest Select Editions,
Reader’s Digest Young Families, series books, general books, Reiman 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. For
more information about how we market our books and home entertainment products,
please refer to the section of this report captioned “Marketing.”
Reader’s
Digest Select Editions
Reader’s
Digest Select Editions, which were formerly called “Condensed Books” in many
markets, are 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 26 other countries.
We
generally publish six volumes of Select Editions each 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 the
appropriateness of existing Select Editions works for its own local
market.
Reader’s
Digest Young Families
Reader’s
Digest Young Families sells products for children up to age eight, 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.
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. One of our series
is The
World’s Best Reading,
which
consists of full-length editions of classic 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
also publish illustrated series, which are generally closed-ended, in six
languages and sell them in 11 countries.
General
Books
Our
general books consist primarily of reference books, cookbooks, health books,
“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, nature, home, computers and puzzles. We publish general books in
23
languages and sell them in the United States, Canada and 42 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.
-3-
Reiman
Books
Reiman
books are books published by Reiman Media Group and whose editorial content
derives principally from material contributed to Reiman magazines by its
readers. Reiman books are created to complement the Reiman magazines and
leverage the magazines’ brand equity, reader loyalty and editorial capability.
Reiman principally markets annual editions of books that are mostly created
from
prior year magazine content; it also markets single sales products. Reiman
has
12 annual book programs and two calendar programs (including one book program
that was launched in fiscal 2006) 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.
Music
We
release our music collections on compact discs and cassettes in the United
States and 38 other countries. These releases 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 that reflect our customers’
tastes and expectations. In most markets, we also sell series products 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 and are now offering an increasing number of tracks through various
online providers. 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. We are also a member of the International Federation of the
Phonographic Industry in several other countries.
Video
We
market
our range of video products in 27 countries. Our home video products reflect
the
interests of our global customers—travel, natural history, history, and
children’s animated programs. Our high editorial and production standards make
our programs stand out in a competitive marketplace.
Our
original special interest documentaries are produced with award-winning
production companies in Europe, Australia and the United States. To ensure
we
are able to create programs cost effectively, we are developing partnerships
with international broadcasters and prestigious moving image
archives.
When
we
film for our original programs we archive the valuable footage for potential
use
in future productions. We are responding to technological innovation by filming
in high definition. We are keeping pace with DVD penetration in all markets
worldwide.
-4-
Production
and Fulfillment
We
hire
independent contractors to print and bind the various editions of Select
Editions. We have an agreement through 2007 with a printing company for printing
the English-language Select Editions distributed in the United States and
Canada. For all other North American direct mail books, we have an agreement
through 2009 with a printing company. We have a U.S. based manufacturing
contract for entertainment products that will expire at the end of calendar
year
2006, and we are currently negotiating a global contract for this business.
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. On a global basis, we have contracts
through 2008 with three printers for conventional books printed in China.
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
globally supply paper for Select Editions 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 who arrange 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 December 2012. In
addition, in July 2006, we entered a four-year contract with a single
fulfillment company to handle warehousing and fulfillment for our United States
direct mail business units. 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.”
We
believe that, generally, there is an adequate supply of alternative production
and fulfillment 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 contractors
be
unable to meet our production and fulfillment requirements.
Magazines
Reader’s
Digest Magazine
Reader’s
Digest magazineis
a
monthly, general interest magazine that features original articles, previously
published articles in condensed form, and a condensed version of a previously
published or soon-to-be published full-length book. The United States
English-language edition of Reader’s
Digest
also
contains monthly humor columns, such as “Laughter, The Best Medicine®,”
“Life
in These United States®”
and
“All In A Day’s Work®,”
and
other regular features, including “Quotable Quotes®,”
“Word
Power®,”
“Only
in America,”“Everyday Heroes,” “That’s Outrageous!®”
and
“RD
Living.” 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.
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.
-5-
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
content of and editorial procedures for the international editions of
Reader’s
Digest
are
similar to those of 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.
The
rd.comwebsite
extends 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 also
utilize rd.com
to
market our products through e-mail and the Internet, as well as to communicate
with and provide service to our customers online. For more information about
rd.com,
please
refer to the section of this report captioned “Marketing.”
Globally,
Reader’s
Digest is
published in 50 editions and 21 languages. We license independent contractors
to
publish Reader’s
Digest
in
India, Italy, Korea, Denmark, Norway, South Africa, Slovenia, Croatia and
Indonesia. These magazines are sold primarily through direct marketing.
Reiman
Magazines
Reiman
publishes 12 bi-monthly magazines and one quarterly magazine in the United
States and Canada, including Cooking
for 2,
which
we launched in the third quarter of fiscal 2005, and Birds
& Blooms Extra,
which
we launched in the fourth quarter of fiscal 2005.
Reiman
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 80% of the editorial content of Reiman magazines
is
contributed by readers and there is nominal advertising.
Special
Interest Magazines
We
publish several special interest magazines that we believe are consistent with
our image, editorial philosophy and market expertise.
In
fiscal
2006, we launched or tested a variety of new special interest magazines. These
magazines include Every
Day with Rachael Ray, our
new
food and lifestyle magazine in the United States; Daheim
in Deutschland
in
Germany and Meidän
Suomi
in
Finland, both general interest magazines with a strong local flavor;
JOY,
a
women’s magazine in Mexico; and Young
Family
magazine
in Russia. Also in Mexico, we began publishing two special interest magazines
-
Crecer Feliz
and
Car
and Driver Mexico - under
a
license from another publisher.
These
launches are in addition to our existing special interest magazines. In the
United States, we publish The
Family Handyman
and
American
Woodworker.
The
Family Handyman
provides
instructions and guidance for “do-it-yourself” home improvement projects.
American
Woodworker provides
information, instruction and guidance for professional and serious amateur
woodworkers. Internationally, we publish Receptar,
a
leading Czech do-it-yourself and gardening monthly magazine, Handyman
in
Australia and Our
Canada,
a
bi-monthly general interest magazine with principally reader-contributed
content.
-6-
We
promote most of 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.
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. In addition, we publish a
series of monthly check-out counter magazines branded as RD
Specials and
Taste
of Home Specials
that
consist primarily of repurposed content from our books and magazines relating
to
the topics of home, health and food.
Reader’s
Digest Trade Publishing
Trade
Publishing sells books and products for both children and adults and comprises
two divisions: Reader’s Digest Children’s Publishing and Adult Trade Publishing.
Reader’s Digest Children’s Publishing produces books, games and other products
for children up to age 12 under the Reader’s Digest Children’s Publishing
imprint. Its products are sold through retail channels as well as through our
other businesses (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, Sesame Street,
Fisher-Price, Marvel and NASCAR. The book products have been translated into
39
localized editions and are marketed in the United States, Canada and 40 other
countries.
Our
Adult
Trade Publishing group originates books in many illustrated reference
categories, including gardening, crafts, travel, do-it-yourself, history, and
family reference. These books are sold through retail channels, catalogs, book
clubs, Books Are Fun, QSP, television, and through our domestic and
international divisions.
Circulation
and Advertising
The
following table shows fiscal 2006 circulation and advertising information for
our portfolio of magazines:
Magazines
Circulation
Advertising
Pages
Carried
Reader’s
Digest
magazine(1)
18,324,000
10,520
Reiman
magazines(2)
14,168,000
8
Special
interest magazines
3,725,000
2,535
(1)
In
Canada and international markets, Reader’s
Digest
magazine is published in multiple editions and languages. Circulation
for
these editions
constitutes
a rate base.
(2)
Reiman
magazines do not have a guaranteed circulation rate base and are
not
audited by the Audit Bureau of Circulations, a not-for-profit organization
that audits circulation in the United States and Canada. The amount
indicated in
the table above represents their average circulation for the year
for all
of their publications.
Circulation
generated approximately 70% of total U.S. fiscal 2006 revenues for Reader’s
Digest
and
advertising generated approximately 30% of total revenues. Circulation levels
for all Reiman titles fluctuate throughout the year. The overall
circulation level for Reiman titles 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. Substantially
all
of the Reiman magazinesdo
not
accept on-page advertising and rely on subscriptions for approximately 90%
of
their revenue, with newsstand sales supplying the balance. “Bonus Books” of
coupons are poly-bagged with the food magazines.
-7-
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 Circulations. Subscriptions account for approximately 95% of the
U.S.
paid circulation of Reader’s
Digest,
while
single copy sales—via newsstands, supermarkets and similar retail
establishments—account for the remainder. We also 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. We sell subscriptions in
the
United States through a variety of direct response marketing techniques and
by
direct mail in international markets. We typically sell the largest percentage
of subscriptions between July and December of each fiscal year. Subscribers
to
Reader’s
Digest may
cancel their subscriptions at any time and we will refund any 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 more than 90% of circulation. The balance is attributable
to newsstand and other retail sales. Approximately 80% of total international
fiscal 2006 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.
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 October 2011. We have two printers to print
our Reiman magazines under contracts expiring in 2008.
Lightweight
coated and uncoated papers are the principal raw materials used in the
production of Reader’s
Digest, Reiman
and special interest magazines. Our global paper supply contract for
Reader’s
Digest
and
Reiman magazines expires in June 2008. We believe that our supply contracts
will
continue to 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
an agreement 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. This agreement expires
in December 2012. 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.”
-8-
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 fulfillment, warehousing,
customer service, and payment and order processing. We have two primary printing
companies for printing Reader’s
Digest
magazine
in Europe.
We
believe that, generally, there is an adequate supply of alternative production
and fulfillment 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 contractors
be
unable to meet our production and fulfillment requirements.
Allrecipes.com
On
April20, 2006, we acquired Allrecipes.com
for
approximately $66 million. Allrecipes.com
is
an
online community food and cooking website that leverages an active and growing
network of home cooks and generates revenue from advertising sponsorships and
retail licensing. Allrecipes.com
was
launched in 1997 as a place for home cooks to “meet” and share their favorite
recipes. Since its launch, Allrecipes.com
has
become the world’s largest online community of home cooks, with more than 1.8
million registered members. Each month, the website attracts an average of
6
million unique visitors who collectively view more than 70 million pages; during
peak holiday months, traffic spikes to more than 9 million visitors and 111
million page views. Allrecipes.com
also
includes 30,000 recipes, which are created, tested and reviewed by participating
home cooks.
Taste
of Home Entertaining
On
May 1,2006, we launched a new direct selling business as an extension of our
Taste
of Home magazine
brand in the United States. Revenues are generated from independent sales
consultants selling food and décor products to their party guests. As of June30, 2006, more than 4,000 consultants have joined and the number of shipped
parties exceeds 7,000.
Consumer
Business Services
This
reportable segment consists of Books Are Fun and QSP, which do not create their
own products, but rather have specific ways to market the products of our other
business units, as well as products that they acquire from other
businesses.
Books
Are Fun
Our
Books
Are Fun subsidiary sells premium quality books and gift items, including
Reader’s Digest books and home entertainment products, at discount prices. It
display markets those products on-site at schools and businesses in all 50
states of the United States and across Canada through 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 bath and beauty products, music,
videos and gift items. Books Are Fun’s products are sold by more than 800
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 and typically
experiences substantial volume in the second quarter of our fiscal
year.
-9-
Books
Are
Fun purchases book titles, gifts and other products from more than 500
publishers and vendors worldwide. Most 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.
QSP
QSP,
Inc.
operates in the United States and markets and sells subscriptions to
Reader’s
Digest,
the
Reiman magazines, the special interest magazines and other publishers’
magazines, as well as food, gift, music and book products. 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 420 sales
representatives.
QSP
is
party to a licensing agreement with World’s Finest Chocolate, Inc. that requires
QSP to purchase annual minimum amounts of World’s Finest Chocolate products and
gives QSP the exclusive right to sell those products for fundraising purposes
and through other channels, under specified circumstances, through 2020.
Quality
Service Programs, Inc., our Canadian subsidiary, conducts operations in Canada
substantially similar to those conducted by QSP in the United States.
In
the
United States, operations at QSP 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 independent contractors to
process and fulfill gift, food, magazine, music and book orders.
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. 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 the amount paid. We believe that our returned goods
policy is essential to our reputation and that it elicits a greater number
of
orders. Most of our customers are satisfied with our books and keep them. Sales
of our books and home entertainment products are seasonal. In the direct
marketing industry as a whole, more consumers respond in the fall and winter
months (especially before Christmas) than during the rest of the
year.
-10-
While
we
sell most copies of general books through initial promotional single offer
mailings, we also sell substantial additional copies through other channels
including catalog, package inserts and the Internet. We also distribute our
general books for retail sale in stores via independent distributors and via
Books Are Fun and QSP.
Reiman
markets most of its books through direct mail and cross-promotion on its
magazines. 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. In
addition, Reiman markets magazines principally via direct mail, package inserts,
the Internet and cross-promotion of titles within its magazine group. It markets
products to its customer database of approximately 47 million current and former
customers, combined with selective rental of outside customer lists. Reiman
test
markets new magazine ideas and titles, which rely on reader-submitted editorial
content, with current subscribers of their own magazines and with selected
readers from outside lists.
As
part
of our growth strategy and to better manage distribution and customer
acquisition costs, we are increasing sales of our products through direct
channels other than direct mail. These other distribution channels include
our
Consumer Business Services segment, direct-response television, package inserts,
free-standing inserts, telemarketing, the Internet, display marketing and other
direct sales. Reader’s
Digest
magazine
and our other magazine publications, including Reiman, obtain and renew the
vast
majority of its subscribers in the United States through non-sweepstakes
promotions.
We
are
adapting the editorial content and marketing methods of our magazines and books
and home entertainment products to new technologies. Our rd.com
website
links
to
our many international and domestic websites and to our multiple online stores
for shopping and information about our products. We also market subscriptions
on
rd.com.
In
fiscal 2006, rd.com
(including changeone.com
and
other
sub-sites) had over 17 million visitors from around the world. We are also
utilizing electronic direct marketing to offer magazine subscriptions and books
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 $2.6 million for the 2006 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. Although some of these
proceedings may have negatively affected our direct marketing business, we
do
not believe that any current proceedings or currently 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 four 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. Increases in the postal rate are factored
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.
-11-
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 databases of current and prospective customers in the
countries where we operate contribute significantly to our business. We are
constantly striving to improve our customer databases. We believe that our
U.S.
databases of more than 70 million households—over half the total number of
households in the country—are one of the largest direct response databases in
the United States. Our international databases include a total of almost 55
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 for our customer base and to facilitate
globalization of our operations.
The
United States and some international jurisdictions, particularly in Europe,
have
data protection laws or regulations that prohibit or limit exchanging the type
of information 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 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
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”, “Taste of Home”,
“Allrecipes.com”,
“Select Editions” 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.
-12-
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,
QSP 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 consumer 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, 2006, 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 (62)
In
April 1998, Mr. Ryder joined Reader’s Digest and was named Chairman of the
Board and Chief Executive Officer. He retired as Chief Executive
Officer
on January 1, 2006 but continues as Chairman of the Board.
Eric
W. Schrier (54)
Mr.
Schrier became
President and Chief Executive Officer of Reader’s Digest in January 2006.
Prior to that he had been
President, Reader’s Digest North America, since February 2003. Also, he
was Senior Vice President and Global Editor-in-Chief from January
2000,
when he joined Reader’s Digest, until February 2003.
Bonnie
K. Bachar (44)
Ms.
Bachar has been President, U.S. Publishing since August 2005. She
was
General Manager of the Reader’s Digest North American Publishing Group
from March 2004 to August 2005 and Vice President and General Manager
of
TheFamily Handyman Group prior to March 2004. She joined
Reader’s Digest in 1998.
Michael
A. Brizel (49)
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 (42)
Mr.
Clark has been Senior Vice President, Investor Relations and Global
Communications, since November 2004. He joined Reader’s Digest as Vice
President, Investor Relations, in March
2000.
-13-
Name
and Age
Positions
With Reader’s Digest and Recent Business
Experience
Thomas
D. Gardner (48)
Mr.
Gardner has been Executive Vice President of Reader’s Digest since January
2006 and has been President, Reader’s Digest International, since February
2003. Mr. Gardner has also had responsibility for the oversight of
Books
Are Fun since January 2006. He was 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 (47)
Mr.
Geltzeiler joined Reader’s Digest as Senior Vice President and Chief
Financial Officer in September 2001. In August 2004, Mr. Geltzeiler’s
responsibilities were expanded to include oversight of Global Operations
and Information Technology.
Gary
S. Rich (45)
Mr.
Rich has been President, QSP, and a Senior Vice President of Reader’s
Digest 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.
Dawn
M. Zier (41)
Ms.
Zier has been President, North American Consumer Marketing and U.S.
Books
and Home Entertainment since August 2005. She was Vice President,
Consumer Marketing, U.S. Magazines prior to August 2005. She joined
Reader’s Digest in February 1992.
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
-14-
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, NY10570-7000 or via e-mail to:
carlos_jimenez@rd.com.
You
should carefully consider the following risks associated with our businesses.
Any of the following risks could have a material adverse effect on our
businesses, financial condition or results of operations. The risks described
below are not the only ones we face. Our businesses may also be materially
adversely affected by risks that are not presently known to us or that we
currently believe to be immaterial. For additional information regarding risk
factors, see Item 7 of this report.
We
cannot assure you that we will attain the goals of our fiscal 2006-2008
three-year strategic plan by fiscal 2008.
During
fiscal 2006, we launched a three-year strategic plan, shifting our focus from
stabilization of our businesses to sustainable top- and bottom-line growth
by
(1) diversifying the core business, (2) deepening customer relationships and
(3)
leveraging our global scale. The failure to achieve the overall goal or the
components of the three-year strategic plan could have a material adverse effect
on our results of operations and financial condition.
We
may not be able to achieve the proper balance between circulation rate base
and
advertising revenues.
Like most companies that publish magazines, we must balance our circulation
rate
base goals, in particular those for the U.S. Reader’s
Digest magazine,
with our advertising revenue objectives. This effort requires both effective
management of the circulation rate base and the acquisition of new subscribers
through cost-effective marketing methods. To maintain our circulation rate
base,
we may incur significant additional costs. We cannot assure you that we will
be
able to retain and acquire a sufficient number of magazine subscribers in an
economically efficient manner. Failure to do so could require further reductions
of our circulation rate base, which could negatively affect our advertising
revenues and materially and adversely affect our results of operations and
financial condition.
Failure
to efficiently manage our direct marketing initiatives or to protect the
integrity of our customer databases could negatively affect our
business.
One
of
our most valuable assets is our customer list, which is a database containing
information about our current and prospective customers. We rely on this
database to develop and implement our direct marketing initiatives. Managing
the
frequency of our direct marketing initiatives and delivering appropriately
tailored products in such initiatives is crucial to maintaining and increasing
our customer base and achieving adequate results from our direct marketing
efforts. Enhancing the database, maintaining the ability to utilize the
information available from the database and properly utilizing the available
information are vital to the success of our business, and our failure to do
so
could materially and adversely affect our results of operations and financial
condition.
-15-
Changes
in privacy law could adversely affect our ability to effectively market our
products.
We
collect information from our customers in the various markets in which we
operate and we utilize that information principally for marketing and promotion
purposes. Our collection, transfer and use of this information is limited by
privacy and data protection laws and regulations in those jurisdictions,
including the National Do Not Call Registry operated by the U.S. Federal Trade
Commission, the U.S. Federal CAN-SPAM Act of 2003 and the European Data
Protection Directive. Our compliance with additional regulations in these areas
may increase our operating costs and adversely affect our ability to effectively
market our products. Our failure to comply with these regulations could result
in fines, sanctions and other penalties and additional restrictions on our
collection, transfer or use of personal data. These developments could
materially and adversely affect our results of operations and financial
condition.
Changes
in the legal and regulatory environment could increase our costs, restrict
our
operations and limit our marketing and other business
activities.
The
marketing and sale of our products is subject to various laws, regulations
and
policies administered by U.S. federal, state and local and foreign governments
in markets in which we operate our businesses. Changes in these laws,
regulations and policies, or in their interpretation, could increase our costs
and liabilities and limit the manner in which market our products and conduct
our other business operations.
We
currently rely on the use of sweepstakes as an important component of most
of
our direct marketing techniques in attracting and retaining customers in
non-U.S. markets. If significant legislative or regulatory restrictions on
these
techniques occur in these markets, we will be forced to revise our marketing
practices in those markets. We cannot assure you that revised practices would
yield equally favorable results, and the failure to do so could materially
and
adversely affect our results of operations and financial condition.
We
also rely on the use of sweepstakes as an important component of our direct
marketing efforts in our U.S. Books and Home Entertainment business. Legislative
and regulatory developments and agreements with state attorneys general in
the
United States have reduced the effectiveness of sweepstakes as a marketing
method. As a result, we have increasingly tested other direct marketing
techniques in an effort to diversify our overall marketing strategy in our
Books
and Home Entertainment business and to attract and retain new customers of
this
business. We cannot assure you that non-sweepstakes marketing techniques will
be
as effective as sweepstakes were. If we fail to effectively utilize alternative
marketing techniques in our Books and Home Entertainment business, our business
may be materially and adversely affected, which would materially and adversely
affect our results of operations and financial condition.
We
may not be able to successfully achieve the expected benefits of acquisitions
and other ventures.
In
the
recent past, we have acquired companies and we may in the future make
acquisitions intended to support and strengthen our businesses. Future
acquisitions may divert our management’s attention for our other business
operations. Future acquisitions also may require us to incur additional debt
and
contingent liabilities, which could materially and adversely affect our results
of operations and financial condition. Also, our failure to effectively
integrate newly acquired operations—including, among other things, (1) the
failure to maintain important business relationships, (2) the failure to retain
key employees and (3) the occurrence of unforeseen costs and complexities,
could
prevent us from realizing our expected rate of return on an acquired business
and could have a material and adverse affect on our results of operations and
financial condition.
-16-
Our
earnings and net worth could be materially and adversely affected by impairment
in the carrying value of goodwill or other intangible
assets.
The
carrying value of goodwill represents the fair value of an acquired business
in
excess of identifiable assets and liabilities as of the acquisition date. The
carrying value of other intangibles represents the fair value of trademarks,
trade names, and other acquired intangibles as of the acquisition date. Goodwill
and other acquired intangibles expected to contribute indefinitely to the cash
flows of the Company are not amortized, but must be evaluated by management
at
least annually for impairment. We assess our goodwill and other intangibles
for
impairment during the third fiscal quarter of each year, and on an interim
basis
should indicators of impairment become apparent. If carrying value exceeds
current fair value, the intangible is considered impaired and is reduced to
fair
value via a charge to earnings. During fiscal 2006 and 2005, we incurred
impairment charges totaling $316.8 million related to Books Are Fun goodwill.
Should management’s assessment of the fair value of any of our acquired
intangible assets decline, our earnings and net worth may be materially and
adversely affected. For additional information, see Note 6 to our Consolidated
Financial Statements referred to in Item 8 of this report.
We
operate in highly competitive industries and must launch new products to attract
new and younger customers to augment and replenish our maturing customer base
while maintaining the quality of existing products.
We
operate in highly competitive industries both in the United States and in our
foreign markets. We compete on the basis of the following, among other things:
(1) the variety, quality and attractiveness of our products and services; (2)
the pricing of our products and services; (3) the manner in which we market
and
promote our products and services; and (4) the effectiveness of the distribution
of our products and services and our customer service. Numerous well-established
and smaller entrepreneurial companies produce, market and sell products that
compete with the products that our businesses offer. Our magazines compete
with
other magazines for subscribers and with all media, including television, radio,
newspapers and the Internet, for advertising. Our Books and Home Entertainment
and Books Are Fun businesses compete with companies selling similar products
at
retail outlets, through direct and display marketing and on the Internet. QSP
competes with companies selling similar products through fundraising services,
direct marketing, the Internet and retail outlets.
Our success in attracting and retaining new and younger consumers to augment
and
replenish our maturing customer base depends in large part on our ability to
identify customer trends and preferences and to develop new products across
our
business lines and to acquire and effectively manage the inventory of new
products in our display marketing businesses in response to those trends and
preferences. If we fail to launch a broadly appealing mix of new products,
we
may not be able to attract new customers and it is possible that our existing
customers will seek product offerings from our competitors, which could
materially and aversely affect our results of operations and financial
condition.
We
face additional risks associated with significant non-U.S. operations and we
continue to expand into foreign markets.
We
are
committed to expanding our business internationally. As we enter new markets,
we
may, among other things: (1) utilize some portion of the attention of existing
regional personnel; (2) identify, recruit, hire, train, develop and retain
qualified and effective local personnel; (3) establish local internal business
systems; (4) establish external business relationships, including
outsourcing, joint venturing and licensing core business functions and (5)
compete with established local competitors that may be more familiar with the
particular tastes of the consumers in such markets. We cannot guarantee that
we
will be successful. If we fail to accomplish these matters effectively, our
expansion opportunities could be limited and our results of operations and
financial condition could be materially and adversely affected.
-17-
Economic
weakness in the United States and abroad could negatively affect our
business.
Most
of
our products are recreational in nature and, therefore, involve discretionary
spending on the part of consumers. This makes our products particularly
sensitive to general economic conditions and economic cycles and trends in
advertising placements. Also, we derive a portion of our revenues from the
sale
of advertising in our publications. Our advertising revenues are susceptible
to
fluctuations in economic cycles. Sustained economic weakness in the United
States or in Europe and in other markets where we generate a significant amount
of our revenues, would likely further reduce consumer spending in our markets
and negatively affect our business, which could materially and adversely affect
our results of operations and financial condition.
Currency
exchange rate fluctuations could reduce our revenue and net
income.
We
operate globally, through operations in various locations around the world.
In
fiscal 2006, we generated 50% of our revenue in markets outside of the United
States. We purchase a significant portion of our inventory and raw materials
primarily in U.S. dollars. The functional currency for most of our foreign
operations is the applicable local currency. In preparing our financial
statements, we translate revenues and expenses in foreign countries from their
local currencies into U.S. dollars using weighted average exchange rates.
If the U.S. dollar strengthens relative to local currencies, our reported
revenues, gross profits and net income will likely be reduced. Given our
inability to predict the degree of exchange rate fluctuations, we cannot
estimate the effect these fluctuations may have upon future reported results,
product pricing or our overall financial condition, but they could materially
and adversely affect our results of operations and financial
condition.
Increases
in postage costs or paper prices could negatively affect our
results.
Because
the price of postage and paper are two of our largest operating expenses, our
income may be reduced by increases in either postage or paper
prices.
We
expect to incur postage and delivery service costs of approximately $400 million
in fiscal 2007. We largely use the United States Postal Service in the United
States and a variety of carriers outside of the United States. Postage costs
increase periodically and can be expected to increase in the future. Higher
postal rates or other delivery charges increase the total cost of our products
to the customers, which may have a negative effect on sales.
Paper is the principal raw material used in our business. We expect to incur
costs of approximately $200 million in fiscal 2007 for paper for printed
products and promotional material. The price of paper may fluctuate
significantly in the future. Although we have attempted to ensure adequate,
competitively priced, long-term supplies of paper, changes in the market supply
of or demand for paper could affect delivery times and prices. We cannot be
sure
that we will not need to find alternative sources for paper from time to time
and that we will continue to have access to paper in the necessary amounts
or at
reasonable prices or that any increases in the cost of paper will not have
a
material adverse effect on our business.
Our inability to absorb the impact of increases in postage and paper costs
or
our strategic determination not to pass on all or a portion of these increases
to the customers could materially and adversely affect our results of operations
and financial condition.
We
may not be able to obtain at favorable prices the third-party products that
we
sell.
Our
profit margins in our Books Are Fun and QSP businesses are highly dependent
on
the costs to obtain the books, gifts and magazines that they sell. Although
these products have been available to us on negotiated, competitive terms in
the
past, there can be no assurance that we will have access to these products
at
comparable prices in the future.
-18-
A
failure by QSP to meet minimum purchase requirements in one of its agreements
could materially and adversely affect our results of operations and financial
condition.
QSP
entered into a long-term licensing agreement with World’s Finest Chocolate, Inc.
in May 2000 pursuant to which QSP is licensed to sell World’s Finest Chocolate
products as part of QSP’s fundraising support business. The agreement was
amended in 2002 to reduce the minimum purchase requirements and extend the
term
of the agreement. Under a long-term licensing agreement with World’s Finest
Chocolate, Inc. originally entered into in May 2000, QSP must satisfy estimated
minimum annual purchase requirements of chocolate products ranging from
approximately $56 million in fiscal 2007 to approximately $75 million
in each year from fiscal 2008 to fiscal 2021. For additional information about
this agreement, see
Note
6 to our Consolidated Financial Statements referred to in Item 8 of this
report.
QSP is
required to meet these minimum annual purchase requirements regardless of
whether QSP would otherwise use that amount of World’s Finest Chocolate products
in the operation of its business. During the fourth quarter of fiscal 2006,
we
determined that it was probable that we will not meet the calendar 2006 minimum
tonnage purchase commitment under this agreement and accordingly, recorded
a
charge of $6 million. We cannot assure you that QSP will be able to satisfy
these minimum requirements throughout the remainder of the term of the
agreement. A significant failure of QSP to meet the minimum annual purchase
requirements under the agreement could materially and adversely affect our
results of operations and financial condition.
We
may not be able to retain or attract the key management, creative, editorial,
marketing and sales personnel that we need to remain competitive and
grow.
We
operate in a number of highly visible industry segments where there is intense
competition for experienced and highly effective key employees. Our successful
operations in these segments may increase the market visibility of members
of
our key management and creative and editorial teams and result in their
recruitment by other businesses.
We
depend on our ability to identify, recruit, hire, train, develop and retain
qualified and effective personnel. A loss of a significant number of skilled
creative and editorial personnel could have a negative effect on the quality
of
our products. Similarly, a loss of a significant number of experienced and
effective sales personnel would likely result in fewer sales of our products
and
could materially and adversely affect our results of operations and financial
condition. We expend significant resources and management time in identifying
and training our creative, editorial, marketing and sales personnel. Our ability
to identify, recruit, hire, train, develop and retain qualified and effective
personnel in these areas depends, however, on numerous factors, including
factors that we cannot control, such as competition and conditions in the local
employment markets in which we operate.
Furthermore, we depend on the continued services of our senior management team.
This team is familiar with our industries and our business strategies and the
departure of key management personnel could adversely affect our business,
which
could materially and adversely affect our results of operations and financial
condition.
Increases
in sales or other taxes could reduce our revenues.
In
some
markets, our products are subject to local and national sales taxes and other
taxes such as value added taxes. Higher taxes will either increase the cost
of
our products to consumers, which could have a negative effect on the sales
of
our products, or reduce profit margins on these products if we do not pass
on
the increase to customers. This could materially and adversely affect our
results of operations and financial condition.
-19-
Events
that are beyond our control may disrupt the marketing and promotion and delivery
of our products and services.
The
success of our businesses is largely contingent on the availability of direct
access to consumers. A significant portion of our business relies on postal
services for delivery of products and for promotional marketing activity. For
example, our Consumer Business Services segment requires direct personal access
to consumers through offices and schools for display marketing and access to
schools and youth groups for fund-raising activities. As a result, any event
that disrupts or limits our direct access to consumers could materially and
adversely affect our business, which could materially and adversely affect
our
results of operations and financial condition. Some of these events may be
beyond our control, such as: adverse weather conditions; war; political
instability or civil unrest; terrorism and related heightened security measures;
natural and other disasters and catastrophic events; pandemics; increased energy
costs; strikes and other labor-related supply chain disruptions;
Our
businesses are largely seasonal and could be significantly unfavorably affected
by adverse events during the principal selling season.
Our
businesses are largely seasonal, with more marketing activity occurring during
the Northern Hemisphere’s fall and early winter. Shifts in the timing of
important holding selling seasons relative to our fiscal quarters also may
affect our results. Higher seasonal and holiday demand for our products and
services increases, among other things, our inventory requirements and our
borrowing and liquidity requirements. The occurrence of unfavorable
events—whether within or outside of our control—during the periods of seasonally
high demand or our failure to effectively manage our seasonal inventory could
have a disproportionately unfavorable effect on our business, which could
materially and adversely affect our results of operations and financial
condition.
We
may not be able to adequately protect our intellectual property, our brand
and
our reputation.
Our
copyrights, trademarks, service marks patents, trade secrets and all of our
other intellectual property rights are important assets. We rely on copyright,
patent, trademark and other laws in the United States and other jurisdictions
to
protect our proprietary rights. It may be more difficult to protect our
intellectual property rights in some foreign jurisdictions. Our significant
proprietary rights could be infringed or invalidated. In addition, our business
activities could be alleged or determined to infringe upon the proprietary
rights of others. We could incur significant costs to protect our rights or
to
defend against infringement claims by others. If we are unsuccessful, our
results of operations and financial condition could be materially and adversely
affected.
Our brand and our reputation are also important assets as our ability to attract
and retain customers is in part dependent upon the external perceptions of
our
Company, the quality of its products and services, and its integrity. Damage
to
our reputation or negative publicity or perceptions about us, including by
association with adverse developments in the industries in which we conduct
our
businesses, could cause a loss of consumer confidence in our Company, as well
as
unfavorable regulatory scrutiny.
Our
substantial indebtedness, and the potential for increased indebtedness, could
adversely affect our financial condition, which could adversely affect our
liquidity and results of operations.
As
of
June 30, 2006, we had significant leverage consisting of approximately $395.0
million of indebtedness outstanding under our $500 million Five-Year Revolving
Credit Agreement (the “Revolving Credit Facility”) and $300 million
in 6
½% senior unsecured notes due 2011 (the “Senior Unsecured Notes”). This
level of indebtedness could have important consequences to stockholders,
including the following:
·
it
may limit our ability to borrow money for capital expenditures,
acquisitions, debt service requirements and general corporate or
other
purposes;
·
it
may limit our flexibility in planning for, or reacting to, changes
in our
business and future business opportunities and changing market
conditions;
-20-
·
we
may be more highly leveraged than some of our competitors, which
may place
us at a competitive disadvantage;
·
it
may make us more vulnerable than a less leveraged company to a downturn
in
our business or in the economy;
·
there
would be a material adverse effect on our business, results of operations
and financial condition if we were unable to service our
indebtedness.
The interest rate under our Revolving Credit Facility is based in part on our
leverage ratio and LIBOR, the prime rate or the federal funds rate then in
effect. Increases in our leverage ration or increases in LIBOR, the prime rate
or the federal funds rate could result in an increase in our interest rates,
which would increase our interest payment obligations and would have an adverse
effect on us.
We
maintain liquidity to fund the ongoing cash needs of our businesses, including
the repayment of outstanding indebtedness, the payment of dividends and the
repurchase of our stock, principally through our operating cash flow and our
borrowings. Our ability to make payments on and to refinance our indebtedness
will depend on our ability to generate cash from our operations in the future
and manage our working capital. To the extent that our operating cash flow
is
insufficient and we are unable to access the capital markets on terms acceptable
to us, we may decrease our business expenditures or we may increase our
indebtedness under our existing Revolving Credit Facility or through additional
financings, or we may do both. In order to obtain additional financing, we
may
be required to refinance our existing credit facilities. Our failure to obtain
any necessary refinancing or additional financing on terms and conditions that
are comparably favorable to us could materially and adversely affect our results
of operations and financial condition.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our Revolving Credit
Facility and other borrowing facilities will be adequate to meet our future
liquidity needs for the foreseeable future.
We
cannot assure you, however, that our business will generate sufficient cash
flow
from operations or that future borrowings will be available to us in an amount
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. If we cannot service our indebtedness, we may have to take actions such
as selling assets, seeking additional equity or forgoing, reducing or delaying
capital expenditures, strategic acquisitions, investments and alliances. We
cannot assure you that any such actions, if necessary, could be effected on
commercially reasonable terms, or at all.
Restrictive
covenants in our credit facilities and the indenture governing our Senior
Unsecured Notes may restrict our ability to pursue our business
strategies.
Our
Revolving Credit Facility and, in some cases, the indenture governing our Senior
Unsecured Notes will limit our ability, among other things, to:
·
incur
additional indebtedness;
·
issue
preferred stock;
·
incur
liens;
·
consolidate,
merge, sell or otherwise dispose of all or substantially all of our
assets;
·
sell
assets, including capital stock of
subsidiaries;
-21-
·
pay
dividends or make distributions in respect of our capital stock or
make
certain other restricted payments or investments, subject to certain
exceptions;
·
make
certain types of investments, loans, guarantees or
acquisitions;
·
enter
into transactions with our
affiliates
·
agree
to payment restrictions affecting our subsidiaries;
and
·
make
capital expenditures.
In
addition, our Revolving Credit Facility requires us to achieve specified
financial and operating results and maintain compliance with specified financial
ratios. If we fail to comply with the covenants containing these requirements,
we would be in default and, under certain circumstances, our the lenders under
the Revolving Credit Facility could declare all amounts owed to them to be
due
and payable, which could have a material and adverse effect on our results
of
operations and financial condition.
Significant
changes in pension fund investment performance or assumptions relating to
pension costs may have a material effect on the valuation of pension
obligations, the funded status of pension plans and our pension cost.
Our
funding policy for pension plans is to accumulate plan assets that, over the
long run, will approximate the present value of projected benefit obligations.
Although our U.S. qualified pension plan is overfunded, some of our foreign
pension plans are under-funded. Our pension cost is materially affected by
the
discount rate used to measure pension obligations, the level of plan assets
available to fund those obligations at the measurement date and the expected
long-term rate of return on plan assets. Significant changes in investment
performance or a change in the portfolio mix of invested assets can result
in
corresponding increases and decreases in the valuation of plan assets,
particularly equity securities, or in a change of the expected rate of return
on
plan assets. A change in the discount rate would result in a significant
increase or decrease in the valuation of pension obligations, affecting the
reported funded status of our pension plans as well as the net periodic pension
cost in the following fiscal years. Similarly, changes in the expected return
on
plan assets can result in significant changes in the net periodic pension cost
of the following fiscal years. Significant variations in pension performance
could produce volatility in our reported results and significant under-funding
in our foreign pension plans could necessitate higher company contributions
to
those plans.
The
table
below shows our headquarters and other properties that we own or lease. These
locations house our executive, administrative, editorial, advertising sales
and
operational offices and warehouse and other facilities.
Location
Area
(sq. ft.)
Westchester
County, NY
278,536
leased
Greendale,
WI
164,800
owned
Fairfield,
IA
105,393
owned
New
York, NY
99,200
leased
Various
U.S. cities
72,788
leased
International
363,981
owned; 364,452 leased
In
December 2004, we completed the sale and partial leaseback of our headquarters
in Westchester County, New York. During fiscal 2005 we sold our local
headquarters buildings in Australia and Portugal, and during fiscal 2006 we
sold
our local headquarters building in Mexico.
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 leases that expire in the near future.
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
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
The
information contained under the captions “Selected Quarterly Financial Data and
Dividend and Market Information” and “Corporate and Shareholder Information” in
Exhibit 13 to this report is incorporated into this Item by
reference.
Issuer
Purchases of Equity Securities
Period
(a)
Total Number of Shares (or Units) Purchased(1)
(b)
Average Price Paid per Share (or Unit)
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs(2)
(d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under
the
Plans or Programs(2)
April
1-30, 2006
79,433
$
13.76
75,000
48,601,320
May
1-31, 2006
1,350,000
$
13.73
1,350,000
30,066,759
June
1-30, 2006
835
$
14.00
---
30,066,759
Total
1,430,268
$
13.73
1,425,000
(1)
The
shares purchased in April and June 2006 include 4,433 and 835 shares,
respectively, of the Company’s Common Stock surrendered to the Company by
employees in order to fulfill tax withholding obligations of employees
upon vesting of restricted stock.
(2)
On
April 28, 2005, we
announced our repurchase of up to $100.0 million of our Common Stock
over
the succeeding two years.
Recent
Sales of Unregistered Securities
Shown
in
the table below are securities of the registrant that were not registered under
the Securities Act of 1933 and were sold by the registrant during the fiscal
year ended June 30, 2006. The securities were sold to employees of subsidiaries
of the Company located outside of the United States pursuant to international
employee stock purchase plans that permitted the participants to purchase shares
of the Company’s Common Stock, generally at a purchase price of 95% of the fair
market value of the stock on the last day of a six-month period. These sales
were made outside of the United States in reliance on the safe harbor under
Regulation S under the Securities Act of 1933.
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;
·
the
strength of relationships of newly acquired and newly formed businesses
with their employees, suppliers and customers;
·
the
accuracy of the basis of forecasts relating to newly acquired and
newly
formed businesses;
·
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 reengineering 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;
-25-
·
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 our access to consumers;
and
·
the
economic effects of terrorist activity and related events, especially
those limiting our access to consumers and otherwise affecting
the direct
marketing and direct sales
industries.
For
additional information regarding risk factors, see Item 1A of this
report.
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 “Quantitative and Qualitative Disclosures About Market
Risk” 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 reports of Ernst &
Young LLP as of and for the year ended June 30, 2006 and KPMG LLP as of and
for
the years ended June 30, 2005 and 2004 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
Our
management evaluated, with the participation of our principal executive officer
and principal financial officer, the effectiveness of our disclosure controls
and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
the
end of the period covered by this report.
Internal
Control Over Financial Reporting
The
information contained under the captions “Report of Management” and “Report of
Independent Registered Public Accounting Firm” in Exhibit 13 to this report are
incorporated into this Item by reference. There has been no change in the
Company’s internal control over financial reporting during the fiscal quarter
ended June 30, 2006, that has materially affected, or is reasonably likely
to
materially affect, the Company’s internal control over financial
reporting.
Information
required by this Item with respect to our directors under the captions “Proposal
1: Election of Directors” and “Governance Information” in the Proxy Statement
for our Annual Meeting of Stockholders to be held on November 17, 2006, is
incorporated into this Item by reference.
Information
required by this Item 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.
Information required
by this Item with respect to compliance with Section 16 of the Securities
Exchange Act of 1934 appears under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement for our Annual Meeting of
Stockholders to be held on November 17, 2006, and is incorporated into this
Item
by reference.
Code
of Ethics
Our
Ethical, Legal and Business Conduct Policies, which are a “code of ethics”
within the meaning of Item 406 of the Securities and Exchange Commission’s
Regulation S-K, apply to all of our Directors and employees, including our
principal executive officer, principal financial officer and principal
accounting officer, or persons performing similar functions. These Policies
are
available on our Internet website at www.rd.com.
We
intend to post on our website (or disclose by any other means permitted under
SEC rules) any amendment to, or waiver from, any provision of the Policies
that
applies to our principal executive officer, principal financial officer or
principal accounting officer, or persons performing similar
functions.
Information
required by this Item 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 17, 2006, is incorporated into this Item
by
reference.
-28-
ITEM
12.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity
Compensation Plan Information
The
following table sets forth information as of June 30, 2006, with respect to
compensation plans under which equity securities of Reader’s Digest may be
issued. The equity securities to be issued under the plans are Reader’s Digest
Common Stock.
Plan
category
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights(1)
(a)
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column (a))
(c)
Equity
compensation plans approved by security holders
14,439,021
$
19.81
4,110,484
Equity
compensation plans not approved by security holders
---
---
---
Total
14,439,021
$
19.81
4,110,484
(1)
Includes
3,597,890 shares available for future grants under the Company’s 2005 Key
Employee Long Term Incentive Plan. This plan provides for the grant
of
stock options, stock appreciation rights, restricted stock, performance
shares, performance units and other stock-based awards. Includes
73,750
shares available for future grant under the Company’s Director
Compensation Program. Includes 241,934 shares available for issuance
under
the Company’s Employee Stock Purchase Plan, which permits U.S. employees
to purchase shares from Reader’s Digest at a discount. Includes 196,910
shares available for issuance under the Company’s International Employee
Stock Ownership Plan, which comprises our international employee
stock
purchase plans for non-U.S. employees and our U.K. Share Incentive
Plan,
which provides for compensatory share awards to U.K.
employees.
Security
Ownership Information
Information
required by this Item 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 17,2006, is incorporated into this Item by reference.
ITEM
13.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information
required by this Item with respect to principal accountant fees and services
under the captions “Audit Committee Report” and “Ratification of Independent
Registered Public Accounting Firm” in the Proxy Statement for our Annual Meeting
of Stockholders to be held on November 17, 2006, is incorporated into this
Item
by reference.
-30-
PART
IV
ITEM
15.EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a) 1Financial
Statements
An
index
of our Consolidated Financial Statements appears on page 38 of this
report.
2Financial
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.
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.*
4.1
Indenture,
dated as of March 3, 2004, between The Reader’s Digest Association, Inc.,
as issuer, and JPMorgan Chase Bank, as trustee, filed as Exhibit
4.1 to
our Registration Statement on Form S-4 (Registration No. 333-113961)
filed
on March 26, 2004, is incorporated herein by
reference.
4.2
Registration
Rights Agreement, dated as of March 3, 2004, by and among The
Reader’s
Digest Association, Inc., J.P.Morgan Securities Inc., ABN AMRO
Incorporated, Commerzbank Aktiengesellschaft, The Royal Bank
of Scotland,
plc and Wachovia Securities Inc., filed as Exhibit 4.2 to our
Registration
Statement on Form S-4 (Registration No. 333-113961) filed on
March 26,2004, 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
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 March31, 1996,
is incorporated herein by
reference.*
*Management
contract or compensatory contract, plan or arrangement.
-31-
10.7
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 June30, 2003,
is incorporated herein by
reference.*
10.8
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.*
10.9
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.*
10.10
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.*
10.11
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.*
10.12
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.*
10.13
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.*
10.14
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.*
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 June30, 2002,
is incorporated herein by
reference.*
10.17
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.*
*Management
contract or compensatory contract, plan or arrangement.
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10.18
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.*
10.19
Form
of Indemnification Agreement between The Reader’s Digest Association, Inc.
and individual directors and Named Executive 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.*
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 December31, 2003, is incorporated herein by
reference.*
10.23
Form
of stock option award terms and conditions to Named Executive
Officers
under The Reader’s Digest Association, Inc. 1994 and 2002 Key Employee
Long Term Incentive Plans,
filed as Exhibit 10.34 to our Quarterly Report on Form 10-Q
for the
quarter ended September 30, 2004, is incorporated herein by
reference.*
10.24
Form
of restricted stock award terms and conditions to Named Executive
Officers
under The Reader’s Digest Association, Inc. 1994 and 2002 Key Employee
Long Term Incentive Plans,
filed as Exhibit 10.35 to our Quarterly Report on Form 10-Q
for the
quarter ended September 30, 2004, is incorporated herein by
reference.*
10.25
Addendum
effective January 1, 2005 to The Reader’s Digest Association, Inc.
Director Compensation Program, filed as Exhibit 10.34 to our Current
Report on Form 8-K dated November 18, 2004, is incorporated herein
by
reference.*
10.26
Amended
and Restated Sale Purchase Agreement between The Reader’s Digest
Association, Inc. and GAP III Properties LLC and Summit Development,
LLC
dated as of November 18, 2004, but effective as of September 10,2004,
filed as Exhibit 10.35 to our Current Report on Form 8-K dated
November18, 2004, is incorporated herein by
reference.
10.27
Description
of operation of the executive incentive program of The Reader’s Digest
Association, Inc., including the Senior Management Incentive Plan
(fiscal
2006 awards), the Management Incentive Compensation Plan (fiscal
2006
awards) and the 2002 Key Employee Long Term Incentive Plan (fiscal
2005
and 2006 awards), included in Item 1.01 of our Current Report on
Form 8-K
dated March 11, 2005, is incorporated herein by
reference.*
*Management
contract or compensatory contract, plan or arrangement.
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10.28
Five-Year
Revolving Credit Agreement, dated as of April 14, 2005, among The
Reader’s
Digest Association, Inc., as Borrower and Guarantor, Books Are
Fun, Ltd.,
QSP, Inc. and Reiman Media Group, Inc., as Borrowing Subsidiaries
and
Subsidiary Guarantors, the Lenders party thereto, filed as Exhibit
10.1 to
our Current Report on Form 8-K dated April 14, 2005, is incorporated
herein by reference.
10.29
The
Reader’s Digest Association, Inc. 2005 Key Employee Long Term Incentive
Plan, filed as Exhibit 10.6 to our Current Report on Form 8-K dated
August12, 2005, is incorporated herein by
reference.*
Form
of award letter and terms and conditions of fiscal 2006 stock option
grants to Named Executive Officers under The Reader’s Digest Association,
Inc. 2002 and 2005 Key Employee Long Term Incentive Plans (including
amendments to previous awards under The Reader’s Digest Association, Inc.
1989 and 1994 Key Employee Long Term Incentive Plans), filed as
Exhibit
10.1 to our Current Report on Form 8-K dated August 12, 2005, is
incorporated herein by reference.*
10.32
Form
of award letter and terms and conditions of fiscal 2006 restricted
stock
grants to Named Executive Officers under The Reader’s Digest Association,
Inc. 2002 and 2005 Key Employee Long Term Incentive Plans (including
amendments to previous awards under The Reader’s Digest Association, Inc.
1989 and 1994 Key Employee Long Term Incentive Plans), filed as
Exhibit
10.2 to our Current Report on Form 8-K dated August 12, 2005, is
incorporated herein by reference.*
10.33
Form
of award letter and terms and conditions of fiscal 2005-2007 restricted
stock unit grants to Named Executive Officers under The Reader’s Digest
Association, Inc. 2002 Key Employee Long Term Incentive Plan, filed
as
Exhibit 10.4 to our Current Report on Form 8-K dated August 12,2005, is
incorporated herein by reference.*
10.34
Form
of award letter and terms and conditions of fiscal 2006-2008 restricted
stock unit grants to Named Executive Officers under The Reader’s Digest
Association, Inc. 2002 Key Employee Long Term Incentive Plan, filed
as
Exhibit 10.5 to our Current Report on Form 8-K dated August 12,2005, is
incorporated herein by reference.*
10.35
Description
of performance criteria for fiscal 2005-2007 and 2006-2008 restricted
stock units awarded to Named Executive Officers of The Reader’s Digest
Association, Inc.,
included in Item 1.01 of our Current Report on Form 8-K dated August12,2005, is incorporated herein by
reference.*
10.36
Letter
agreement dated as of October 31, 2005 between The Reader’s Digest
Association, Inc. and Thomas O. Ryder, filed as Exhibit 10.53 to
our
Current Report on Form 8-K dated October 31, 2005, is incorporated
herein
by reference.*
10.37
Noncompetition,
Nonsolicitation and Confidentiality Agreement dated October 28,2005
between The Reader’s Digest Association, Inc. and Eric W. Schrier, filed
as Exhibit 10.54 to our Current Report on Form 8-K dated October31, 2005,
is incorporated herein by
reference.*
*Management
contract or compensatory contract, plan or arrangement.
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10.38
Merger
Agreement dated March 31, 2006 by and among The Reader’s Digest
Association, Inc., RD Merger Sub, Inc. and Allrecipes.com, Inc.
filed as
Exhibit 2.1 to our Current Report on Form 8-K dated March 31, 2006,
in
incorporated herein by reference.
10.39
Form
of Support Agreement dated March 31, 2006 by and among The Reader’s Digest
Association, Inc., RD Merger Sub, Inc. and the signatories thereto,
filed
as Exhibit 10.1 to our Current Report on Form 8-K dated March 31,2006, in
incorporated herein by reference.
10.40
First
Amendment, dated as of April 19, 2006, to the $400,000,000 Five-Year
Revolving Credit Agreement, dated as of April 14, 2005, among The
Reader’s
Digest Association, Inc., the Borrowing Subsidiaries party thereto,
the
Lenders party thereto, JPMorgan Chase Bank, as administrative agent
and
collateral agent, and the co-documentation agents party thereto,
filed as
Exhibit 10.58 to our Current Report on Form 8-K dated April 19,2006, is
incorporated herein by reference.
10.41
The
Reader’s Digest Association, Inc. 2006 Income Continuation Plan for Senior
Management.*
10.42
The
Reader’s Digest Association, Inc. Executive Cash Balance Plan (Amended
& Restated June 30, 2006).*
10.43
Compensation
information regarding a Named Executive Officer, included in Item
1.01 of
our Current Report on Form 8-K dated November 18, 2005, is incorporated
herein by reference.*
10.44
Form
of award letter and terms and conditions of fiscal 2007 stock option
grants to Named Executive Officers under The Reader’s Digest Association,
Inc. 2005 Key Employee Long Term Incentive Plan, filed as Exhibit
10.1 to
our Current Report on Form 8-K dated August 17, 2006, is incorporated
herein by reference.*
10.45
Form
of award letter and terms and conditions of fiscal 2007-2009 restricted
stock unit grants to Named Executive Officers under The Reader’s Digest
Association, Inc. 2005 Key Employee Long Term Incentive Plan, filed
as
Exhibit 10.2 to our Current Report on Form 8-K dated August 17,2006, is
incorporated herein by reference.*
10.46
Form
of retention restricted stock unit grants to Named Executive Officers
under The Reader’s Digest Association, Inc. 2005 Key Employee Long Term
Incentive Plan, filed as Exhibit 10.3 to our Current Report on
Form 8-K
dated August 17, 2006, is incorporated herein by
reference.*
10.47
Description
of operation of the Senior Management Incentive Plan (Fiscal 2007)
and the
Management Incentive Compensation Plan (Fiscal 2007) of The Reader’s
Digest Association, Inc, included in Item 1.01 of our Current
Report on Form 8-K dated August 17, 2006, is incorporated herein
by
reference.*
*Management
contract or compensatory contract, plan or arrangement.
-35-
13
Financial
information to be included in our 2006 Annual Report to Stockholders
(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).
Letter
of KPMG LLP to the Securities and Exchange Commission dated August29,2005, filed as Exhibit 16.1 to our Current Report on Form 8-K dated
August23, 2005, is incorporated herein by
reference.
16.2
Letter
of KPMG LLP to the Securities and Exchange Commission dated August31,2005, filed as Exhibit 16.2 to our Current Report on Form 8-K dated
August30, 2005, is incorporated herein by
reference.
21
Subsidiaries
of The Reader’s Digest Association,
Inc.
23.1
Consent
of independent registered public accounting firm (Ernst & Young
LLP).
23.2
Consent
of independent registered public accounting firm (KPMG
LLP).
24
Power
of attorney.
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.
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.
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.
Consolidated
Statements of Cash Flows--For the Years Ended June 30, 2006, 2005
and
2004
*
Consolidated
Statements of Changes in Stockholders’ Equity--For the Years Ended June30, 2006, 2005 and 2004
*
Notes
to Consolidated Financial Statements
*
Reports
of Independent Registered Public Accounting Firms
*
Report
of Management
*
Selected
Financial Data
*
Selected
Quarterly Financial Data and Dividend and Market Information
(Unaudited)
*
Corporate
and Shareholder
Information
*
____________
*This
financial information is incorporated by reference to our 2006 Annual Report
to
Stockholders. For additional information, please refer to Item 8 of this
report.
-
38 -
Dates Referenced Herein and Documents Incorporated by Reference