Exhibit 99.1
The Reader's Digest Association, Inc.
Media: William Adler, (914) 244-7585 william.adler@rd.com
Investor Relations: Richard Clark, (914) 244-5425 richard.clark@rd.com
Reader's Digest Reports Earnings for 4Q and Fiscal 2003;
Announces Guidance and Outlook for Fiscal 2004
PLEASANTVILLE, N.Y., July 30, 2003 -- The Reader's Digest Association,
Inc. (NYSE: RDA) today reported a loss of ($0.14) per share, including
restructuring charges totaling ($0.20) per share, for the Fiscal 2003 fourth
quarter ended June 30, 2003. Excluding these charges, the results were in
line with the company's prior guidance. By comparison, earnings per share
for the Fiscal 2002 fourth quarter was a loss of ($0.03), including
restructuring and special items of ($0.22).
Fiscal 2003 free cash flow (change in cash before the change in total
borrowings, dividends, share repurchases, divestitures and acquisitions)
continued strong at $26 million in the fourth quarter, closing the year with
$162 million, compared with $160 million in Fiscal 2002. The company reduced
its total debt outstanding by $85 million, more than double its required
payment of $32 million. In addition, approximately $100 million in cash was
used to complete the recapitalization and share repurchase in December 2002.
At year-end, total debt outstanding was $866 million, and cash on hand was
$51 million.
Fourth-quarter Fiscal 2003 revenues were $564 million, up 3 percent from
$545 million in the prior-year quarter. The company had an operating loss of
($6) million, including ($26) million in restructuring charges related to
companywide re-engineering and cost-reduction programs to improve
profitability. This compares with an operating profit of $7 million in the
Fiscal 2002 fourth quarter, which included restructuring charges and special
items of ($26) million.
"The fourth quarter was in line with our expectations, and we are
accelerating our cost reduction plans in an effort to position the company
for improved earnings performance," said Thomas O. Ryder, Chairman and Chief
Executive Officer. "The quarter was consistent with the full year, which was
characterized by overall flat revenues and operating profits. We achieved
significant profit growth in our U.S. businesses, principally because of the
addition of Reiman Media Group, as well as sharply reduced losses at U.S.
Books and Home Entertainment. For the full year, revenues for all U.S.
businesses were up 16 percent collectively, and operating profits more than
doubled. Reiman, Books Are Fun, and QSP contributed to revenue growth,
although at a slower pace than previously anticipated. While the domestic
gains were encouraging, they were offset in both the quarter and the year by
significant declines in almost all of our international markets. Adjusted
EBITDA for the year grew by 11 percent to $244 million, contributing to
strong free cash flows and enabling the company to accelerate debt repayment."
Full-year Fiscal 2003 EPS was $0.60, including restructuring charges and
special items totaling ($0.32). Fiscal 2002 earnings per share was $0.89,
including restructuring charges and special items of ($0.22). Fiscal 2003
revenues were up 4 percent, to $2.5 billion, and operating profits were $139
million, including ($40) million in restructuring charges and special items.
Fourth-quarter Fiscal 2003 revenues increased 3 percent compared with
the prior-year period, principally because of the addition of an incremental
$49 million in revenues from Reiman. Other contributors included QSP, which
grew in low double digits, RD Specials and Books Are Fun (BAF), and
advertising-related gains at the Special Interest Publications. These
revenue gains were partially offset by softness in International Businesses
and planned marketing activity reductions at U.S. Books and Home
Entertainment (BHE) and U.S. Reader's Digest magazine circulation. Operating
profits were down by $13 million, reflecting significant declines in
International Businesses. The declines were partially offset by the addition
of Reiman and reduced losses at U.S. BHE.
For the full year, revenue growth was driven by $291 million in
incremental revenues from Reiman, partially offset by planned lower revenues
at U.S. BHE, the absence of discontinued businesses in the comparison,
advertising softness at U.S. Reader's Digest magazine, and lower revenues in
International Businesses. Operating profits for the full year declined by 12
percent, driven by a 54 percent drop in International Businesses profits, $13
million in incremental restructuring charges and special items, and a $15
million reduction in U.S. pension income and increased post-retirement
healthcare costs. This was partially offset by the addition of an
incremental $32 million in profits from Reiman and reduced losses at U.S. BHE.
Fourth-quarter and full-year results were reported reflecting the
company's new organizational structure, as previously announced. Prior period
results have been restated on a comparable basis. The three operating
segments are RD North America, Consumer Business Services, and International
Businesses. A list of the businesses within each segment appears at the end
of this release. Additionally, the company separately reports Corporate
Unallocated expenses, covering governance and corporate-related expenses that
are not allocated to business units. The new organization is designed to
combine related businesses under common leadership, and to facilitate efforts
to leverage best practices and significantly reduce overhead and operating
costs. In addition, the structure is intended to stimulate growth within
each division through more targeted investment in the most promising
activities with demonstrable payback. RD North America includes Reader's
Digest magazine and Books and Home Entertainment (BHE) in North America, as
well as Reiman Media Group, all of which have a database of customers and a
goal to increase new customer acquisition at lower cost. Consumer Business
Services includes Books Are Fun and QSP, Inc., both focused on growing
revenues by expanding their sales forces in schools, as well as other
locations. International Businesses brings BHE and Reader's Digest magazine
outside of North America under one administration, facilitating cost
reductions and the identification of international opportunities to extend
successful U.S. businesses.
Outlook
With its new organization now fully implemented, the company is
initiating a two-year plan to achieve sustainable revenue and profit growth
by Fiscal 2005. The major components are expected to include over $20
million of incremental investments during Fiscal 2004, as well as significant
cost reductions intended to result in at least $70 million in annual savings
by 2005. Lower costs are expected to be achieved mainly through overhead
reductions, including the scheduled elimination of 580 positions, or 12
percent of the workforce, expected to be completed by December 31, 2003.
Most of the eliminations have been communicated. The costs of these actions
were included in the third- and fourth-quarter restructuring charges.
"Our goal is to return to year-over-year revenue and profit growth over
the long term, and to increase our already strong free cash flow," Ryder
said. "We have been through a tough period and see another difficult year
ahead, especially in our International Businesses. At the same time, we are
aggressively cutting costs and reinvesting in our most promising businesses
to lay the groundwork for long-term growth."
The two-year plan will include specific actions for each of the three
operating segments, including stabilizing the customer base and improving
margins in the more mature businesses by reducing activity in the near term,
as well as investing in new products, expanding new customer acquisition
channels, and increasing inter-divisional selling opportunities with the goal
of driving revenue growth in all businesses.
In the course of meeting its goal of sustainable revenue and profit
growth by Fiscal 2005, the company assumes flat to slightly lower operating
performance in Fiscal 2004, excluding restructuring and special items,
followed by improved performance and double-digit year-over-year profit
growth in Fiscal 2005.
For full-year Fiscal 2004, the company expects that:
1. Revenues should be flat, as growth at Reiman, Books Are Fun and QSP
should be offset by planned lower revenues as well as unfavorable
business trends in International Businesses.
2. Operating profits should be between $165 and $180 million. Each
operating segment is expected to grow operating profits in the low to
mid teens. These results should be offset by a $30 million increase
in Corporate Unallocated expenses relating to lower U.S. pension
income from the company's over-funded pension plan, and higher
post-retirement healthcare and other employee-related costs.
3. Operating profit should include $20 million in incremental investments
intended to drive revenue growth in the second half of Fiscal 2004 and
beyond.
4. EPS should be negatively affected by approximately ($0.05) per share
compared with Fiscal 2003 due to the absence of one-time gains in
"Other Income and Expense" associated with asset sales in the prior
year.
5. Quarter-to-quarter comparisons should be down in the first half of
Fiscal 2004, attributable to lower international profits, as
re-engineering and cost-reduction efforts are implemented to offset
negative revenue trends and planned activity reductions. The first
half should also be negatively affected by a reduction in U.S. pension
income and the timing of investment spending. Results should improve
in the second half, mainly because of the beneficial impact of the
cost reductions announced in Fiscal 2003.
6. Free cash flow should continue to be strong, exceeding Fiscal 2003.
7. The company should pay down approximately $150 million of debt in
Fiscal 2004, even though mandatory principal payments on the company's
term loan are $32 million for that year.
Assuming the above, the company expects EPS to be in the range of $0.75
to $0.85 in Fiscal 2004 and higher in Fiscal 2005.
Segment Information
The following financial information related to segments has been
restated to reflect the company's new organization structure. A list of the
components of each segment appears at the end of this release.
RD North America
In the fourth quarter, operating profits at RD North America (RD NA)
were $13 million, an improvement of $10 million over prior year. Full year
operating profits grew to $61 million in Fiscal 2003, an improvement of $63
million versus the year-ago results. The substantial year-over-year
improvement in both the quarter and the full year was principally driven by
the addition of incremental profits from Reiman, dramatically reduced losses
at U.S. BHE, and higher profits at the Special Interest Publications. These
gains were partially offset by investments made in new business initiatives,
most notably RD Specials, which are new one-time special interest magazines
that use repurposed Reiman and Reader's Digest content and are sold at
checkout. Reiman added an incremental $4 million in profits in the quarter
and $32 million for the full year.
Revenues at RD NA grew by 25 percent in the quarter to $209 million and
by 32 percent for all of Fiscal 2003, to $854 million. This growth reflected
a full year of revenues from Reiman, partially offset by planned reductions
at U.S. BHE, and the absence of revenues due to last year's closing of New
Choices and Walking magazines. Reiman added an incremental $49 million in
revenues to the quarter and $291 million to full-year results.
Reiman, which was acquired in May 2002, reported $322 million of
revenues and approximately $34 million of operating profits in Fiscal 2003.
EBITDA for Reiman was $68 million. Strategically, the unit added
considerably greater value to the company's portfolio. Reiman produced the
content for over half of the most successful newsstand specials launched by
Reader's Digest magazine. Reiman has facilitated enhanced new customer
acquisition strategies at the company's U.S. magazines and U.S. BHE units,
primarily through cross promotion. Also, Reiman is providing the content
and/or the format for several of the company's most promising 2004 growth
initiatives at BAF and in new magazine launches.
As planned, U.S. BHE reduced its operating losses by approximately 80
percent for the Fiscal 2003 full year, driven by lower operating and overhead
costs and improved promotion campaign performance. Operating results
improved in each unit: Home and Health, Entertainment and Reading Series.
U.S. BHE reduced costs through its strategy to lower risk and restore
predictability to the business by: reducing marketing activity, focusing on
the areas with the most promise; eliminating campaigns that were unprofitable
or marginal; implementing other cost-cutting measures; and reducing
dependence on sweepstakes direct mail. The division launched several
successful health titles in Fiscal 2003 and, after some favorable test
results, is selling selected Reader's Digest products to Reiman customers.
During the year, U.S. Reader's Digest magazine reduced its rate base by
eliminating marginal subscribers, enabling it to complete its exit from
sweepstakes marketing, reduce customer acquisition costs and improve the
quality of subscribers. Full year revenues for the magazine declined by 8
percent on lower circulation sales and a 5 percent reduction in advertising
sales. In early July, the company announced the hiring of a new group
publisher and a new marketing director to improve its capabilities in
advertising sales. Profits were modestly lower across the magazine group as
the advertising decline at U.S. Reader's Digest and the investment in new
initiatives including RD Specials, ChangeOne, and the Reader's Digest
National Word Power Challenge(SM) were offset by increased profitability at
the Special Interest Publications Selecciones and The Family Handyman, driven
by aggregate double-digit increases in advertising revenues. These new
initiatives contributed over $5 million in revenues in Fiscal 2003.
Consumer Business Services
In the fourth quarter, Consumer Business Services (CBS) reported an
operating loss of ($1) million, about flat with Fiscal 2002. For the full
year, operating profit increased by 2 percent to $91 million, driven by
improved performance at RD Young Families and the absence of losses from
Gifts.com, Inc., which was discontinued in Fiscal 2002. This improvement was
partially offset by lower profits in the comparison due to the absence of a
one-time payment received in connection with the termination of a financial
services alliance in Fiscal 2002.
Full-year profits at QSP were down modestly due to lower profits at QSP
Canada and lower magazine subscription and gift sales in the United States,
reflecting the continued effects of the soft economy on fundraising. During
the year, QSP made incremental investments in sales force expansion to
increase school penetration by opening new territories, expanding school
programs to include food and gift products, and improving incentives to
increase student participation. Books Are Fun profits were flat in Fiscal
2003, as double-digit gains in the first half of the year were offset in the
second half when severe weather in the third quarter led to the cancellation
of numerous sales events.
Overall, fourth quarter revenues at CBS were $110 million, down 4
percent versus the year ago period, entirely due to the absence of Gifts.com
in the comparison. Books Are Fun had a modest revenue increase, and QSP had
double-digit growth, reflecting higher magazine subscription sales and
increased gift and chocolate volumes. For the full year, revenues for CBS
were $640 million, down 4 percent from $667 million in Fiscal 2002, as low
single-digit growth at QSP and mid-single digit growth at BAF were offset by
the absence of over $40 million in revenues from Gifts.com and a terminated
financial service alliance, as well as lower revenues at RD Young Families,
reflecting the planned elimination of unprofitable products.
International Businesses
International Businesses' operating profits fell by $19 million in the
fourth quarter compared with the Fiscal 2002 quarter, on a 7 percent decline
in revenues. Excluding the favorable foreign exchange impact, revenues were
17 percent below last year. For the year, International Businesses profits
declined by 54 percent to $49 million. Full-year revenues were 6 percent
lower on a reported basis and 14 percent lower in constant dollars.
The international BHE revenue decline for the year was most acute in the
major European markets of the United Kingdom, Germany and France, as well as
in Mexico. Revenues were higher in Russia and Hungary, but lower almost
everywhere else. Profits were affected more negatively than revenues, which
is attributable to the highly leveraged nature of the direct-marketing
model. Lower response rates across most markets, a difficult global
advertising market, weak global economies and execution issues related to the
implementation of outsourcing programs in France and Australia also
contributed to the lower operating results.
Management is aggressively implementing its international turnaround
plan. As previously announced, this plan has three components, to:
restructure the business and reduce overheads by 20 percent; eliminate
marginal businesses; and invest in high-potential initiatives. The goal is
to scale back the business to a sustainable level of revenues and return to
double-digit margins. The International Businesses headcount at June 30,
2003 was 12 percent below last year. Most of the remaining cost reduction
initiatives should be in place by December 2003. The segment does not expect
to see year-over-year profit improvement until the second half of Fiscal
2004, as the negative trends and impacts of reducing marketing activity will
more than offset cost savings in the short term.
Corporate
Corporate Unallocated expenses include the cost of governance and other
corporate-related expenses, as well as the accounting for U.S. pension plans,
post-retirement healthcare costs, and executive compensation programs. The
unfavorable variance in this category for both the quarter and full year were
attributable to significantly lower pension income from the company's
over-funded U.S. pension plans, a higher mix of restricted stock in
compensation plans, and higher post-retirement healthcare costs versus the
prior year. Excluding these items, Corporate Unallocated expenses are lower
than the prior year for both periods. The U.S.-based pension credit for
Fiscal 2003 was $25 million, $12 million less than Fiscal 2002.
In addition, "Other Income and Expense" amounted to $39 million for the
full year Fiscal 2003, compared with $17 million in Fiscal 2002. The primary
components of this line item are interest expense of $46 million, offset by
$5 million from the sale of the company's holdings of LookSmart, Ltd. shares
(most of which have been sold) and a gain on the sale of a building in
Australia for $2 million. In Fiscal 2002, interest expense amounted to $19
million, and the company realized $7 million in gains from the sales of
LookSmart shares.
Consolidated Results
Non-GAAP Financial Measures
The company publicly reports its financial information in accordance
with accounting principles generally accepted in the United States (GAAP).
To facilitate external analysis of the company's operating performance, the
company also presents financial information that may be considered "non-GAAP
financial measures" under Regulation G promulgated by the Securities and
Exchange Commission. Non-GAAP financial measures should be evaluated in
conjunction with, and are not a substitute for, GAAP financial measures. The
following non-GAAP financial measures included in this release are used by
the company in its internal analysis of the business.
- Adjusted EBITDA (operating profit before other operating items,
depreciation and amortization) - Adjusted EBITDA is a measure used by
management in evaluating the company's cash-generating ability as it
provides operating profit exclusive of non-operating items and
significant non-cash expenses of depreciation and amortization.
- Free Cash Flow (change in cash before the change in total borrowings,
dividends, share repurchases, divestitures and acquisitions) - Free cash
flow is presented to provide period-to-period cash flow trends generated
by the business before any discretionary, finance-related uses/sources
of cash. It is used by management to reconcile the change in net debt
from period to period.
As required by Regulation G, reconciliations of the non-GAAP financial
measures presented in this release and the most directly comparable GAAP
financial measures are included in the tables attached to this release.
Certain amounts may not recalculate due to rounding.
Selected Financial Data for the Current Quarter
Millions of dollars, except Restructuring Charges and
earnings per share Special Items
Fiscal 2003 Fiscal 2002
Revenues
Operating expenses
Other operating items, net $ 26.5 (1) $ 26.7 (1)
-------- --------
Operating profit (loss) 26.5 26.7
Other (expense)income, net 7.0 (2)
Income tax (expense)benefit (7.0) (10.6)
-------- --------
Net income (loss) $ 19.5 $ 23.1
======== ========
Diluted EPS $ 0.20 $ 0.22
======== ========
The "Restructuring Charges and Special Items" column consists of certain
items that are highlighted within the company's GAAP financial information.
(1)Other operating items, net primarily consists of charges for severance
related to cost reduction actions. For Fiscal 2003, net charges of $(26.5)
million or $(0.20) per share consisted of $(29.2) million in charges,
primarily for severance, and adjustments of $2.7 million related to accrual
balances from charges originally recorded in prior periods. For Fiscal
2002, other operating items, net was $(0.17) per share comprised of charges
of $(35.6) million, primarily for severance costs, and adjustments of $8.9
million related to accrual balances from charges originally recorded in
prior periods.
(2)For Fiscal 2002, other (expense) income, net includes a loss of $(0.06)
per share consisting of a loss of $1.0 million on the sale of Benchmark
magazine, a write-off of Schoolpop, Inc. of $2.5 million, and expenses
incurred in connection with the company's recapitalization of $3.5 million.
Selected Financial Data for the Year-to-Date Period
Millions of dollars, except Restructuring Charges and
earnings per share Special Items
Fiscal 2003 Fiscal 2002
Revenues
Operating expenses
Other operating items, net $ 39.8 (1) $ 26.7 (1)
-------- -------
Operating profit 39.8 26.7
Other (expense) income, net 3.3 (2) 7.0 (3)
Income tax (expense)benefit (11.7) (10.6)
-------- -------
Net income $ 31.4 $ 23.1
======== ========
Diluted EPS $ 0.32 $ 0.22
======== ========
The "Restructuring Charges and Special Items" column consists of certain
items that are highlighted within the company's GAAP financial information.
(1) Other operating items, net primarily consists of charges for severance
related to cost reduction actions. For Fiscal 2003, net charges of $(39.8)
million or $(0.32) per share consisted of $(45.3) million in charges,
primarily for severance, adjustments of $2.7 million related to accrual
balances from charges originally recorded in prior periods and income of
$2.8 million due to a settlement of a 6-year-old lawsuit on terms more
favorable than earlier estimates. For Fiscal 2002, other operating items,
net was $(0.17) per share comprised of charges of $(35.6) million,
primarily for severance costs, and adjustments of $8.9 million related to
accrual balances from charges originally recorded in prior periods.
(2) For Fiscal 2003, other (expense) income, net includes net expenses of
$(3.3) million or $(0.03) per share directly related to costs incurred in
connection with the share recapitalization completed in the second quarter
of Fiscal 2003.
(3) For Fiscal 2002, other (expense) income, net includes a loss of $(0.06)
per share consisting of a loss of $1.0 million on the sale of Benchmark
magazine, a write-off of Schoolpop, Inc. of $2.5 million, and expenses
incurred in connection with the company's recapitalization of $3.5 million.
The company will host a conference call with financial analysts to
discuss the company's third quarter results on July 30, 2003 at 8:30 a.m.
EDT. The company invites investors to listen to the webcast of the
conference call at the company's Web site, www.rd.com in the Investor
Relations section. This will also include a reconciliation of non-GAAP
financial measures that may be disclosed on the conference call or from time
to time in other oral, webcast or broadcast public announcements by the
company.
The company now reports business results in three segments:
- Reader's Digest North America - Reader's Digest magazine in the United
States and Canada; Reiman Media Group, including magazines Taste of
Home, Light & Tasty, Quick Cooking, Birds & Blooms, Country, Country
Woman, Country Discoveries, Reminisce, Farm & Ranch Living and Crafting
Traditions, as well as books, cooking schools, country tours and other
enterprises; The Family Handyman, American Woodworker, Reader's Digest
Large Print Edition and U.S. Selecciones magazines; Select Editions,
series and general books, health and home books and products, and music
and video products in the US and Canada.
- Consumer Business Services - Books Are Fun; Young Families and
children's products in the United States and Canada; adult and
children's trade books; QSP, Inc., and QSP Canada; and financial
services marketing alliances and other strategic initiatives in the
United States.
- International Businesses - Products sold in more than 60 countries
outside the United States and Canada, including: Select Editions, series
and general books, music, video and Young Families products; Reader's
Digest magazine in 48 editions and 19 languages, Special Interest
magazines in the Czech Republic, a personal finance magazine in the
United Kingdom; Books Are Fun operations in France, Mexico and Spain;
and financial services marketing partnerships and other initiatives in
more than 30 countries.
The Reader's Digest Association, Inc. is a global publisher and direct
marketer of products that inform, enrich, entertain and inspire people of all
ages and cultures around the world. Global headquarters are located at
Pleasantville, New York. The company's main Web site is at www.rd.com.
This release may include "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements inherently involve risks and uncertainties that could cause actual
future results and occurrences to differ materially from the forward-looking
statements. The Reader's Digest Association, Inc.'s filings with the
Securities and Exchange Commission, including its reports on Forms 10-K, 10-Q
and 8-K, contain a discussion of additional factors that could affect future
results and occurrences. Reader's Digest does not undertake to update any
forward-looking statements.
###
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)
Three-month periods ended Twelve month periods ended
June 30, 2003 and 2002 (A) June 30, 2003 and 2002
Fiscal Years Better/ Fiscal Years Better/
2003 2002 (Worse) 2003 2002 (Worse)
Revenues $ 563.6 $ 545.3 3% $ 2,474.9 $ 2,368.6 4%
Product, distribution and editorial expenses (236.7) (222.1) (7%) (1,002.2) (947.7) (6%)
Promotion, marketing and administrative expenses (306.5) (289.9) (6%) (1,293.8) (1,236.5) (5%)
Other operating items, net (26.5) (26.7) 1% (39.8) (26.7) (49%)
--------- --------- ---- ----------- ------------ ---
Operating profit (loss) (6.1) 6.6 (192%) 139.1 157.7 (12%)
Other (expense) income, net (10.4) (11.4) 9% (38.7) (17.1) (126%)
--------- --------- ---- ----------- ------------ ---
Income (Loss) before provision for income taxes (16.5) (4.8) (244%) 100.4 140.6 (29%)
Benefit (Provision) for income taxes 3.4 1.8 89% (39.1) (49.4) 21%
--------- --------- ---- ----------- ------------ ---
Net income (loss) $ (13.1) $ (3.0) (337%) $ 61.3 $ 91.2 (33%)
========= ========= ==== =========== =========== ===
Basic earnings (loss) per share:
Weighted average common shares outstanding 96.9 99.7 98.1 100.2
Basic earnings (loss) per share $ (0.14) $ (0.03) (367%) $ 0.61 $ 0.90 (32%)
========= ========= ==== =========== =========== ===
Diluted earnings (loss) per share:
Weighted average common shares outstanding 96.9 99.7 99.2 100.6
Diluted earnings (loss) per share $ (0.14) $ (0.03) (367%) $ 0.60 $ 0.89 (33%)
========= ========= ==== =========== =========== ===
Dividends per common share $ 0.05 $ 0.05 -- $ 0.20 $ 0.20 --
(A) The company reports on a fiscal year beginning July 1. The three-month periods ended June 30, 2003 and 2002 are the fourth
fiscal quarters of fiscal year 2003 and fiscal year 2002, respectively. Operating results for any interim period are not
necessarily indicative of the results for an entire year.
N/M - Not meaningful.
Table 2 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Revenues and Operating Profit by Operating Segments
(In millions)
(Unaudited)
Three-month periods ended Twelve-month periods ended
June 30, 2003 and 2002 (A) June 30, 2003 and 2002
Fiscal Years Fiscal Years
Restated (B) Better/ Restated (B) Better/
2003 2002 (Worse) 2003 2002 (Worse)
Revenues
Reader's Digest North America $ 209.3 $ 167.7 25% $ 854.4 $ 649.0 32%
International Businesses 251.7 269.9 (7%) 1,007.8 1,077.5 (6%)
Consumer Business Services 109.6 114.2 (4%) 639.9 667.1 (4%)
Intersegment eliminations (C) (7.0) (6.5) 8% (27.2) (25.0) 9%
-------- -------- --- ---------- ---------- ---
Total Revenues $ 563.6 $ 545.3 3% $ 2,474.9 $ 2,368.6 4%
======== ======== === ========== ========== ===
Operating Profit (Loss)
Reader's Digest North America $ 13.3 $ 3.4 291% $ 60.6 ($ 2.2) N/M
International Businesses 14.8 34.1 (57%) 49.1 106.3 (54%)
Consumer Business Services (0.8) (0.4) (100%) 90.6 88.4 2%
Corporate Unallocated (D) (6.9) (3.8) 82% (21.4) (8.1) 164%
-------- -------- --- ---------- ---------- ---
$ 20.4 $ 33.3 (39%) $ 178.9 $ 184.4 (3%)
Other Operating Items, net (26.5) (26.7) 1% (39.8) (26.7) (49%)
-------- -------- --- ---------- ---------- ---
Operating Profit (Loss) $ (6.1) $ 6.6 (192%) $ 139.1 $ 157.7 (12%)
======== ======== === ========== ========== ===
Reconciliation of Adjusted EBITDA
Three-month periods ended Twelve-month periods ended
June 30, 2003 and 2002 June 30, 2003 and 2002
Consolidated Company Consolidated Company Reiman
Fiscal Years Fiscal Years Fiscal Year
2003 2002 2003 2002 2003
Operating Profit (Loss) ($ 6.1) $ 6.6 $ 139.1 $ 157.7 $ 32.7
Other Operating Items, net 26.5 26.7 39.8 26.7 0.7
Depreciation and amortization 16.6 11.6 64.7 35.9 34.5
------- ------- -------- -------- -------
Adjusted EBITDA $ 37.0 $ 44.9 $ 243.6 $ 220.3 $ 67.9
======= ======= ======== ======== =======
N/M - Not meaningful.
(A) The company reports on a fiscal year beginning July 1. The three-month periods ended June 30, 2003 and 2002 are the fourth
fiscal quarters of years 2003 and 2002, respectively. Operating results for any interim period are not necessarily indicative of
the results for an entire year.
(B) The operating segment results for fiscal 2002 have been restated to conform to our new operating segments, effective June 30,
2003.
(C) In the normal course of business, the company's segments enter into transactions with one another. These intersegment
transactions are recorded by each segment at fair value as if the transactions were to third parties and, therefore, impact segment
performance. Operating segment revenues, above, are presented gross before intersegment eliminations. However, intersegment
revenues and associated expenses are eliminated in consolidation and are not reflected in the company's consolidated results.
(D) Corporate Unallocated includes expenses for the cost of governance and centrally managed expenses, as well as the accounting
for U.S. pension plans, post-retirement healthcare costs, and executive compensation programs which are not allocated to the
operating segments. Governance and centrally managed expenses include costs such as legal, corporate finance, treasury, investor
and public relations, general corporate management, and related information technology and facility costs utilized by the
departments.
Table 3 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions)
(Unaudited)
June 30, June 30,
2003 2002
Assets
Cash and cash equivalents $ 51.3 $ 107.6
Accounts receivable, net 256.5 306.0
Inventories, net 155.7 156.0
Prepaid and deferred promotion costs 132.7 140.9
Prepaid expenses and other current assets 191.8 153.2
---------- ----------
Total current assets 788.0 863.7
Property, plant and equipment, net 162.5 168.1
Goodwill 1,009.4 1,004.0
Other intangible assets, net 212.3 240.6
Other noncurrent assets 441.9 426.3
---------- ----------
Total assets $ 2,614.1 $ 2,702.7
========== ==========
Liabilities and Stockholders' Equity
Loans and notes payable $ 31.3 $ 132.7
Accounts payable 97.5 102.8
Accrued expenses 281.4 283.2
Income taxes payable 51.1 28.4
Unearned revenue 414.8 426.9
Other current liabilities 19.7 6.8
---------- ----------
Total current liabilities 895.8 980.8
Long-term debt 834.7 818.0
Unearned revenues 127.6 134.8
Other noncurrent liabilities 355.7 297.2
---------- ----------
Total liabilities 2,213.8 2,230.8
Capital stock 17.6 25.5
Paid-in-capital 215.0 224.6
Retained earnings 1,301.5 1,261.2
Accumulated other comprehensive income (loss) (109.1) (89.7)
Treasury stock, at cost (1,024.7) (949.7)
---------- ----------
Total stockholder's equity 400.3 471.9
---------- ----------
Total liabilities and stockholder's equity $ 2,614.1 $ 2,702.7
========== ==========
Table 4 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(unaudited)
Twelve-month periods ended
June 30,
2003 2002
Cash flows from operating activities
Net Income $ 61.3 $ 91.2
Investment Impairments -- 2.5
Asset Impairments 2.3 11.7
Depreciation and amortization 64.7 35.9
Net gain on sales of businesses, certain assets and certain
investments (8.6) (6.9)
Changes in current assets and liabilities, net of effects
of acquisitions and dispositions
Accounts receivables, net 65.8 7.4
Inventories 6.4 21.8
Unearned revenues (22.9) (10.1)
Accounts payable and accrued expenses (19.2) 24.7
Other, net 11.8 35.7
Changes in noncurrent assets and liabilities, net of effects
of acquisitions and dispositions (8.3) (81.4)
-------- --------
Net change in cash due to operating activities 153.3 132.5
-------- --------
Cash flows from investing activities
Proceeds from maturities and sales of marketable
securities and short-term investments 5.2 11.6
Purchases of marketable securities, short-term
investments and licensing agreements (10.5) (1.3)
Proceeds from sales of businesses and other long-term
investments -- 2.2
Proceeds from sales of property, plant and equipment 5.5 2.4
Payments for business acquisitions, net of cash acquired -- (763.2)
Capital expenditures (15.7) (24.6)
-------- --------
Net change in cash due to investing activities (15.5) (772.9)
-------- --------
Cash flows from financing activities
Total borrowings, net (85.3) 789.6
Dividends paid (21.0) (21.3)
Common stock repurchased (101.7) (64.1)
Proceeds from employee stock purchase plan and exercise
of stock options 4.3 8.6
Other, net 6.9 2.7
-------- --------
Net change in cash due to financing activities (196.8) 715.5
-------- --------
Effect of exchange rate changes on cash 2.7 (2.9)
-------- --------
Net change in cash and cash equivalents (56.3) 72.2
-------- --------
Cash and cash equivalents at beginning of period 107.6 35.4
-------- --------
Cash and cash equivalents at end of period $ 51.3 $ 107.6
======== ========
Free Cash Flow Reconciliation
Twelve-month periods ended Three-month periods ended
June 30, June 30,
2003 2002 2003
Reported change in cash per cash flow statement ($ 56.3) $ 72.2 ($ 29.7)
Less:
Change in total borrowings, net (85.3) 779.8 (A) (50.8)
Common stock repurchased (101.7) (64.1) --
Dividends paid (21.0) (21.3) (5.2)
Acquisitions:
Reiman Purchase -- (760.0) --
Acquisition costs for Reiman and Financing Fees (2.7) (24.0) (2.7)
Proceeds from other long-term investments -- 2.2 --
Cash payments associated with share recapitalization (7.9) -- 2.5
-------- -------- --------
Free Cash Flow $ 162.3 $ 159.6 $ 26.5
======== ======== ========
(A) Excludes forgiveness of a $9.8 million loan related to a minority interest partner in Fiscal 2002.