FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1994, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 91,801,510
shares
Class B Voting Common Stock, $0.01 par value:21,515,159 shares
Page 1 of 12 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
September 30, 1994
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month periods ended
September 30, 1994 and 1993 3
Consolidated Condensed Balance Sheets
as of September 30, 1994 and June 30, 1994 4
Consolidated Condensed Statements of Cash Flows
for the three-month periods ended
September 30, 1994 and 1993 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 11
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three-month periods ended September 30, 1994 and 1993
(in millions, except per share data)
(unaudited)
<TABLE>
Three-month period ended
September 30,
1994 1993
<S> <C> <C>
Revenues $ 710.8 $ 637.2
Cost of sales, fulfillment and 267.0 244.0
distribution expense
Promotion, selling and 342.2 325.0
administrative expense
Effect of promotion accounting --- ( 90.4 )
changes, net
Total operating expenses 609.2 478.6
Operating profit 101.6 158.6
Other income, net 6.2 33.8
Income before provision for income
taxes and
cumulative effect of change in 107.8 192.4
accounting principle
Provision for income taxes 40.5 74.1
Income before cumulative effect of
change in 67.3 118.3
accounting principle
Cumulative effect of change in
accounting --- ( 25.8 )
principle, net of tax benefit
Net income $ 67.3 $ 92.5
Earnings per share before cumulative
effect of $ 0.59 $ 1.01
change in accounting principle
Cumulative effect of change in
accounting --- ( 0.23 )
principle, net of tax benefit
Earnings per share $ 0.59 $ 0.78
Average common shares outstanding 113.5 116.7
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
<TABLE>
<CAPTION>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 1994 and June 30, 1994
(in millions)
(unaudited)
September 30, June 30,
1994 1994
<S> <C> <C>
Assets
Cash and cash equivalents $ 199.9 $ 183.2
Short-term investments, at cost which
approximates market 138.6 211.5
Receivables, less allowances for
returns and bad debts 538.9 392.8
Inventories 181.8 167.3
Prepaid expenses and other current assets 280.5 242.4
Total current assets 1,339.7 1,197.2
Marketable securities, at cost 364.0 372.2
Property, plant and equipment, net 241.6 241.8
Other noncurrent assets 241.6 238.2
Total assets $2,186.9 $ 2,049.4
Liabilities and stockholders' equity
Accounts payable $ 217.3 $ 205.5
Accrued expenses 349.4 346.7
Federal and foreign income taxes 124.0 84.4
Unearned revenue 454.0 388.8
Other current liabilities 14.9 14.5
Total current liabilities 1,159.6 1,039.9
Long-term notes payable 8.9 8.7
Other noncurrent liabilities 214.4 209.8
Total liabilities 1,382.9 1,258.4
Capital stock 29.7 29.7
Paid-in capital 101.8 90.3
Retained earnings 1,032.2 1,005.0
Net unrealized gains on certain 6.6 11.9
investments
Foreign currency translation adjustment ( 13.4) ( 22.1)
Less: Treasury stock, at cost (352.9) ( 323.8)
Total stockholders' equity 804.0 791.0
Total liabilities and stockholders' $2,186.9 $ 2,049.4
equity
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
<TABLE>
<CAPTION>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three-month periods ended September 30, 1994 and 1993
(in millions)
(unaudited)
Three-month period ended
September 30,
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income $ 67.3 $ 92.5
Depreciation and amortization 10.4 10.5
Cumulative effect of change in accounting --- 25.8
principle
Other, net ( 68.2) ( 126.2)
Net cash provided by operating activities 9.5 2.6
Cash flows from investing activities:
Proceeds from maturities and sales of
short-term investments and
marketable securities 94.7 59.7
Purchases of short-term investments
and marketable securities ( 19.2) ( 3.6)
Capital expenditures ( 6.6) ( 5.9)
Proceeds from sales of other long-term 2.5 9.9
investments, net
Other, net 0.4 0.5
Net cash provided by investing activities 71.8 60.6
Cash flows from financing activities:
Dividends paid ( 40.1) ( 35.3)
Common stock repurchased ( 31.3) ( 21.0)
Other, net 2.6 0.9
Net cash used in financing activities ( 68.8) ( 55.4)
Effect of exchange rate changes on cash 4.2 1.5
Net increase in cash and cash equivalents 16.7 9.3
Cash and cash equivalents at beginning of 183.2 183.5
period
Cash and cash equivalents at end of period $ 199.9 $ 192.8
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in millions, except per share data)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The
three-month periods ended September 30, 1994 and 1993 are the
first fiscal quarters of fiscal year 1995 and fiscal year 1994,
respectively.
The accompanying consolidated condensed financial statements
have not been audited, but in the opinion of management, have
been prepared in conformity with generally accepted accounting
principles applying certain judgments and estimates which include
all adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information.
Operating results for any interim period are not necessarily
indicative of the results for an entire year due to the
seasonality of the company's business.
(2) Changes in Accounting Principles
The company adopted Statement of Financial Accounting Standards
No. (SFAS) 112, "Employers' Accounting for Postemployment
Benefits," on July 1, 1993. SFAS 112 requires the accrual of
benefits such as disability, severance and health insurance
provided to former or inactive employees prior to retirement over
an employee's period of service. The cumulative effect of the
change was a net after-tax charge of $25.8 million, or $.23 per
share.
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs,"
retroactive to July 1, 1993. Effective with the adoption of SOP
93-7, the company defers the costs of direct response advertising
(promotion) and amortizes such costs over the period the related
revenues are expected to be earned. The company's former
practice was to expense these costs as incurred. As required by
the provisions of SOP 93-7, there were no adjustments to prior
years' reported results or to the company's consolidated balance
sheet as of July 1, 1993.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting for premiums to defer and
amortize such costs over the period of the related revenues. The
company's former practice was to expense these costs as incurred.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting policy to expense external
product development costs as incurred. The company's former
practice was to defer and expense such costs against the initial
revenues generated. The impact of the product development and
premium accounting changes on prior years was not significant.
Results for the first quarter of 1994 were restated to reflect
the promotion, premium and product development accounting changes
("effect of promotion accounting changes, net"). As a result of
these accounting changes, first quarter 1994 results reflect a
one-time increase in operating profit of
$90.4 million, or $.47 per share after taxes.
As of June 30, 1994, the company adopted SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities," which
affects the value at which certain investments are recorded in
the company's consolidated balance sheet. This adoption had no
effect on the company's consolidated statements of income.
However, as a result of SFAS 115, the company's short-term
investments and marketable securities are recorded in the
consolidated balance sheet at fair value with the net unrealized
gains and losses on these investments shown as a separate
component of stockholders' equity, net of its related tax
effects.
(3) Earnings Per Share
Earnings per share is based on the average number of common
shares and common share equivalents outstanding for the period
and net income after deducting preferred stock dividend
requirements of $.3 million in each of the three-month periods
ended September 30, 1994 and 1993.
(4) Inventories
September 30, June 30,
1994 1994
Raw materials $ 33.1 $ 17.4
Work-in-process 20.6 23.7
Finished goods 128.1 126.2
$ 181.8 $ 167.3
(5) Segment Information
The company's operations consist of the following segments:
(1) Reader's Digest magazine, (2) books and home entertainment
products, (3) special interest magazines and (4) other
businesses. The books and home entertainment products segment
includes books, music and video products. The special interest
magazines segment includes magazines acquired or launched since
1987. A summary of revenues by business segment and major
geographic areas for the three-month periods ended September 30,
1994 and 1993, is as follows:
Three-month period ended
September 30,
BUSINESS SEGMENTS 1994 1993
Revenues
Reader's Digest magazine $ 171.9 $ 164.9
Books and home
entertainment products 502.1 439.9
Special interest magazines 18.7 17.8
Other businesses 18.1 14.6
Total revenues $ 710.8 $ 637.2
GEOGRAPHIC AREAS
Revenues
United States $ 268.7 $ 257.4
Europe 343.5 288.9
Other Markets 98.6 90.9
Total revenues $ 710.8 $ 637.2
The Reader's Digest Association, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three-Month Period Ended September 30, 1994 Compared With Three-
Month Period Ended September 30, 1993.
Changes in Accounting Principles
On July 1, 1993 the company adopted Statement of Financial
Accounting Standards No. (SFAS) 112, "Employers' Accounting for
Postemployment Benefits." As a result, the company recognized a
one-time, after-tax non-cash charge for the cumulative effect of
this change of $25.8 million, or $.23 per share.
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs,"
retroactive to July 1, 1993. Effective with the adoption of SOP
93-7, the company defers the costs of direct response advertising
(promotion) and amortizes such costs over the period the related
revenues are expected to be earned. The company's former
practice was to expense these costs as incurred. As required by
the provisions of SOP 93-7, there were no adjustments to prior
years' reported results or to the company's consolidated balance
sheet as of July 1, 1993.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting for premiums to defer and
amortize such costs over the period of the related revenues. The
company's former practice was to expense these costs as incurred.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting policy to expense external
product development costs as incurred. The company's former
practice was to defer and expense such costs against the initial
revenues generated. The impact of the product development and
premium accounting changes on prior years was not significant.
Results for the first quarter of 1994 were restated to reflect
the promotion, premium and product development accounting changes
("effect of promotion accounting changes, net"). As a result of
these accounting changes, first quarter 1994 results reflect a
one-time increase in operating profit of
$90.4 million, or $.47 per share after taxes.
As of June 30, 1994, the company adopted SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities," which
affects the value at which certain investments are recorded in
the company's consolidated balance sheet. This adoption had no
effect on the company's consolidated statements of income.
However, as a result of SFAS 115, the company's short-term
investments and marketable securities are recorded in the
consolidated balance sheet at fair value with the net unrealized
gains and losses on these investments shown as a separate
component of stockholders' equity, net of its related tax
effects.
Revenues/Operating Profit
The company's worldwide revenues for the three-month period ended
September 30, 1994 increased $73.6 million, or 12%, to $710.8
million compared with revenues for the same period a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 8%. This 8% increase was due to
higher sales of books and home entertainment products.
Operating profit for the company was $101.6 million in the first
quarter of 1995 compared with
$158.6 million in 1994. Because the accounting changes for
promotion, premium and product development costs were adopted, as
required, on a prospective basis, operating profit for 1994 is
not comparable to that of 1995. Adjusting 1994 results to
reflect the accounting practices of 1995 ("comparable basis"),
worldwide operating profit would have increased about 18%.
Excluding the effect of changes in foreign currency exchange
rates, operating profit on a comparable basis increased about
11%. This 11% increase was primarily because of higher revenues.
Other Income, Net
Other income, net for the quarter decreased $27.6 million to $6.2
million compared with $33.8 million a year ago primarily because
of lower capital gains on the sales of certain investments ($0.7
million in 1995 compared with $24.7 million in 1994). Interest
income was $11.0 million in the first quarter of 1995 compared
with $10.4 million in 1994. Other income, net also includes the
effect of foreign exchange ($4.2 million expense in 1995 compared
with $0.1 million income in 1994).
Income Taxes
The effective income tax rate for the company declined to 37.5%
in 1995 from 38.5% in 1994 due to effective global tax planning.
The company anticipates that the effective tax rate will remain
at 37.5% throughout 1995.
Earnings Per Share
Earnings per share before the cumulative effect of change in
accounting principle was $.59 in 1995 compared with $1.01 in
1994. On a comparable basis, earnings per share decreased about
6%. This 6% decline was due to minimal capital gains on the
sales of certain investments in 1995 compared with $.13 per share
in 1994. The effects of foreign exchange increased 1995 earnings
per share by $.01 per share compared with 1994. Excluding the
combined total effect of foreign exchange and capital gains on
the sales of certain investments, earnings per share, on a
comparable basis, increased about 16%. This earnings per share
growth was favorably affected by the reduction in outstanding
shares due to the company's ongoing share repurchase program and
a lower effective income tax rate.
In the fourth quarter of 1994 the company purchased foreign
currency options to hedge its foreign currency exposure. These
hedges were implemented at exchange rates and in amounts designed
to minimize any unfavorable effect of currency fluctuations on
1995 earnings per share. As these options are required to be
reported at fair value, the company may experience some impact on
1995 quarterly results from currency fluctuations. Since the
company hedged with options, results for 1995 will continue to
benefit if the U.S. dollar continues to weaken. While the
company does not predict movements in foreign currency exchange
rates, if exchange rates remained as they were in early November
for the remainder of the year, the company's 1995 results would
benefit from a positive impact on earnings per share of $.10 to
$.15 per share compared with 1994.
Business Segments
The company's operations are divided into four business segments:
(1) Reader's Digest magazine,
(2) books and home entertainment products, (3) special interest
magazines and (4) other businesses.
Reader's Digest magazine revenues increased $7.0 million, or 4%,
to $171.9 million compared with $164.9 million a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 2%. Approximately two-thirds of
this 2% revenue increase was attributable to increased
advertising revenues with the remaining one-third due to higher
circulation revenues. The increase in advertising revenues was
attributable to increased advertising pages as the worldwide
advertising environment improved. Circulation revenues increased
because of higher subscription pricing. Circulation levels
declined slightly due to the decrease in the U.S. magazine's rate
base to 15 million from 16.25 million effective January 1, 1994.
Excluding the effect of changes in foreign currency exchange
rates, operating profit on a comparable basis was essentially the
same as that of the prior year.
Books and home entertainment products revenues increased $62.2
million, or 14%, to $502.1 million compared with $439.9 million
for the same period a year ago. Excluding the effect of changes
in foreign currency exchange rates, revenues increased about 10%.
More than half of this 10% increase was attributable to higher
unit sales. The remaining increase was due to sales of a higher
priced product mix. Revenues in the U.S. and in international
markets increased compared with the prior year. The increase in
the U.S. revenues was directly attributable to the improved
timing and targeting of promotional mailings. This was evidenced
by an increase of more than 25% in orders for the general books
Great Health Hints and Handy Tips and Who's Who in the Bible
compared with book titles offered in the prior year and an
increase in Condensed Book membership of over 10%. Excluding the
effect of changes in foreign currency exchange rates, operating
profit on a comparable basis increased in line with revenues.
Special interest magazines revenues increased $0.9 million, or
5%, to $18.7 million from $17.8 million a year ago. Excluding
the effect of changes in foreign currency exchange rates,
revenues increased about 5%. The increase in revenues was
principally due to higher advertising revenue. Advertising
revenues increased because of increases in advertising rates.
Circulation levels were about the same as the prior year. On a
comparable basis, the operating loss for special interest
magazines declined because of increased revenues and lower
amortization expense.
Geographic Areas
The company has operations in the United States and in various
international locations. International locations are divided
between operations in Europe and Other Markets.
United States revenues increased 4% compared with the prior year.
Revenues for Europe increased 19% for the quarter compared with
the prior year. Excluding the effect of changes in foreign
currency exchange rates, revenues for Europe increased about 10%.
Revenues for Other Markets increased 8% compared with the prior
year. Excluding the effect of changes in foreign currency
exchange rates, revenues for Other Markets increased about 9%.
The increases in revenues for the U.S., Europe and Other Markets
were primarily due to higher books and home entertainment
products sales.
Liquidity and Capital Resources
September 30, 1994 Compared With June 30, 1994
Cash and cash equivalents, short-term investments and marketable
securities decreased $65 million to $702 million at September 30,
1994, compared with $767 million at June 30, 1994. The decrease
was primarily the result of payments of dividends ($40 million)
and the repurchase of 735,600 shares of
Class A nonvoting common stock ($31 million) exceeding cash
provided by operations ($9 million). Unrealized gains on the
company's short-term investments and marketable securities
decreased $9 million to $10 million at September 30, 1994.
The company paid a $.35 per share dividend on its common stock in
the first quarter of fiscal 1995 compared with $.30 per share a
year ago. This represents a 17% increase in the first quarter
dividend payment. In October 1994, the company's Board of
Directors raised the quarterly dividend from $.35 per share to
$.40 per share, which at the current rate will result in a total
dividend of $1.55 per share for fiscal 1995.
As part of its share repurchase program, the company repurchased
735,600 shares of Class A nonvoting common stock in the first
quarter of 1995. The company anticipates that this program,
announced in March 1994 to acquire five million shares, should be
completed in fiscal 1995.
The company believes that its liquidity, capital resources and
cash flow are sufficient to fund normal capital expenditures,
working capital requirements, the payment of dividends and the
company's share repurchase program. The company also believes
its liquidity, capital resources and cash flow are sufficient to
finance present plans to expand existing product lines in
existing markets and to identify and develop new products and
markets.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
(Registrant)
Date: November 11, 1994 By: Anthony W. Ruggiero
Anthony W. Ruggiero
Senior Vice President and
Chief Financial Officer
Joseph G. NeCastro
Joseph G. NeCastro
Vice President and Controller
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the quarter ended September 30,
1994.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1.00
<CASH> 199,900
<SECURITIES> 138,600
<RECEIVABLES> 767,700
<ALLOWANCES> 228,800
<INVENTORY> 181,800
<CURRENT-ASSETS> 1,339,700
<PP&E> 560,400
<DEPRECIATION> 318,800
<TOTAL-ASSETS> 2,186,900
<CURRENT-LIABILITIES> 1,159,600
<BONDS> 8,900
<COMMON> 900
0
28,800
<OTHER-SE> 774,300
<TOTAL-LIABILITY-AND-EQUITY> 2,186,900
<SALES> 710,800
<TOTAL-REVENUES> 710,800
<CGS> 267,000
<TOTAL-COSTS> 267,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823
<INCOME-PRETAX> 107,800
<INCOME-TAX> 40,500
<INCOME-CONTINUING> 67,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,300
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
