SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1994 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
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (914) 238-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Nonvoting Common Stock New York Stock Exchange
par value $.01 per share
Class B Voting Common Stock New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
______________
Indicate by check mark 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. [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 [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of registrant, at September 19, 1994, was
approximately $242,110,150, based on the closing price of
registrant's Class B Voting Stock on the New York Stock Exchange-
- -Composite Transactions on such date.
As of September 19, 1994, 92,229,152 shares of the registrant's
Class A Nonvoting Common Stock and 21,515,159 shares of the
registrant's Class B Voting Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders of registrant for the fiscal year
ended June 30, 1994. Certain information therein is incorporated
by reference into Part I and Part II hereof.
Proxy Statement for the Annual Meeting of Stockholders of
registrant to be held on November 11, 1994. Certain information
therein is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
Reader's Digest Magazine 2
Circulation 2
Advertising 4
Editorial 6
Production and Fulfillment 7
Licensed Editions 7
Books and Home Entertainment Products 7
Condensed Books 8
Series Books 8
General Books 9
Music 10
Video 10
Reader's Digest Young Families, Inc. 11
Production and Fulfillment 11
Direct Mail Operations and Sweepstakes 12
Management Information Systems and List Enhancement 13
Special Interest Magazines 14
Other Businesses 16
Competition and Trademarks 16
Employees 17
Executive Officers of the Company 17
Additional Corporate Officers 19
ITEM 2. PROPERTIES 19
United States Properties 19
International Properties 20
General 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 22
TABLE OF CONTENTS
(Continued)
Page
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 22
ITEM 11. EXECUTIVE COMPENSATION 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 23
SIGNATURES 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 27
"Reader's Digest" is a registered trademark of The Reader's
Digest Association, Inc.
PART I
ITEM 1. BUSINESS
The Reader's Digest Association, Inc. ("RDA" and, together
with its subsidiaries, the "Company") is a global publisher and
direct mail marketer of magazines, books, recorded music
collections, home videos and other products. DeWitt and Lila
Wallace founded Reader's Digest magazine in 1922. Today, 45
editions of Reader's Digest in 17 languages are read in virtually
every country in the world by an estimated 100 million people
each month.
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. For financial information by business segment,
see Note 16 to the Company's consolidated financial statements
appearing in the Company's 1994 Annual Report to Stockholders,
which note is incorporated herein by reference.
The sale of magazine subscriptions, Condensed Books, series
books, general books, music and video products, as well as
certain other products, is accomplished principally through
direct mail solicitations to households on the Company's customer
lists, usually accompanied by sweepstakes entries and, in some
cases, premium merchandise offers. The Company's customer lists
are maintained on computer data bases throughout the world. The
size and quality of the customer lists contribute significantly
to the Company's business. The Company's United States customer
list includes about 50 million households, and its international
lists include a comparable number of households, in the
aggregate. Approximately half of the households on the United
States list have purchased one or more products or received
services from the Company within the past two years. The Company
does not rent or sell its customer lists to third parties. The
Company's special interest magazines do rent their subscription
lists.
The Company is one of the leading magazine and book
publishers in Europe, with operations in Austria, Belgium,
Denmark, Finland, France, Germany, Hungary, Italy, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the
United Kingdom. The Company also has operations in Australia,
Canada, Hong Kong, Mexico, New Zealand and South Africa and
publishes Reader's Digest in many other countries, including
Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the
Czech Republic, the Dominican Republic, Ecuador, Japan, Malaysia,
Pakistan, Paraguay, Peru, the Philippines, Puerto Rico, the
Russian Federation, Singapore, Sri Lanka, Taiwan, Thailand,
Uruguay and Venezuela. Reader's Digest is also published in
Korea and India by licensees of the Company.
Each of the Company's 16 principal international operating
subsidiaries is responsible for the full range of the Company's
businesses in its territory and separately maintains its own
customer list. Editorial content of the international editions
of Reader's Digest, Condensed Books, general books, series books
and music and video products is also the responsibility of each
subsidiary and is generally a mix of material published by the
Company in the United States and other international markets,
adapted as appropriate, and material produced locally. In this
manner, the Company's international subsidiaries are able to
respond to local markets and customer preferences in their local
languages.
The Company's businesses are organized in three operating
groups -- Reader's Digest Europe, Reader's Digest U.S.A. and
Reader's Digest Pacific. This structure recognizes the distinct
business needs and strategies appropriate in different markets
throughout the world. For financial information by geographic
area, see Note 16 to the Company's consolidated financial
statements appearing in the Company's 1994 Annual Report to
Stockholders.
RDA is a Delaware corporation that was originally
incorporated in New York in 1926 and was reincorporated in
Delaware in 1951. The mailing address of its principal executive
offices is Pleasantville, New York 10570 and its telephone
number is (914) 238-1000.
Reader's Digest Magazine
Reader's Digest magazine is a monthly, general interest
magazine consisting of original articles and previously published
articles in condensed form, a condensed version of a previously
published or soon-to-be published full-length book, monthly humor
columns, such as "Laughter, The Best Medicine(r)," "Life In These
United States(r)," "Humor In Uniform(r)," "Campus Comedy(r)" and "All
In A Day's Work(r)", and other regular features, including "Heroes
For Today(r)," "It Pays To Enrich Your Word Power(r)" and "News From
The World Of Medicine(r)." Reader's Digest began publication in
1922. Today, Reader's Digest has a worldwide circulation of
approximately 27 million and an estimated 100 million readers
each month, generating revenues of $689,089,000 in fiscal 1994,
as compared with $720,047,000 in fiscal 1993 and $685,044,000 in
fiscal 1992. The Company began publication of a Czech language
edition in October 1993 and over the next few years plans to
launch several new editions of Reader's Digest. A Polish edition
is scheduled to start in May 1995. International editions for
many years have contained a substantial amount of local and
international editorial material in addition to selections from
the United States edition.
In September 1993, the ABC Television Network broadcast a
special program entitled "Reader's Digest: On Television," which
was developed together by ABC and Reader's Digest and showcased
the editorial power of Reader's Digest and the variety of drama,
entertainment and information that appears in its pages each
month. The Company continues to explore television to determine
the best way to proceed in this medium.
Circulation
Based on the most recent audit report issued by the Audit
Bureau of Circulation, Inc. ("ABC"), a not-for-profit
organization that monitors circulation in the United States and
Canada, the Company has determined that the United States edition
of Reader's Digest has the largest circulation of any United
States magazine, other than one that is automatically distributed
to all members of the American Association of Retired Persons.
Approximately 95% of the United States circulation of Reader's
Digest consists of subscriptions. The balance consists of single
copy sales at newsstands and in supermarkets and similar
establishments. In the United States, the newsstand price of
Reader's Digest is currently $2.25 per copy and the regular
subscription price is $22.46 per year, including delivery
charges. The Company sells one-year subscriptions to Reader's
Digest, with the subscription price payable near the beginning of
the term of the subscription.
The following table sets forth the global circulation rate
base of Reader's Digest, by edition, effective January 1994.
Circulation
Edition Rate Base
Europe:
Belgium--Flemish 86,000
Belgium--French 94,000
Czech Republic 50,000
Denmark 116,000
Finland 337,000
France 1,056,000
Germany and Austria 1,250,000
Hungary 150,000
Italy 541,000
The Netherlands 390,000
Norway 197,000
Portugal 250,000
Russia 100,000
Spain 107,000
Sweden 201,000
Switzerland--French 85,000
Switzerland--German 245,000
United Kingdom 1,600,000
Asia/Pacific:
Australia 450,000
Hong Kong and other Asia--Chinese 104,000
Hong Kong and other Asia--English 73,000
India--English 364,000
India--Hindi 18,000
Korea 123,000
Malaysia--English 54,000
New Zealand 150,000
Philippines--English 90,000
Singapore--English 60,000
Taiwan--Chinese 186,000
North America:
Canada--English 1,231,000
Canada--French 317,000
United States--English 15,000,000
United States--Spanish 130,000
Latin America:
Argentina 127,000
Brazil 56,000
Central America 35,000
Chile 41,000
Colombia 55,000
Ecuador 10,000
Mexico 620,000
Peru 33,000
Puerto Rico/Dominican Republic 60,000
Uruguay/Paraguay/Bolivia 38,000
Venezuela 33,000
Other:
South Africa 413,000
Total 26,726,000
Reader's Digest is truly a global magazine. The European
editions together have the largest paid circulation of any
magazine in Europe. The Latin American editions together have
the largest paid circulation of any magazine in Latin America.
The Asian/Pacific editions together have the largest paid
circulation of any magazine in that area of the world. In
addition, Reader's Digest has the largest paid circulation of any
monthly general interest magazine in Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Italy, Mexico, the
Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland
and the United Kingdom and several markets in South America and
Asia. The global nature of Reader's Digest positions the Company
well to serve opening markets in Eastern Europe. For most
international editions of Reader's Digest, subscriptions comprise
about 90% of circulation. The balance is attributable to
newsstand and other retail sales. The Latin American editions
are distributed exclusively through retail outlets, except for
the Mexican edition, which is sold principally through
subscriptions.
The average annual subscription renewal rate for the United
States edition of Reader's Digest magazine, remained
approximately the same at 65% as of June 1994, compared with 66%
as of June 1993. The current average renewal rates for
international editions are generally equivalent to the United
States rate, but are as high as 76% in Finland, 75% in
Switzerland, 74% in Germany and Portugal, 73% in Belgium and 70%
in Australia and Korea.
The Company maintains its circulation rate base through
annual subscription renewals and new subscriptions. The
circulation rate base for the United States--English edition was
reduced from 16,250,000 to 15,000,000 effective with the January
1994 issue. In the United States, the Company sells
approximately five million new subscriptions each year in order
to maintain its circulation rate base. New subscriptions are
sold primarily by direct mail, with extensive use of sweepstakes
entries and, in some cases, premium merchandise offers. As is
customary in the industry, new subscriptions are generally
offered at a discount from both the newsstand price and the
regular subscription price of Reader's Digest. The largest
percentage of subscriptions is sold between July and December of
each year. Many of these subscriptions are purchased by current
subscribers as gifts for others as part of the Company's
Christmas promotion. The Company also conducts its largest
mailings of introductory offers to non-subscribers during this
period. The Company receives a small portion of its subscription
orders from unrelated subscription sellers. Subscriptions to
Reader's Digest may be canceled at any time. If a customer
cancels during the term of a subscription, the Company refunds
the portion of the subscription price that relates to issues not
yet shipped.
Worldwide revenues from circulation accounted for
$553,849,000, or 80% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1994.
Advertising
The following table sets forth the number of advertising
pages carried by Reader's Digest and its advertising revenues
(before deducting discounts and commissions) in the United States
and internationally for each of the last five fiscal years.
United States figures are as reported by Publishers Information
Bureau, Inc. ("PIB"), an independent organization that analyzes
and reports on monthly advertising space and revenues in general
circulation magazines and newspaper supplements. International
figures are estimated by the Company based on data contained in
the LNA/Rome Report of Expenditures in International Media, a
compilation of selected international advertising activity.
<TABLE>
<CAPTION>
Number of Gross
Advertising Advertising
Pages Carried Revenues <F1>
<S> <C> <C>
1994:
United States Edition 837 $118,480,000
All International Editions<F2> 11,772 116,307,700
Total 12,609 $234,787,700
1993:
United States Edition 1,042 $138,101,000
All International Editions<F2> 12,829 120,230,500
Total 13,871 $258,331,500
1992:
United States Edition 852 $104,148,700
All International Editions<F2> 13,001 114,956,800
Total 13,853 $219,105,500
1991:
United States Edition 945 $ 99,997,400
All International Editions<F2> 13,242 107,070,900
Total 14,187 $207,068,300
1990:
United States Edition 1,120 $116,631,400
All International Editions<F2> 14,986 105,413,800
Total 16,106 $222,045,200
__________
<FN>
<F1>
(1) Gross advertising revenues are computed from basic one-
time rates and the number of advertising pages carried and,
therefore, exceed actual advertising revenues as included in
the Company's financial statements. Actual advertising
revenues reflect lower rates for multiple insertion, volume
discounts and cash discounts.
<F2>
(2) Includes United States Spanish language edition.
</FN>
</TABLE>
Reader's Digest maintains an average ratio of editorial
pages to advertising pages of not less than 60/40, which is among
the highest in the publishing industry, based on statistics
published by Hall's Magazine Report, a trade report. In order to
maintain this ratio, Reader's Digest will add additional
editorial pages to issues which contain a greater number of
advertising pages. The Company believes that the editorial
quality of Reader's Digest is the principal factor responsible
for its high subscription base. Because Reader's Digest is
circulation-driven rather than advertising-driven, its revenue
base is less vulnerable to adverse trends in the advertising
industry than are those of many other magazines.
The United States and the larger international editions of
Reader's Digest offer advertisers different regional editions,
major market editions and demographic editions. These editions,
containing the same editorial material, permit advertisers to
concentrate their advertising in specific markets or to target
specific audiences. Reader's Digest sells advertising in both
the United States and international editions principally through
an internal advertising sales force. The Company sells
advertisements in multiple editions worldwide, and offers
advertisers discounts for placing advertisements in more than one
edition.
Worldwide revenues from advertising accounted for
$135,240,000, or 20% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1994.
Editorial
Reader's Digest is a reader-driven, family magazine.
Editorial content is, therefore, crucial to the loyal subscriber
base that constitutes the cornerstone of the Company's
operations. The editorial goal 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. Unlike many magazines, Reader's Digest offers reprints
of many articles in response to reader demand. In fiscal 1994,
the Company sold almost six million reprints.
The United States editions on average contain about 160
editorial pages, among the highest of any major magazine, as
reported by Hall's Magazine Report. The table of contents is
printed on the front cover of each issue in order to stress
editorial content. The compact size of the magazine complements
the concise editorial presentation and has, over many years,
become a principal distinguishing aspect of the appearance of
Reader's Digest.
The editorial content of the articles in Reader's Digest
continually evolves so as to retain a relevant and contemporary
flavor and cover a variety of subjects. Many of the longstanding
features in Reader's Digest magazine, such as the humor columns
and the Drama In Real Life(r) articles, are widely recognized by a
substantial portion of the reading public in the United States
and in other countries in which Reader's Digest is well
established.
Approximately half the selections in Reader's Digest are
original articles written by staff writers or free-lance writers.
The balance are selected from existing published sources. All
material is condensed by Reader's Digest editors. In the United
States, editorial staff members read approximately 600
publications each month in order to identify selections suitable
for condensation and reprinting in Reader's Digest. The Company
then obtains necessary copyrights or permissions from the authors
and publishers. Reader's Digest solicits anecdotes and humor
from its readers, to whom it pays a fee upon publication. In
fiscal 1994, the Company received more than 280,000 reader
contributions. The Company's art editors commission original
illustrations and photographs to accompany editorial selections.
The Company employs a professional staff for research and
fact-checking and believes that its research and fact-checking
standards are among the highest in the publishing industry. All
published pieces are researched and checked prior to publication,
including condensed versions of articles previously published by
others and anecdotes contributed by readers.
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
United States edition and material taken from other international
editions varies greatly among editions. In general, the
Company's larger international editions, for example, in Canada,
France, Germany and the United Kingdom, carry more original or
locally adapted material than do smaller editions.
Production and Fulfillment
All editions of Reader's Digest are printed by independent
third parties. The United States edition is currently printed by
one printer at its location in New York State. In September
1994, the Company signed a new 10-year printing agreement with
another printer, commencing in late 1996, to produce the United
States edition at its Pennsylvania location. The Company has had
a longstanding relationship with the current and future printers
of the United States edition and with the printers of most of the
international editions, some of whom are also publishers of other
magazines that compete with Reader's Digest. Nonetheless, the
Company believes that generally there is an adequate supply of
alternative printing services available to the Company at
competitive prices, should the need arise. The Company has
developed plans to minimize recovery time in the event of a
disaster at an existing printing facility.
The principal raw materials used in the publication of
Reader's Digest are coated and uncoated paper. The Company has
supply contracts with a number of suppliers of paper in the
United States. Each international edition separately contracts
for a supply of paper. In addition, the Company has entered into
arrangements for paper with European paper supply companies, upon
which any of the international editions may draw. These
arrangements permit Reader's Digest to qualify for volume
discounts for which each international edition alone would not be
eligible. The Company believes that its existing supply
contracts provide an adequate supply of paper for its needs and
that, in any event, alternative sources are available at
competitive prices. Paper prices are affected by a variety of
factors, including demand, capacity, pulp supply, and general
economic conditions.
Subscription copies of the United States edition of Reader's
Digest are delivered through the United States Postal Service as
second class mail. Subscription copies of international editions
are also delivered through the postal service in each country.
For additional information about postal rates and service, see
"Direct Mail Operations and Sweepstakes."
Newsstand and other retail distribution is accomplished
through a distribution network. The Company has contracted in
each country with a magazine distributor for the distribution of
Reader's Digest. The Company gives credit for unsold copies of
Reader's Digest each month, as is customary in the industry. The
United States retail circulation of Reader's Digest is
approximately 800,000 per month. Many retail buyers of Reader's
Digest subsequently become subscribers.
Licensed Editions
Three international editions--the Korean and the two Indian
editions--are not produced by subsidiaries of the Company, but
rather are published by third parties to whom the Company has
licensed the right to publish Reader's Digest and use the
Company's trademarks. The Reader's Digest Fund for the Blind,
Inc., a New York not-for-profit corporation, publishes a large-
type edition of Reader's Digest, pursuant to a royalty-free
license. The Company also licenses, royalty-free, the right to
publish a braille edition and a recorded edition of Reader's
Digest. Revenues from licensed editions are not material.
Books and Home Entertainment Products
The Company publishes and markets, principally by direct
mail, Reader's Digest Condensed Books, series books, general
books created by the Company or acquired from third parties,
recorded music collections and home video products. See "Direct
Mail Operations and Sweepstakes."
Condensed Books
Reader's Digest Condensed Books is a continuing series of
condensed versions of current popular fiction and, to a limited
extent, nonfiction. Condensation reduces the length of an
existing text, while retaining the author's style, integrity and
purpose. Condensed Books appeal especially to consumers who have
limited reading time and enjoy the convenience of direct-mail
purchasing. Also, the price of a Condensed Book is a fraction of
the total retail price of the individual titles, if purchased
separately. The Company began publishing Condensed Books in
1950. Today, 15 editions of Condensed Books published in 12
languages are marketed in 23 countries. The Company sells about
20 million copies of Condensed Books annually. In fiscal 1994,
Condensed Books generated worldwide revenues of $363,924,000, as
compared with $352,305,000 in fiscal 1993 and $340,246,000 in
fiscal 1992.
Each Condensed Books volume typically contains condensed
versions of four recently published books, which are selected and
condensed by the Company's staff of Condensed Books editors and
copy editors. Condensed Books are illustrated by free-lance
artists. Recent works which have appeared as Condensed Books in
the United States include Fatal Cure, by Robin Cook, Decider, by
Dick Francis, I'll Be Seeing You, by Mary Higgins Clark, and
Having Our Say, by Sarah and A. Elizabeth Delany with Amy Hill
Hearth. The Company publishes the condensed version
approximately three to six months after publication of the full-
length version.
International editions of Condensed Books generally include
some material from the United States edition or from other
international editions, translated and edited as appropriate, and
some condensations of locally published works. Each local
editorial staff determines whether existing Condensed Books
selections are appropriate for their local market.
Each volume of Condensed Books will usually contain a
variety of types of works. Works included may be by well-known
or less well-known authors. The Company's research indicates
that readers do not consider the relative fame of the author to
be important to their enjoyment of a particular selection. The
Company selects works that reflect the traditional values with
which the Company and Condensed Books have always been
associated.
The Company publishes six volumes of Condensed Books a year
in the United States. Some of the Company's international
subsidiaries also publish six volumes a year, while others
publish five. Condensed Books are marketed as an open-ended
series. The Company automatically ships a volume to each
established Condensed Books customer every two to three months
until a cancellation is received. New customers are solicited
primarily by direct mail, with extensive use of sweepstakes
entries and premium merchandise offers. See "Direct Mail
Operations and Sweepstakes."
Series Books
The Company also markets series books typically in the same
manner as Condensed Books, in that the first book is offered free
of charge, and subsequent books are automatically shipped until
the Company receives a cancellation. Series books are published
in two types: reading series and illustrated series. Some of
the Company's book series are open-ended continuing series, while
others consist of a limited number of volumes. The Company sells
about nine million copies of series books annually. In fiscal
1994, series books generated worldwide revenues of $214,949,000,
as compared with $228,761,000 in fiscal 1993 and $190,737,000 in
fiscal 1992.
Previously launched reading series in the United States
include World's Best Reading, consisting of full-length editions
of classic works of literature, of which six volumes are
published each year, and Great Biographies, a 15-volume series of
condensed versions of biographies of famous historical figures.
Today's Best Nonfictionr, introduced in June 1989, is published
five times per year. Each volume contains condensed versions of
four contemporary works of nonfiction. Recent selections include
D-Day: June 6, 1944, by Stephen E. Ambrose, The Fifties, by
David Halberstam, Den of Lions, by Terry Anderson, and Days of
Grace, by Arthur Ashe and Arnold Rampersad.
Illustrated series, which are marketed in the United States
and several other countries, include The Reader's Digest American
Medical Association Home Medical Library, People and Places of
the World, and Successful Gardening. In addition, the Vie
Sauvage illustrated series is marketed in seven countries outside
of the United States. Illustrated series are generally closed
ended.
Series books are published in nine languages and marketed in
18 countries. The Company's global publishing group coordinates
the development of books that are considered likely to have
global consumer appeal and that will require only limited
adaptation for use in different countries. Today's Best
Nonfiction and World's Best Reading were introduced during fiscal
1990 and 1991 by some of the Company's international operating
subsidiaries. Currently, Today's Best Nonfiction is published in
10 countries in three languages and World's Best Reading is
published in 11 countries in four languages. Additional book
series are in various stages of development or testing in the
United States and internationally.
General Books
The Company's general books consist primarily of reference
books, cookbooks, "how-to" and "do-it-yourself" books, songbooks,
and books on subjects such as history, travel, religion, health,
nature and the home. The Company's most successful books are
Book of the Road, Do-It-Yourself, You and the Law, Great World
Atlas, and the Illustrated Guide to Gardening. Many of these
titles, along with the more recent Practical Problem Solver,
reflect the Company's strategy of producing books with global
appeal--the ability to generate strong sales throughout the world
with only limited adaptation. Six of the Company's titles have
sold in excess of five million copies worldwide. In the United
States alone, the Company has had eight "million-seller" books in
the last five fiscal years. The Company sold more than 27
million copies of general books in fiscal 1994. General books
are published in 12 languages and are marketed in 31 countries.
In fiscal 1994, general books generated worldwide revenues of
$755,165,000, as compared with $826,445,000 in fiscal 1993 and
$770,533,000 in fiscal 1992.
New books are generally 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, the
Company conducts extensive research and prepares an appropriate
marketing strategy for each book.
The Company enjoys a reputation for producing books of
editorial accuracy and high quality within the genres in which
the Company publishes. Prepublication testing and the Company's
customer lists provide statistical data supporting the projected
market for the proposed book before substantial expenses are
incurred for the creation of the book. Moreover, the Company is
able to generate through its customer lists average sales per
title that are, based on published reports, considered high in
the publishing industry, which permits editorial expense to be
absorbed over a larger number of units.
The typical initial print order for a Reader's Digest book
in the United States is several hundred thousand copies.
Although most sales of a general book will result from the
initial bulk promotional mailing, substantial additional sales
occur through subsequent promotions, catalog sales and the use of
sales inserts in mailings for other Reader's Digest products.
The Company also distributes a small portion of its books for
retail sale in bookstores, through third-party distributors.
The Company's global publishing group coordinates the
development of books that are considered likely to have global
consumer appeal and that will require only limited adaptation for
use in different countries. International subsidiaries acquire
some of their general book titles from the Company in the United
States or from other international subsidiaries.
The Company is pursuing the use of electronic media and new
technologies, such as CD-ROM and computer on-line services. In
September 1994, the Company announced an agreement with Microsoft
Corporation to produce original multimedia software for home
computer users based on editorial content of the Company's best-
selling books. The CD-ROM will be marketed by both companies and
will carry both the Reader's Digest(r) and the Microsoft(r) Home
brand names. Under the agreement, the Company has global direct
mail rights and Microsoft Corporation has worldwide retail rights
to the product.
Music
The Company publishes recorded music packages, which it
sells by direct mail on cassettes and compact discs. The music
packages are generally collections of previously recorded
material by a variety of artists, which the Company combines in a
particular collection. The collections span a broad range of
musical styles, including classical, country, popular
contemporary, jazz, rock 'n' roll, easy listening and religious
music. All of the Company's music packages are multi-unit sets,
typically including three to four cassettes or the equivalent on
compact discs. Two of the Company's music products, consisting
of multiple cassettes or compact discs, have sold 1,500,000 sets,
the equivalent of over 10 million cassettes by music industry
standards. Several other collections have each sold in excess of
1,000,000 sets. In certain markets, the Company also sells music
series, which are marketed in the same manner as Condensed Books
and series books. The Company sold more than nine million music
sets in fiscal 1994. In fiscal 1994, music products generated
worldwide revenues of $392,370,000, as compared with $399,944,000
in fiscal 1993 and $349,148,000 in fiscal 1992.
In addition to obtaining the rights to existing recordings,
the Company also conducts recording sessions, principally of
popular contemporary, classical and light classical orchestral
and choral selections, in order to create its own library of
recordings for use in its music packages. There are currently
more than 15,000 selections in the Company's library. The
Company anticipates, however, that most of the recordings
included in its packages will continue to be obtained from third
parties under royalty agreements.
The marketing strategy for music packages is similar to that
for general books. Extensive preproduction research is conducted
to help identify saleable music products and potential purchasers
within the Company's customer lists.
The Company markets music products in 20 countries. Music
products cannot generally be adapted for use in diverse
international markets to the same extent as general books. The
cost of creating a music package, however, is less than the cost
of creating a book. The Company generally markets different
music products in each international market, although many music
concepts and series have been adapted for other markets.
The Company utilizes the services of one contractor for a
substantial portion of its supply of music products in the United
States. It believes that the same services are readily available
from other sources on competitive terms.
Video
The Company began producing home video products in 1986 and
is currently expanding its video operations. The Company's home
video products are in genres similar to its general books.
Several original video products have won awards of excellence,
including three Emmy awards, and have appeared on the Disney
Channel and the Discovery Channel. The Company sold more than
four million home video products in fiscal 1994. The Company
continues to expand its video operations in international markets
and is presently marketing video products in the United States
and 16 other countries. Most of the Company's original video
programs have been leased to cable television networks. The
Company has also begun to sell its home video products through
retail establishments. In fiscal 1994, home video products
generated worldwide revenues of $173,889,000, as compared with
$150,611,000 in fiscal 1993 and $94,105,000 in fiscal 1992.
Reader's Digest Young Families, Inc.
During fiscal 1994, the Company established Reader's Digest
Young Families, Inc., a new wholly owned subsidiary that creates
and markets children's books and home entertainment products.
The new subsidiary brings together in one stand-alone operation
the business of Joshua Morris Publishing, Inc., a book publisher
acquired in 1991, and the publishing imprint of Reader's Digest
Kids(r). Reader's Digest Young Families publishes books in 25
languages and is introducing more than 40 titles for the fall
1994 season.
Production and Fulfillment
The various editions of Condensed Books are printed and
bound by third-party contractors, most of whom have had
longstanding relationships with the Company. The Company owns
the printing press and certain other equipment at the printing
facility for the United States edition of Condensed Books. The
Company solicits bids for the printing and binding of each
general book or book series. Production and manufacture of music
and video products is typically accomplished through third
parties.
The principal raw material necessary for the publication of
Condensed Books, series books and general books is paper. The
Company has a number of paper supply arrangements relating to
paper for Condensed Books. Paper for series books and general
books is purchased for each printing. The Company believes that
existing contractual and other available sources of paper provide
an adequate supply at competitive prices. Third parties arrange
for the acquisition of some of the necessary raw materials for
the manufacture of music and video products.
Fulfillment, warehousing and payment processing are
conducted principally by independent contractors. Most of the
Company's products are packaged and delivered to the Postal
Service directly by the printer or supplier. For information
about postal rates and service, see "Direct Mail Operations and
Sweepstakes."
In all of the Company's direct mail sales, a customer may
return any book or home entertainment product to the Company
either prior to payment or after payment for a refund. The
Company believes that its returned goods policy is essential to
its reputation and also elicits a greater number of orders, many
of which are not returned because of the generally high
satisfaction rate of consumers with the Company's products.
Nonetheless, this policy and a "first book free" policy for
Condensed Books and series books result in a significant amount
of returned goods.
Sales of the Company's books and home entertainment products
are seasonal to some extent. In the direct mail industry as a
whole, the winter months have traditionally had higher consumer
response than other times of the year. Sales are also higher
during the pre-Christmas season than in spring and summer.
Direct Mail Operations and Sweepstakes
The sale of magazine subscriptions, Condensed Books, series
books, general books, music and video products, as well as
certain other products, is accomplished principally through
direct mail solicitations to households on the Company's customer
lists, usually accompanied by sweepstakes entries and, in some
cases, premium merchandise offers. For many years the Company
has been acknowledged as a pioneer and innovator in the direct
mail industry. The Company was among the first to use
sweepstakes in conjunction with its mailings and to employ
certain information management techniques designed to increase
the accuracy of mailing lists and eliminate duplicate entries.
A typical Reader's Digest direct mail promotion includes
literature about the product being promoted, which may be
Reader's Digest magazine, Condensed Books, a book series, or an
individual book, music or video product, and also includes an
order form and a sweepstakes entry. Many promotions offer a
"premium," which is a small gift item, such as a road atlas, at
no additional charge, if the consumer purchases the product being
promoted. Some include an eye-catching item visible from the
outside of the envelope, such as a coin, a key or a miniature
license plate. Each of these devices helps to increase the
number of consumers who read the promotional material, which in
turn increases the "pull," or the number of orders received in
response to a mailing, according to the Company's research.
To promote the sale of its products in the United States,
the Company offers in its promotional mailings participation in
an annual sweepstakes, whose prizes totaled $12,000,000 for the
1994 edition and will total about $13,000,000 for 1995. The
grand prize is generally $5,000,000 payable in cash installments.
Prizes may be supplemented based on various criteria such as the
promptness of the response. A consumer need not order a product
to return a valid sweepstakes entry. Generally, each of the
Company's international subsidiaries sponsors its own
sweepstakes, the mechanics of which vary from jurisdiction to
jurisdiction, depending upon local law.
The Company has from time to time been party to
administrative proceedings or court actions with respect to its
direct mail practices and its use of sweepstakes. In the United
States, the Company is a party to consent decrees (the "Consent
Decrees") with the Federal Trade Commission, dating from the
early 1960's. The Company believes that many of the provisions
of the Consent Decrees represent the Federal Trade Commission's
current interpretation of applicable law, and as such, are
equally applicable to all direct mail companies and promotional
sweepstakes. The Company does not believe that the additional
requirements to which it is subject have an adverse effect on its
ability to compete with other direct mail marketers.
From time to time, the Company is involved in proceedings
concerning its direct mail promotions. Although existing laws
and regulations governing direct mail operations and sweepstakes
limit certain aspects of the Company's business, especially in
certain European jurisdictions, the Company believes that the
present regulatory restrictions in the jurisdictions in which it
operates do not prevent the Company from employing the direct
mail and promotion incentive tools necessary to its business.
The Company cannot predict, however, future laws or regulations
which may be enacted or implemented in the jurisdictions in which
it operates. More restrictive laws or regulations governing
sweepstakes or direct mail, which have been considered in some
jurisdictions, principally in Europe, could adversely affect the
business of the Company in those jurisdictions.
The Company is subject to postal rate increases that affect
its product deliveries, promotional mailings and billings. In
the United States, delivery charges are stated separately on
bills for Reader's Digest subscriptions, books and home
entertainment products. In many international jurisdictions,
however, delivery charges must be included in the price of the
product. Moreover, postal rate increases for promotional
mailings and billings can be recouped by the Company only
indirectly, mainly through price increases. Postage is one of
the Company's largest expenses in its promotional and billing
activities. In the past, the Company has had sufficient advance
notice of most increases in postal rates so that the higher rates
could be factored into the Company's pricing strategies and
operating plans. Increased prices (or increased delivery charges
paid by customers) may have a negative effect on sales. The
Company may, therefore, be unable to recover the full amount of
postal rate increases from its customers, particularly rate
increases for promotional mailings. The Company attempts to
contain postal expenses by the use of pre-sorting and other cost
saving measures.
The Company relies on postal delivery service in the
jurisdictions in which it operates for timely delivery of its
products and promotional mailings. In the United States,
delivery service is generally satisfactory. Some international
jurisdictions, however, experience periodic work stoppages in
postal delivery service or less than adequate postal efficiency.
The Company has from time to time experienced such problems in
several countries. Although these problems have not had a
significant impact on the Company, there can be no assurance that
generally favorable conditions will continue. Delayed delivery
of the Company's products may result in an increased rate of
subscription cancellations or reduced rate of renewals for
Reader's Digest magazine and a higher rate of returned goods for
books and home entertainment products. In addition, marketing
strategies depend on certain promotional mailings arriving at
consumers' homes on certain dates. Delayed delivery of
promotional mailings can significantly affect the pull of a given
mailing. The Company devotes substantial time to its relations
with postal authorities in the jurisdictions in which it
operates.
In some states in the United States and in some foreign
jurisdictions, some or all of the Company's products are subject
to sales tax or value added tax. Tax, like delivery, is
generally stated separately on bills where permitted by
applicable law. Nonetheless, tax increases or imposition of new
taxes will increase the total cost to the customer and thus may
have a negative effect on sales. Moreover, in jurisdictions
where applicable tax must be included in the purchase price, the
Company may be unable to fully recover from customers the amount
of any tax increase or new tax.
Management Information Systems and List Enhancement
The size and quality of the Company's customer list in each
country in which it operates contribute significantly to its
business and the Company is constantly striving to improve its
lists. The Company's lists contain, in addition to names and
addresses, demographic, promotional and purchase history data
accumulated about its customers, which the Company uses in its
product development and marketing efforts. The Company believes
that its United States list of about 50 million households, over
half the total number of households in the country, is one of the
largest mail response lists in the United States. The Company's
international lists include a comparable number of households, in
the aggregate. Approximately half of the households on the
United States list have purchased one or more products or
received services from the Company within the last two years.
Unlike many publishers, the Company does not rent or sell its
lists to third parties. The Company's special interest magazines
do rent their subscription lists.
The Company maintains all of its customer lists on computer.
The Company maintains extensive security at all of its data
sites, keeps backup copies of its customer lists off-site and
maintains fully operational backup data processing facilities.
The Company is making and will continue to make significant
investments in management information systems in order to improve
its operating efficiencies, increase the level of service
provided to its customer base and facilitate globalization of the
Company.
List management activity is limited in some international
subsidiaries because local jurisdictions, particularly in Europe,
have data protection laws or regulations prohibiting or limiting
the exchange of such information. Certain jurisdictions also
prohibit the retention of information, other than certain basic
facts, about noncurrent customers. Although data protection laws
may hinder the Company's list enhancement capacity, the Company
believes that current laws and regulations do not prevent the
Company from engaging in activities necessary to its business.
The Company cannot predict the scope of any future data
protection laws or their effect on the Company's business.
Special Interest Magazines
In fiscal 1987, the Company began a program to acquire
special interest magazines that the Company deems consistent with
its image, editorial philosophy and market expertise. Travel
Holiday(r) magazine (acquired in December 1986) is a practical
travel magazine aimed at middle income travelers. The Family
Handyman(r) magazine (acquired in December 1987) provides
instructions and guidance for "do-it-yourself" home improvement
projects. New Choices For Retirement Living(r) magazine (acquired
in January 1988) is aimed at active, mature readers and provides
information on entertainment, travel, health and leisure time
activities. American Health(r) magazine (acquired in February
1990) provides helpful information on medicine, nutrition,
psychology and fitness. These magazines are sold by
subscription. The Family Handyman and American Health are also
sold on newsstands. In addition, Travel Holiday is distributed
to members of a travel club, which also provides its members with
various other benefits, such as travel insurance. Like most
magazines, the Company's special interest magazines are highly
dependent on advertising revenue, and are therefore susceptible
to negative trends in the demand for advertising. Each of these
magazines publishes 10 issues per year. In fiscal 1990, the
Company expanded its special interest magazine business to the
United Kingdom, with the acquisition of Moneywise magazine, a
magazine devoted to helping families manage their finances.
The following table sets forth the circulation rate base of
each of the Company's United States special interest magazines as
of the end of each of the last five fiscal years, as well as the
number of advertising pages carried and the advertising revenues
(before deducting discounts and commissions) for those fiscal
years. Circulation rate base data is as reported to ABC and
advertising data is as reported by PIB.
<TABLE>
<CAPTION>
Number of Gross
Circulation Advertising Advertising
Rate Base Pages Carried Revenues <F1>
<S> <C> <C> <C>
The Family Handyman<F2>:
1994 1,000,000 508 $15,333,200
1993 1,000,000 467 12,982,200
1992 1,000,000 439 10,779,600
1991 1,000,000 441 11,230,800
1990 1,300,000 378 8,995,200
Travel Holiday:
1994 575,000 589 13,566,500
1993 550,000 521 10,507,700
1992 550,000 458 8,887,500
1991 550,000 450 8,098,900
1990 550,000 413 6,980,400
New Choices For Retirement Living:
1994 575,000 417 11,486,300
1993 575,000 384 10,179,800
1992 575,000 324 7,065,800
1991 575,000 323 6,757,300
1990 575,000 381 7,408,400
American Health<F3>:
1994 800,000 443 11,822,100
1993 800,000 433 10,144,100
1992 800,000 424 9,213,300
1991 800,000 295 5,904,700
1990 800,000 603 11,541,500
____________
<FN>
<F1>
(1) Gross advertising revenues are computed from basic one-
time rates and the number of advertising pages carried and,
therefore, exceed actual advertising revenues as included in
the Company's financial statements. Actual advertising
revenues reflect lower rates for multiple insertion, volume
discounts and cash discounts.
<F2>
(2) The circulation rate base was reduced to 1,000,000
effective in January 1991.
<F3>
(3) Acquired by the Company in February 1990.
</FN>
</TABLE>
Moneywise had a circulation rate base of 114,000, 100,000,
86,000, 86,000 and 45,000 as of the end of fiscal 1994, 1993,
1992, 1991 and 1990, respectively.
Of total revenues of $90,607,000 for the Company's special
interest magazines in fiscal 1994, 60% was generated by
circulation revenues and 40% by advertising revenues. At July 1,
1994, The Family Handyman had a cover price of $2.25 and a basic
annual subscription price of $19.97, Travel Holiday had a basic
annual subscription price of $12.97, New Choices For Retirement
Living had a basic annual subscription price of $18.97, and
American Health had a cover price of $1.95 and a basic annual
subscription price of $18.97.
Since acquiring each magazine, the Company has upgraded
editorial quality, effected changes in personnel, revised
marketing strategies and created a management infrastructure.
The U.S. magazines are promoted to the Company's U.S. customer
list and the Company's other products are promoted to each
magazine's customer list, as appropriate. The Company believes
that this strategy will help to expand the Company's customer
base for all of its products.
The Company is working with software developers and computer
on-line services to adapt its magazines to new technologies.
Within the past year, The Family Handyman has become available
through The CompuServe Information Service and Travel Holiday
became available through America Online and through the
Electronic Newsstand on the Internet.
The Company has made and continues to make expenditures in
its special interest magazines with a view toward long-term
growth. When appropriate, the Company will also discontinue
publication of a magazine. Although the Company does not have
any current plans with respect to any acquisitions of additional
magazines, it will make additional acquisitions if and when
appropriate magazines become available on terms the Company finds
satisfactory.
Other Businesses
In some markets, the Company also sells other products by
direct mail, principally language courses (consisting of written
materials and cassettes) and globes. Revenues from these
activities are not material to the Company's business.
The Company's wholly owned subsidiary, QSP, Inc. ("QSP"), is
in the business of assisting schools and youth groups in their
fundraising efforts. QSP's staff helps schools and youth groups
prepare fundraising campaigns in which participants sell magazine
subscriptions, music and video products, books, food and gifts.
QSP derives its revenue from a portion of the proceeds of each
sale. Several hundred publishers (including the Company) make
magazine subscriptions available to QSP at a substantial
discount. QSP also obtains discounted music products from a
large music publisher. Processing of magazine subscription
orders and payments is performed for QSP by an independent
contractor. The Company's Canadian subsidiary is a 50% owner of
a Canadian company which engages in Canada in the same type of
fundraising activities as QSP. The other 50% is owned by another
large Canadian publisher.
Competition and Trademarks
Although Reader's Digest magazine is a unique and well-
established institution in the magazine publishing industry, it
competes with other magazines for subscribers and with magazines
and all other media, including radio and television, for
advertising. The Company believes that the extensive and
longstanding international operations of Reader's Digest provide
the Company with a significant advantage over competitors seeking
to establish a global publication.
The Company owns numerous trademarks that it uses in its
business worldwide. Its two most important trademarks are
"Reader's Digest" and the "Pegasus" logo. The Company believes
that the name recognition, reputation and image that it has
developed in each of its markets significantly enhance customer
response to the Company's direct mail sales promotions.
Accordingly, trademarks are important to the Company's business
and the Company aggressively defends its trademarks.
The Company believes that its name, image and reputation, as
well as the quality of its customer lists, provide a significant
competitive advantage over many other direct mail marketers.
However, the Company's books and home entertainment products
business is in competition with companies selling similar
products at retail as well as by direct mail. Because tests show
that consumers' responses to direct mail promotions can be
adversely affected by the overall volume of direct mail
promotions, the Company is also in competition with all other
direct mail marketers, regardless of whether the products being
offered are similar to the Company's products. The Company
believes that it has greater resources than many of its direct
mail competitors, and that, consequently, it is better able to
withstand potential negative industry trends, such as postal rate
increases.
Each of the Company's special interest magazines is in
competition with other magazines of the same genre for readers
and advertising. Nearly all of the Company's products compete
with other products and services that utilize leisure activity
time or disposable income.
Employees
As of June 30, 1994, the Company employed approximately
6,700 persons worldwide. Approximately 2,500 were employed in
the United States and 4,200 were employed by the Company's
international subsidiaries. The Company's relationship with its
employees is generally satisfactory.
Executive Officers of the Company
The following paragraphs set forth the name, age and offices
with the Company of each present executive officer of the
Company, the period during which each executive officer has
served as such and each executive officer's business experience
during the past five years:
Name and Age Positions and Offices With the Company
George V. Grune (65) Mr. Grune is Chairman of the Board of the
Company. He served as Chairman and Chief
Executive Officer from 1984 through July
1994, when he retired as Chief Executive
Officer upon reaching age 65. Mr. Grune
has been a member of the Board of
Directors of the Company since 1976. He
joined the Company in 1960.
James P. Schadt (56) Mr. Schadt was elected Chief Executive
Officer of the Company effective August
1994 and continues as President. He
joined the Company as President and Chief
Operating Officer and was elected to the
Board of Directors of the Company in
September 1991. He was a member of the
board of directors of Cadbury Schweppes
plc of London and Chief Executive Officer
of its worldwide beverage business,
Cadbury Beverages, Inc., from 1986
through July 1991.
Melvin R. Laird (72) Mr. Laird has been a member of the Board
of Directors of the Company since 1990.
He has served as Senior Counsellor since
1974 and was elected to the additional
position of Vice President in 1989. Mr.
Laird joined the Company in 1974.
Kenneth A.H. Gordon (57) Mr. Gordon has been President, Reader's
Digest U.S.A., since July 1993. In
addition, having been a Vice President of
the Company since 1982, he became a
Senior Vice President in January 1994.
He was President, International Group
from October 1989 to June 1993. He
joined the Company in 1960.
Name and Age Positions and Offices With the Company
Heikki K. Helenius (52) Mr. Helenius has been President, Reader's
Digest Europe and Vice President of the
Company since July 1993. He was Vice
President, International Group from
January 1992 to June 1993 and was
Managing Director of the Company's
Finnish subsidiary prior thereto. Mr.
Helenius joined the Company in 1972.
Martin J. Pearson (47) Mr. Pearson, who joined the Company in
August 1973, has been President, Reader's
Digest Pacific and Vice President of the
Company since July 1993. He was Managing
Director of Reader's Digest Australia
from January 1990 to June 1993 and was
its Marketing Director prior thereto.
Peter J.C. Davenport (54) Mr. Davenport was named Senior Vice
President, Global Direct Marketing in
January 1994. He had been Vice
President, Global Direct Marketing since
September 1991 and Vice President and
Deputy Director, International Group
since 1988. Mr. Davenport joined the
Company in 1958.
Joseph M. Grecky (55) Mr. Grecky has been Senior Vice
President, Human Resources since January
1994. He had been Vice President, Human
Resources since he joined the Company in
1987.
Carole M. Howard (49) Mrs. Howard joined the Company in 1985 as
Vice President, Public Relations and
Communications Policy. She had worked
for AT&T for 18 years in various public
relations, advertising and marketing
positions.
Thomas M. Kenney (47) Mr. Kenney has been President, U.S.
Magazine Publishing since July 1993 and a
Vice President since he joined the
Company in October 1989 as President,
Magazine Publishing Group. From 1986
through September 1989, he was President
of Thomas Kenney & Company Inc., an
investment banking firm specializing in
magazine publishing companies.
Bruce G. Koe (51) Mr. Koe, who joined the Company in
October 1992 as Vice President, Global
Operations, was Vice President,
Diversified Products Group of Western
Publishing Company, Inc. from September
1990 to October 1992 and was Vice
President of Banta Corporation from
September 1986 to September 1990.
Marcia M. Lefkowitz (50) Ms. Lefkowitz has been Vice President,
Marketing, Reader's Digest U.S.A. since
July 1993. She served as Vice President,
Marketing Systems from February 1993 to
June 1993, Vice President, Global New
Business Development from August 1990 to
January 1993 and Vice President,
Corporate Planning and Development from
November 1988 to July 1990. Ms.
Lefkowitz joined the Company in 1967.
Name and Age Positions and Offices With the Company
Barbara J. Morgan (49) Mrs. Morgan has been Vice President and
Editor-in-Chief, Condensed Books since
August 1987. She joined the Company in
January 1973.
Kenneth A. Nelson (49) Mr. Nelson joined the Company as Vice
President, Management Information Systems
in November 1990. Since 1980, he had
served in a number of management
capacities for Mars, Inc.
John A. Pope, Jr. (61) Mr. Pope has been Vice President since
March 1984 and Editor-in-Chief, General
Books since September 1991. He joined
the Company in February 1968.
Anthony W. Ruggiero (53) Mr. Ruggiero was elected Senior Vice
President and Chief Financial Officer in
January 1994. He had been Vice President
and Chief Financial Officer since he
joined the Company in July 1990. From
1983 to 1989, he was Senior Vice
President and Chief Financial Officer and
a Director of Squibb Corp. and thereafter
served as Senior Vice President and
Controller of Bristol-Myers Squibb Co.
Kenneth Y. Tomlinson (50) Mr. Tomlinson, who joined the Company in
April 1968, has been Vice President since
1985 and Editor-in-Chief, Reader's Digest
magazine since December 1990.
William H. Willis (43) Mr. Willis has been President, Special
Markets Group and Vice President of the
Company since he joined the Company in
January 1994. He was previously
Executive Vice President, Marketing and
Sales of Ogden Services Corporation.
Additional Corporate Officers
Connie K. Beck Vice President, Corporate Secretary and
Associate General Counsel
Gregory G. Coleman Vice President and Publisher, U.S. Reader's
Digest and Special Interest Magazines
Milan Kofol Vice President and Treasurer
Joseph G. NeCastro Vice President and Controller
Jack A. Smith Vice President, Corporate Planning and
Development
Pursuant to the By-Laws of the Company, officers serve at
the pleasure of the Board of Directors. Officers of the Company
are elected annually to serve until their respective successors
are elected and qualified.
ITEM 2. PROPERTIES
United States Properties
The Company's headquarters and principal operating
facilities are situated on approximately 120 acres in Westchester
County, New York, much of which the Company acquired in 1940.
The site includes five principal buildings aggregating
approximately 697,000 square feet that house executive,
administrative, editorial and operational offices, and data
processing and other facilities. Joshua Morris Publishing, Inc.
also owns approximately 11,000 square feet of space in Wilton,
Connecticut.
The Company leases approximately 84,000 square feet of
warehouse space in Brewster, New York. QSP leases approximately
80,000 square feet in Conyers, Georgia, 48,000 square feet in
Pinola, Georgia, 20,000 square feet in Stone Mountain, Georgia
and 17,000 square feet in Ridgefield, Connecticut.
In New York City, the Company leases approximately 181,000
square feet of office space in a total of four buildings,
portions of which are used as editorial offices for its books and
home entertainment products business, as advertising sales
offices for Reader's Digest magazine and as offices for the
Company's special interest magazines.
The Company leases space for an editorial bureau,
advertising sales offices and other purposes in various cities in
the United States.
International Properties
The following table contains information about all operating
properties owned by the Company outside the United States and the
headquarters, in many cases including operating facilities, of
each of the Company's principal international operating
subsidiaries.
<TABLE>
<CAPTION>
Principal Square
Location Use Footage
<S> <C> <C>
Owned:
Sydney, Australia Headquarters 93,200
Editorial Offices 20,000
Vienna, Austria Administrative Office 1,300
Montreal, Canada Headquarters 96,200
Editorial Offices 34,000
Lettershop 20,000
Helsinki, Finland Headquarters 40,000
Bagneux, France Headquarters 109,500
Montigny, France Lettershop & Warehouse 74,500
Stuttgart, Germany Headquarters 68,000
Editorial Offices 14,000
Hong Kong Headquarters 81,700
Milan, Italy Headquarters 152,000
Verona, Italy Warehouse 109,200
Mexico City, Mexico Headquarters 28,700
Amsterdam, The Netherlands Headquarters 43,300
Lisbon, Portugal Headquarters 58,000
Azeitao, Portugal Warehouse 62,000
Capetown, South Africa Headquarters 75,000
Swindon, United Kingdom Management Information
Systems, Fulfillment,
Warehouse and
Administrative
Offices 262,500<F1>
Total Owned Properties 1,443,100
__________________
<FN>
<F1>
(1) The Company owns the building at this facility and leases
the underlying land pursuant to a long-term lease expiring in 2076.
</FN>
</TABLE>
Principal Square
Location Use Footage
Leased Headquarters:
Brussels, Belgium Headquarters 20,700
Budapest, Hungary Headquarters 13,800
Kista, Sweden Headquarters 19,800
Zurich, Switzerland Headquarters 49,200
London, United Kingdom Headquarters 55,100
In addition, the Company leases various other office space,
warehouses and operational facilities throughout the world. All
international properties leased by the Company, including
headquarters, aggregate approximately 570,000 square feet.
General
The Company believes that its current facilities, together
with expansions and upgrading of facilities presently underway or
planned, are adequate to meet its present and reasonably
foreseeable needs. The Company also believes that adequate space
will be available to replace any leased facilities for which the
leases expire in the near future.
The Company also owns printing and related equipment located
at printing facilities not owned or leased by the Company. See
Item 1, "Business--Reader's Digest Magazine--Production and
Fulfillment" and "Business--Books and Home Entertainment Products-
- -Production and Fulfillment."
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in several
lawsuits and claims arising in the regular course of business.
Based on the opinions of management and counsel for such matters,
recoveries, if any, by plaintiffs and claimants would not
materially affect the financial position of the Company or its
results of operations.
Additionally, on December 21, 1993, the Roman Catholic
Bishop of San Diego and the Chino Unified School District
commenced a lawsuit in the U.S. District Court for the Southern
District of California against a subsidiary of the Company, QSP,
Inc., and the Company, alleging violation of the federal
antitrust laws and seeking treble damages in an unspecified
amount and certain injunctive relief. The complaint alleges that
QSP, Inc. is unlawfully monopolizing the school and youth group
magazine fund raising market. The suit was certified as a class
action on July 1, 1994. The Company believes that the suit is
without merit and, accordingly, no provision for loss has been
made in the Company's consolidated financial statements. The
Company intends to defend this action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended June
30, 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in Note 18 to the Company's
Consolidated Financial Statements in the Company's 1994 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected
Financial Data" in the Company's 1994 Annual Report to
Stockholders is incorporated herein 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 the Company's 1994 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appearing on
pages 26 through 38 of the Company's 1994 Annual Report to
Stockholders, together with the report thereon of KPMG Peat
Marwick LLP appearing on page 39, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company under
the caption "Election of Directors" in the Proxy Statement for
the Annual Meeting of Stockholders of the Company to be held on
November 11, 1994 is incorporated herein by reference.
Information with respect to executive officers of the Company
appears under the caption "Executive Officers of the Company" in
Item 1 of Part I hereof and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation under the
captions "Executive Compensation," "Report of the Compensation &
Nominating Committee" and "Performance Graph" in the Proxy
Statement for the Annual Meeting of Stockholders of the Company
to be held on November 11, 1994 is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain
beneficial owners and management under the caption "Equity
Security Ownership" in the Proxy Statement for the Annual Meeting
of Stockholders of the Company to be held on November 11, 1994 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and
related transactions under the caption "Executive Compensation--
Miscellaneous" in the Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held on November 11, 1994 is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
Listed on the Index to Consolidated Financial Statements
and Schedules on page 27 of this Report.
(2) Financial Statement Schedules
Listed on the Index to Consolidated Financial Statements
and Schedules on page 27 of this Report.
(3) Exhibits
3.1.1 Restated Certificate of Incorporation of The Reader's
Digest Association, Inc. filed with the State of Delaware
on February 7, 1990 filed electronically as Exhibit 3.1.1
to the registrant's Form 10-K for the year ended June 30,
1993, is incorporated herein by reference.
3.1.2 Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
filed with the State of Delaware on February 22, 1991
filed electronically as Exhibit 3.1.2 to the registrant's
Form 10-K for the year ended June 30, 1993, is
incorporated herein by reference.
3.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 filed
electronically as Exhibit 3.2 to the registrant's Form 10-
K for the year ended June 30, 1993, 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).*
*Denotes a management contract or compensatory plan.
10.2 The Reader's Digest Association, Inc. 1989 Key Employee
Long Term Incentive Plan filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (Registration No. 33-
32566) filed by registrant on December 19, 1989, is
incorporated herein by reference.*
10.3 The Reader's Digest Association, Inc. 1994 Key Employee
Long Term Incentive Plan filed electronically as Exhibit
10.17 to the registrant's Form 10-Q for the quarter ended
March 31, 1994, is incorporated herein by reference.*
10.4 The Reader's Digest Association, Inc. Deferred
Compensation Plan (Amendment and Restatement as of July
8, 1994).*
10.5 The Reader's Digest Association, Inc. Severance Plan for
Senior Management (Amendment and Restatement as of July
8, 1994).*
10.6 The Reader's Digest Association, Inc. Income Continuation
Plan for Senior Management (amended and restated) filed
electronically as Exhibit 10.5 to the registrant's Form
10-K for the year ended June 30, 1993, is incorporated
herein by reference.*
10.7 Excess Benefit Retirement Plan of The Reader's Digest
Association, Inc. (Amendment and Restatement as of July
1, 1994).*
10.8 Supplemental Retirement Agreement dated as of May 15, 1985
between the registrant and George V. Grune filed as
Exhibit 10.12 to the Registration Statement on Form S-1
(Registration No. 33-32566) filed by registrant on
December 19, 1989, is incorporated herein by reference.*
10.9 Supplemental Retirement Benefit Agreement dated as of
August 22, 1988 between the registrant and George V.
Grune filed as Exhibit 10.7 to the Registration Statement
on Form S-1 (Registration No. 33-32566) filed by
registrant on December 19, 1989, is incorporated herein
by reference.*
10.10 Supplemental Retirement Benefit Agreement dated as of
August 25, 1988 between the registrant and Kenneth A.
Gordon filed as Exhibit 10.10 to the Registration
Statement on Form S-1 (Registration No. 33-32566) filed
by registrant on December 19, 1989, is incorporated
herein by reference.*
10.11 Supplemental Retirement Benefit Agreement dated as of
December 12, 1989 between the registrant and Thomas M.
Kenney filed as Exhibit 10.21 to the registrant's Form 10-
K for the year ended June 30, 1991, is incorporated
herein by reference.*
10.12 Supplemental Retirement Benefit Agreement dated as of
August 16, 1990 between the registrant and Anthony W.
Ruggiero filed as Exhibit 10.22 to the registrant's Form
10-K for the year ended June 30, 1991, is incorporated
herein by reference.*
10.13 The Reader's Digest 1992 Executive Retirement Plan
(Amendment and Restatement as of July 1, 1994.*
10.14 The Reader's Digest Association, Inc. Deferred
Compensation Plan for Non--Employee Directors filed as
Exhibit 10.20 to the registrant's Form 10-K for the year
ended June 30, 1990, is incorporated herein by
reference.*
*Denotes a management contract or compensatory plan.
10.15 Agreement dated July 10, 1992 between the registrant and
George V. Grune filed as Exhibit 10.15 to the
registrant's Form 10-K for the year ended June 30, 1992,
is incorporated herein by reference.*
10.16 Supplemental Retirement Benefit Agreement dated as of
September 13, 1991 between the registrant and James P.
Schadt filed as Exhibit 10.16 to the registrant's Form 10-
K for the year ended June 30, 1993, is incorporated
herein by reference.*
13 Financial Review appearing at pages 22 through 38 of the
registrant's 1994 Annual Report to Stockholders, together
with the report thereon of KPMG Peat Marwick LLP
appearing on page 39 (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).
21 Subsidiaries of the registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three months
ended June 30, 1994.
*Denotes a management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
By: James P. Schadt
(James P. Schadt)
President and Chief Executive Officer
Date: September 26, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
George V. Grune Chairman of the Board and September 26, 1994
(George V. Grune) a Director
James P. Schadt President and Chief September 26, 1994
(James P. Schadt) Executive Officer and a
Director
Melvin R. Laird Vice President and Senior September 26, 1994
(Melvin R. Laird) Counsellor and a Director
Anthony W. Ruggiero Senior Vice President and September 26, 1994
(Anthony W. Ruggiero) Chief
Financial Officer
Joseph G. NeCastro Vice President and September 26, 1994
(Joseph G. NeCastro) Controller
William G. Bowen Director September 26, 1994
(William G. Bowen)
Lynne V. Cheney Director September 26, 1994
(Lynne V. Cheney)
M. Christine DeVita Director September 26, 1994
(M. Christine DeVita)
James E. Preston Director September 26, 1994
(James E. Preston)
Robert G. Schwartz Director September 26, 1994
(Robert G. Schwartz)
Walter V. Shipley Director September 26, 1994
(Walter V. Shipley)
C.J. Silas Director September 26, 1994
(C.J. Silas)
THE READER'S DIGEST ASSOCIATION, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of KPMG Peat Marwick LLP, Independent Auditors *
Financial Statements:
Consolidated Statements of Income--For the Years Ended June
30, 1994, 1993
and 1992 *
Consolidated Balance Sheets--June 30, 1994 and 1993 *
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1994,
1993 and 1992 *
Consolidated Statements of Changes in Stockholders' Equity--
For the
Years Ended June 30, 1994, 1993 and 1992 *
Notes to Consolidated Financial Statements *
Report of KPMG Peat Marwick LLP, Independent Auditors 28
Schedules:
I Marketable Securities and Other Investments 29
II Amounts Receivable From Related Parties 30
VIII Valuation and Qualifying Accounts 31
IX Short-Term Borrowings 32
X Supplementary Income Statement Information 33
All schedules, except those set forth above, 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.
____________
*Incorporated by reference to the Company's 1994 Annual
Report to Stockholders. See Item 8 of the Annual Report on Form
10-K.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of The Reader's Digest
Association, Inc.:
Under date of September 7, 1994, we reported on the consolidated
balance sheets of The Reader's Digest Association, Inc. and
subsidiaries as of June 30, 1994 and 1993, and the related
consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year
period ended June 30, 1994, as contained in The Reader's Digest
Association, Inc. 1994 Annual Report to Stockholders. These
consolidated financial statements and our report thereon are
incorporated by reference in the Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedules as listed in the Index to
Consolidated Financial Statements and Schedules in the 1994
Annual Report on Form 10-K. These financial statement schedules
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in the notes to consolidated financial statements,
the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits," and the
American Institute of Certified Public Accountants' Statement of
Position No. 93-7, "Reporting on Advertising Costs," effective
July 1, 1993 and the provisions of Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," effective June 30, 1994. As discussed in the notes
to consolidated financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and
No. 109, "Accounting for Income Taxes," effective July 1, 1992.
KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
New York, New York
September 7, 1994
THE READER'S DIGEST ASSOCIATION, INC.
SCHEDULE I -- MARKETABLE SECURITIES AND OTHER INVESTMENTS
Year Ended June 30, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
No. of Market Amount at
Shares or Value of Which Security
Name of Each Issuer Principal Cost of Each Issue Issue is
and Title of Each Issue Amounts of Each at Balance Carried in the
Bonds and Issue Sheet Balance Sheet
Notes Date
<S> <C> <C> <C> <C>
Short-term investments:
Amounts held by United States entities:
Certificates of deposit $ 359 $ 359 $ 359 $ 359
U.S. Treasury Bills $198,000 198,651 199,893 199,893
$199,010 $200,252 $ 200,252
Amounts held by international entities:
Certificates of deposit $11,147 $ 11,147 $ 11,147 $ 11,147
Common stock 15,027 shs 40 55 55
$ 11,187 $11,202 $ 11,202
Total short-term investments $210,197 $211,454 $ 211,454
Long-term investments:
Amounts held by United States
entities:
Common stock:
CML Group 2,890,950 shs $ 2,309 $ 33,607 $ 33,607
Other 264,425 shs 990 1,224 1,224
Corporate Bonds $ 12,000 12,288 12,169 12,169
Government Bonds $ 228,000 231,994 218,382 218,382
State obligations $ 3,650 3,742 3,773 3,773
U.S. Treasury Bonds $ 101,000 102,631 102,889 102,889
$353,954 $372,044 $ 372,044
Amounts held by international entities:
Other $ 129 $ 129 $ 131 $ 131
Total long-term investments $ 354,083 $372,175 $372,175
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC.
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES
Years Ended June 30, 1994, 1993, and 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at End
Deductions of Period
Balance at Effect of
Beginning Foreign Amounts Amounts Not
Name of Debtor of Period Additions Exchange Collected Written Current Current
Off
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1994
Ralph Hancox $106 -- $(8) $ (2) -- -- $ 96<F1>
Heikki Helenius 100 $ -- -- (50) -- -- 50<F2>
Total $206 $ -- $(8) $ (52) -- -- $ 146
Year Ended June 30, 1993
Ralph Hancox $115 -- $(7) $ (2) -- -- $106<F1>
Heikki Helenius -- $ 100 -- -- -- -- 100<F2>
Total $115 $ 100 $(7) $ (2) -- -- $206
Year Ended June 30, 1992
Ralph Hancox $120 -- $(5) -- -- -- $115<F1>
Total $120 -- $(5) -- -- -- $115
________
<FN>
<F1>
(1) Due ninety days after termination
of employment and secured by a mortgage on real estate owned
by Mr. Hancox.
<F2>
(2) Unsecured loan due September 30, 1995.
</FN>
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1994, 1993 and 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions Deductions<F1>
Balance at Charge Balance
Beginning to Costs Amounts at End of
Description of Period and Written Off Period
Expenses
<S> <C> <C> <C> <C>
Year Ended June 30, 1994
Deducted from Receivables:
Allowances for Returns and $198,406 $433,364 $(422,298) $209,472
Bad Debts
Year Ended June 30, 1993
Deducted from Receivables: $173,630 $486,520 $(461,744) $198,406
Allowances for Returns and
Bad Debts
Year Ended June 30, 1992
Deducted from Receivables: $126,852 $433,558 $(386,780) $173,630
Allowances for Returns and
Bad Debts
________
<FN>
<F1>
(1) Deductions include the effect of foreign exchange translation.
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS
Years Ended June 30, 1994, 1993 and 1992
(Dollars in Thousands)
<TABLE>
<CAPTION>
Average Weighted
Weighted Maximum Amount Average
Average Amount Outstanding Interest
Category of Aggregate Balance At Interest Outstanding During Rate During
Short-Term Borrowings End of Rate During Period <F3> Period <F4>
Period Period
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994
Bank Borrowings <F1> $ 0 0.0% $5,188 $ 1,716 20.9%
$ 0 $5,188 $ 1,716
Year ended June 30, 1993
Bank Borrowings <F1> $5,253 20.6% $5,912 $ 2,697 20.2%
$5,253 $5,912 $ 2,697
Year ended June 30, 1992
Bank Borrowings <F1> $ 128 11.6% $2,400 $ 385 11.7%
Notes Payable <F2> 6,258 8,389 6,288
$6,386 $10,789 $ 6,673
________
<FN>
<F1>
(1) Bank borrowings had various maturities ranging from
thirty days to one year.
<F2>
(2) Notes payable were non-interest bearing.
<F3>
(3) The average amount outstanding during the period is
the average of the month-end balances.
<F4>
(4) The weighted average interest rate during the period is
computed by dividing the weighted average interest expense
by the weighted average balance outstanding.
</FN>
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC.
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
Years Ended June 30, 1994, 1993 and 1992
(Dollars in Thousands)
Charged to Costs and Expenses
Item 1994 1993 1992
Royalties $72,490 $73,533 $64,449
Exhibit 10.1
THE READER'S DIGEST ASSOCIATION, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
(Amended and Restated as of July 1, 1994)
ARTICLE I
Purpose of the Plan
1.1 The purpose of the Management Incentive Compensation
Plan (the "Plan") of The Reader's Digest Association, Inc. (the
"Company") is to advance the interests of the Company by
providing senior officers, senior management and key employees of
the Company and its designated Subsidiaries (defined below) with
additional incentive to promote the success of the business and
to increase their vested interest in the success of the business
and to increase their vested interest in the success of the
Company, and to encourage them to remain employees, through the
making of certain incentive cash bonus awards ("awards") linked
to performance goals.
ARTICLE II
Administration of the Plan
2.1 The Plan shall be administered and interpreted by a
committee (the "Committee") appointed from time to time by the
Board of Directors of the Company (the "Board") and consisting of
three or more Directors. Members of the Committee shall not be
eligible to participate in the Plan.
2.2 The Committee shall have full authority to make or
withhold awards, to construe and interpret the terms and
provisions of the Plan and any award made hereunder, to adopt,
alter and repeal such administrative rules, guidelines and
practices governing this Plan and perform all acts, including the
delegation of its administrative responsibilities, as it shall,
from time to time, deem advisable, and to otherwise supervise the
administration of this Plan.
2.3 The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan, or in any
award made hereunder, in the manner and to the extent it shall
deem necessary to carry the Plan into effect.
2.4 Any decision, interpretation or other action made or
taken in good faith by or at the direction of the Company, the
Board, any employee of the Company or the Committee (or any of
its members) arising out of or in connection with the Plan shall
be within the absolute discretion of all and each of them, as the
case may be, and shall be final, binding and conclusive on the
Company and all employees and Participants and their respective
heirs, executors, administrators, successors and assigns.
2.5 No member of the Board, no employee of the Company and
no member of the Committee (nor the Committee itself) shall be
liable for any act or action hereunder, whether of omission or
commission, by any other member or employee or by any agent to
whom duties in connection with the administration of the Plan
have been delegated or, except in circumstances involving his bad
faith, gross negligence or fraud, for anything done or omitted to
be done by himself. The Company or the Committee may consult
with legal counsel, who may be counsel for the Company or other
counsel, with respect to its obligations or duties hereunder, or
with respect to any action or proceeding or any question of law,
and shall not be liable with respect to any action taken or
omitted by it in good faith pursuant to the advice of such
counsel.
2.6 For purposes of this Plan, "designated Subsidiaries"
shall mean such subsidiaries of the Company, 80 percent or more
of the voting capital stock of which is owned, directly or
indirectly, by the Company, which are designated from time to
time by the Committee.
ARTICLE III
Eligibility
3.1 Eligible employees include employees of the Company and
the designated Subsidiaries who are senior officers, members of
senior management or key employees. "Participants" shall mean
all such eligible employees designated by the Committee.
3.2 A Participant who ceases to be employed by the Company
or a designated Subsidiary by reason (i) transfer at the
Company's request to an Affiliate (as defined in Section 414 of
the Internal Revenue Code of 1986, as amended), (ii) death, (iii)
disability (as defined under the terms of The Reader's Digest
Association, Inc. Long Term Disability Plan), or (iv) "early" or
"normal" retirement (as defined under the terms of The Reader's
Digest Association, Inc. Retirement Plan) (in each case, whether
or not such Participant is covered by such plan), shall be
eligible for an award (or portion thereof) for the fiscal year in
which the transfer, death, disability or retirement occurs, only
if and to the extent the Committee shall decide in its sole
discretion.
3.3 A Participant who ceases to be employed by the Company
or a designated Subsidiary for any reason other than those
enumerated in Section 3.2 above, shall not be eligible for an
award in respect of the fiscal year in which such termination of
employment by the Company or a designated Subsidiary occurs. For
the purposes of this Section, it shall not be considered a
termination of employment when a Participant is granted a
military or personal leave of absence by the Company or when a
Participant is transferred from the Company or a designated
Subsidiary to another designated Subsidiary or to the Company or
to any affiliate as defined in Section 414 of the Internal
Revenue Code of 1986, as amended; however, in any such case, the
Committee may change or eliminate any awards or performance goals
previously targeted with respect to such Participant.
ARTICLE IV
Awards Under the Plan
4.1 For each fiscal year, the Company shall establish
individual award targets (by grade level) for awards under the
Plan and shall establish performance goals relating to (a)
financial performance of the Company or any division or other
business unit of the Company (or any combination thereof) during
that fiscal year and (b) individual performance during that
fiscal year.
4.2 For each fiscal year, the Company shall establish a
formula for funding an incentive pool consisting of the maximum
aggregate awards that would be available to all Participants
under the Plan pursuant to the individual award targets.
4.3 No later than the end of the first quarter of the
fiscal year, the Committee shall review the individual award
targets (by grade level) and performance goals established by the
Company pursuant to Section 4.1 and shall, in its discretion,
approve an incentive pool based on the funding formula
established by the Company pursuant to Section 4.2.
4.4 Promptly after the end of a fiscal year, the Company
shall determine the extent to which performance goals for that
fiscal year have been achieved and shall determine the allocation
of individual awards to Participants.
4.5 The Committee shall review and, in its discretion,
shall certify the achievement of the applicable financial
performance goals and shall approve the Company's recommendations
with respect to the individual performance goals of each
executive officer of the Company who is a Participant and, in its
discretion, any other key employee of the Company who is a
Participant. The Committee may, in its discretion, adjust any of
the financial performance goals to exclude the effects of unusual
items, including acquisitions, divestitures, accounting changes,
restructuring and special charges and foreign currency effects.
Regardless of the performance achieved relative to any goals and
standards, and notwithstanding any award targets, no Participant
shall be entitled to any individual award unless and until the
Committee determines to make such award.
4.6 The Committee may, but need not, pay out the full
amount of the incentive pool for any fiscal year.
4.7 Each award made under the Plan shall be paid or
allocated as soon as practicable after the close of the fiscal
year, unless otherwise determined by the Committee. The
Committee in its sole discretion may permit a Participant to
defer payment of his award under The Reader's Digest Association,
Inc. Deferred Compensation Plan, as such plan may be modified
from time to time, or any other plan applicable to the
Participant.
4.8 In the event of the death of a Participant after the
making of the award but prior to the payment of his award
hereunder, payment shall be made to such beneficiary or beneficiaries as the
Participant shall have previously designated in
writing. Such designation shall not be effective unless filed
with the Company. If there is no effective designation of a
beneficiary at the time of the Participant's death, or in the
event that the designated person or persons shall predecease such
Participant, any such award payable shall be made to the
Participant's estate or legal representative.
ARTICLE V
Amendment or Termination of the Plan
5.1 Notwithstanding any other provision of this Plan, the
Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or
terminate it entirely, retroactively or otherwise; provided,
however, that any such amendment, suspension or termination may
not, without the Participant's consent, adversely affect any of
the awards theretofore made to him under the Plan.
ARTICLE VI
Miscellaneous
6.1 No person shall have any claim or right to be made an
award under the Plan, and neither this Plan, the establishment of
any goals or standards nor the making of an award under this Plan
shall give any Participant or other employee any right with
respect to continuance of employment by the Company or any
subsidiary, nor shall there be a limitation in any way on the
right of the Company or any subsidiary by which an employee is
employed to terminate his employment at any time.
6.2 Except by will or the laws of descent and distribution,
no right or interest in any award made under this Plan shall be
assignable or transferable, and no right or interest of any
Participant hereunder shall be subject to any lien, obligation or
liability of such Participant.
6.3 The Company will bear all expenses incurred in
administering this Plan.
6.4 This Plan and the obligations of the Company hereunder
shall be subject to all applicable Federal and state laws, rules
and regulations and to such approvals by any governmental or
regulatory agency as may from time to time be required. The
Board may make such changes in this Plan as may be necessary or
desirable, in the opinion of the Board, to comply with the laws,
rules and regulations of any governmental or regulatory
authority, or to be eligible for tax benefits under the Code, or
any other laws or regulations of any Federal, state, local or
foreign government.
6.5 The Company shall have the right to deduct from any
payment to be made pursuant to this Plan, or to otherwise require
prior to the payment of any amount hereunder, payment by the
Participant of, any Federal, state or local taxes required by law
to be withheld.
6.6 No assets shall be segregated or earmarked in respect
of any award hereunder and no Participant shall have any right to
assign, transfer, pledge or hypothecate his interest, or any
portion thereof, in his award. The Plan and the making of awards
hereunder shall not constitute a trust.
6.7 This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of
the State of New York (regardless of the law that might otherwise
govern under applicable New York principles of conflict of laws).
6.8 Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so
apply, and wherever any words are used herein in the singular
form they shall be construed as though they were also used in the
plural form in all cases where they would so apply. The titles
to Articles of this Plan are intended solely as a convenience and
shall not be used as an aid in construction of any provisions
thereof.
6.9 This Plan shall be known as "The Reader's Digest
Association, Inc. Management Incentive Compensation Plan."
6.10 This Plan, was originally embodied in two plans named
The Reader's Digest Association, Inc. Incentive Compensation Plan
(effective March 8, 1985) and The Reader's Digest Association,
Inc. Incentive Bonus Plan (effective July 1, 1985), respectively,
and was amended and restated effective as of July 1, 1989 and
July 1, 1994.
Exhibit 10.4
THE READER'S DIGEST ASSOCIATION, INC.
DEFERRED COMPENSATION PLAN
(Amendment and Restatement as of July 8, 1994)
ARTICLE I
Purpose
The purpose of the Deferred Compensation Plan (the
"Plan") of The Reader's Digest Association, Inc. (the
"Company") is to offer eligible senior officers and other key
employees of the Company and its Designated Subsidiaries
(defined below), the opportunity to defer receipt of various
incentive payments they may become entitled to, under terms
advantageous to both such executives and the Company, for the
periods provided in the Plan.
ARTICLE II
Definitions
For purposes of this Plan, the following terms shall
have the following meanings:
2.1 "Account" shall have the meaning specified in
Section 4.1.
2.2 "Award" shall mean any payment to which a
Participant may become entitled under the Company's existing
Management Incentive Compensation Plan or (to the extent
provided by the Committee) the Performance Share Plan, and any
payment which may be deferred under the terms of an award made
under the Company's Key Employee Long Term Incentive Plan, in
each case as such plans may be modified from time to time.
2.3 "Beneficiary" shall mean the person or persons
designated from time to time in writing delivered to the
Committee by a Participant to receive payments under this Plan
after the death of such Participant or, in the absence of any
such designation or in the event that such designated person or
persons shall predecease such Participant, the Participant's
estate or legal representative.
2.4 "Committee" shall have the meaning specified in
Section 6.1.
2.5 "Deferred Amount" shall mean at any time the sum
of all of a Participant's Deferred Compensation plus all
Increments credited as of such date to the Account of such
Participant, as provided herein.
2.6 "Deferred Compensation" shall mean that portion
of each Award to which a Participant is entitled, the payment
of which he has elected to defer under this Plan.
2.7 "Designated Deferral Period" shall have the
meaning specified in Section 3.1.
2.8 "Designated Pay-Out Schedule" shall have the
meaning specified in Section 3.1.
2.9 "Designated Percentage" shall have the meaning
specified in Section 3.1.
2.10 "Designated Subsidiary" shall mean such
subsidiaries of the Company, 80 percent or more of the voting
capital stock of which is owned, directly or indirectly by the
Company, which are designated from time to time by the Senior
Vice President, Human Resources of the Company, with the
approval of the Chief Executive Officer of the Company.
2.11 "Election Date" shall have the meaning specified
in Section 3.2.
2.12 "Eligible Employee" shall mean any employee of
the Company or a Designated Subsidiary who is a senior officer
or other key employee and who is designated by the Committee or
by the Senior Vice President, Human Resources of the Company,
with the approval of the Chief Executive Officer of the
Company.
2.13 "Increments" shall have the meaning specified in
Section 4.2.
2.14 "Measuring Year" shall have the meaning
specified in Section 3.2.
2.15 "Participant" shall mean any employee of the
Company or a Designated Subsidiary who is an Eligible Employee
on any date which is an Election Date for any Award which, if
thereafter made or earned, will be made or earned in respect of
the Company's fiscal year following the fiscal year in which
the Election Date occurs or such other period as the Committee
may designate.
2.16 "Plan Interest Rate" shall have the meaning
specified in Section 4.3.
ARTICLE III
Deferral of Awards
3.1 Election. Each Participant may elect to have
the payment of a Designated Percentage of each Award for which
he is eligible deferred pursuant to this Plan for a Designated
Deferral Period with a Designated Pay-Out Schedule. A
"Designated Percentage" shall mean the percentage, not less
than 20% nor more than 100%, selected by the Participant for a
particular Award. A "Designated Deferral Period" shall mean
one of the following periods following the date the Deferred
Compensation would otherwise have been payable, as selected by
the Participant for a particular Award: (i) until January 1 of
a designated year not later than the Participant's attainment
of age 50, or (ii) until January 1 following the Participant's
retirement or other termination of employment with the Company
and its Designated Subsidiaries for any reason. For the
purposes of this Section, it shall not be considered a
termination of employment when a Participant is granted a
military or personal leave of absence by the Company or when a
Participant is transferred from the Company or a Designated
Subsidiary to another Designated Subsidiary or to the Company
or to any affiliate as defined in Section 414 of the Internal
Revenue Code of 1986, as amended. A "Designated Pay-Out
Schedule" shall mean one of the following, as selected by the
Participant for a particular Award: (i) a lump-sum pay-out in
the January following the end of the Designated Deferral
Period; or (ii) a pay-out in annual installments of from one to
ten years in the January of each such year following the end of
the Designated Deferral Period in accordance with the following
method with respect to each Award:
INSTALLMENT METHOD WITH RESPECT TO AN AWARD
For a multi-year installment election where
x is the number of years in the Designated
Deferral Period:
1st payment is 1/x times the Deferred
Amount then credited to such Participant's
Account with respect to such Award,
2nd payment is 1/(x-1) times the Deferred
Amount then credited to such Participant's
Account with respect to such Award,
3rd payment is 1/(x-2) times the Deferred
Amount then credited to such Participant's
Account with respect to such Award,
And so on, decreasing the denominator of
the fraction by one for each year until the
final year for which the payment is the
balance of the Deferred Amount then
credited to such Participant's Account with
respect to such Award;
or (iii) such other Pay-Out Schedule to which the Committee
may, at its option, agree prior to the Election Date for all
such Participants so electing. A numerical example of a Pay-
Out Schedule over five years is attached as Exhibit A. A
separate election shall be made for each Award and shall be
delivered to the Senior Vice President, Human Resources of the
Company on or before the Election Date for such Award in
accordance with Section 3.2.
3.2 Deferral Election. An election under Section
3.1 shall be in writing on a form delivered to the Eligible
Employee by the Company on or before the Election Date. The
"Election Date" for an Award shall be (i) the June 30 prior to
the fiscal year of the Company in respect of which such Award
is earned (the "Measuring Year") even if the Award would
ordinarily be payable in the fiscal year following the
Measuring Year; (ii) in the event that an Award is based upon a
period that extends for three fiscal years, no later than the
June 30 of the first fiscal year applicable to such Award; or
(iii) such other date as the Committee may designate; provided,
however, that in the case of an employee who becomes an
Eligible Employee for the first time, the "Election Date" shall
be 30 days after such employee receives notice that he has
become an Eligible Employee for an Award earned or made
following such Election Date. Each written election shall
specify which Designated Percentage of the Award covered by the
election the Participant desires to have deferred and which
Designated Deferral Period and Designated Pay-Out Schedule will
apply. An election, once made, shall be irrevocable.
ARTICLE IV
Treatment of Deferred Amounts
4.1 Memorandum Account. The Company shall establish
on its books a memorandum account (the "Account") for each
Participant who has Deferred Compensation under this Plan.
Immediately following the date on which any Deferred
Compensation would otherwise be payable to a Participant as
part of an Award, the amount of such Deferred Compensation
shall be credited to such Participant's Account.
4.2 Increments. On the last day of each calendar
quarter, interest shall be credited to each Participant's
Account (an "Increment"), computed separately for each Account,
on the balance (if any) of such Account as of such date,
exclusive of interest previously credited during such fiscal
year, at the Plan Interest Rate. Interest shall be compounded
annually as of each September 30.
4.3 Plan Interest Rate. The "Plan Interest Rate"
shall be designated either by the Committee or by the Senior
Vice President, Human Resources of the Company, with the
approval of the Chief Financial Officer of the Company, as of
the last day of each calendar quarter. Such interest rates may
be designated on any reasonable basis and such designations
made in good faith shall be final.
4.4 Assets. No assets shall be segregated or
earmarked in respect of any Deferred Amount and no Participant
shall have any right to assign, transfer, pledge or hypothecate
his interest, or any portion thereof, in his Account. The Plan
and the crediting of Accounts hereunder shall not constitute a
trust and shall be merely for the purpose of recording an
unsecured contractual obligation.
4.5 Reports. Until the entire Deferred Amount in an
Account shall have been paid in full, the Company will furnish
to each Participant a report, at least annually, setting forth
transactions in such Account and the status of his Account.
ARTICLE V
Payment of Deferred Amounts
5.1 Form of Payment. All payments of Deferred
Amounts under this Plan shall be made in cash.
5.2 Payment of Deferred Amount. The Deferred Amount
credited to each Participant's Account with respect to any
Award (including all Increments attributable to such Award)
shall be payable to such Participant, in accordance with the
Designated Pay-Out Schedule, commencing the January immediately
following the end of the Designated Deferral Period elected
with respect to such Award. If a Participant dies or if the
employment of a Participant is otherwise terminated (within the
meaning of Section 3.1) prior to payment of all or any portion
of the Deferred Amount, the entire Deferred Amount credited to
such Participant's Account shall (if not sooner payable) be
payable to such Participant (or, in the case of death, his
Beneficiary) in accordance with the Designated Pay-Out Schedule
commencing the January immediately following the Participant's
death or other termination of employment; provided, however,
that the Committee may, in its sole discretion, accelerate the
payment of the entire Deferred Amount in a lump-sum in January
of the year immediately following the date of such death or
termination of employment.
5.3 Acceleration of Payments. Notwithstanding any
other provision of this Plan to the contrary, the Committee or
the Senior Vice President, Human Resources of the Company, with
the approval of the Chief Executive Officer of the Company, in
their sole discretion, are empowered to accelerate the payment
of Deferred Amounts to a Participant or to all Participants, in
the event of substantial hardship to a Participant arising out
of mental or physical disability of the Participant or an
immediate family member, death of an immediate family member or
such other cause as the Committee or the Senior Vice President,
Human Resource of the Company, with the approval of the Chief
Executive Officer of the Company shall in their sole discretion
determine to constitute hardship. Neither the Committee nor
the Senior Vice President, Human Resources shall have any
obligation to make such acceleration for any such reason or any
other reason.
ARTICLE VI
Administration
6.1 Committee. The Plan shall be administered and
interpreted by a committee appointed from time to time by the
Board of Directors of the Company (the "Committee") and
consisting of three or more Directors. Members of the
Committee shall not be eligible to participate in the Plan.
The Committee shall have full authority to construe and
interpret the terms and provisions of the Plan, to adopt, alter
and repeal such administrative rules, guidelines and practices
governing this Plan and perform all acts, including the
delegation of its administrative responsibilities as it shall,
from time to time, deem advisable, and to otherwise supervise
the administration of this Plan. The Committee may correct any
defect, supply any omission or reconcile any inconsistency in
the Plan, or in any election hereunder, in the manner and to
the extent it shall deem necessary to carry the Plan into
effect. Any decision, interpretation or other action made or
taken in good faith by or at the direction of the Company, the
Board of Directors of the Company, or the Committee (or any of
its members) arising out of or in connection with the Plan
shall be within the absolute discretion of all and each of
them, as the case may be, and shall be final, binding and
conclusive on the Company and all employees and Participants
and their respective heirs, executors, administrators,
successors and assigns.
6.2 Liability. No member of the Board of Directors
of the Company, no employee of the Company and no member of the
Committee (nor the Committee itself) shall be liable for any
act or action hereunder, whether of omission or commission, by
any other member or employee or by any agent to whom duties in
connection with the administration of the Plan have been
delegated or, except in circumstances involving his bad faith,
gross negligence or fraud, for anything done or omitted to be
done by himself. The Company or the Committee may consult with
legal counsel, who may be counsel for the Company or other
counsel, with respect to its obligations or duties hereunder,
or with respect to any action or proceeding or any question of
law, and shall not be liable with respect to any action taken
or omitted by it in good faith pursuant to the advice of such
counsel.
ARTICLE VII
Miscellaneous
7.1 Amendment or Termination. Notwithstanding any
other provision of this Plan, the Board of Directors of the
Company may at any time, and from time to time, amend, in whole
or in part, any or all of the provisions of the Plan, or
suspend or terminate it entirely, retroactively or otherwise;
provided, however, that any such amendment, suspension or
termination may not, without the Participant's consent,
adversely affect any Deferred Amount credited to him for any
calendar year ended prior to the effective date of such
amendment, suspension or termination. Notwithstanding the
foregoing, upon any termination of this Plan, the Company may
in its sole discretion accelerate the payment of all Deferred
Amounts credited as of the date of termination of this Plan.
The Plan shall remain in effect until terminated pursuant to
this Section.
7.2 Expenses. The Company will bear all expenses
incurred in administering this Plan.
7.3 Withholding. The Company shall have the right
to deduct from any payment to be made pursuant to this Plan, or
to otherwise require prior to the payment of any amount
hereunder, payment by the Participant of, any federal, state or
local taxes required by law to be withheld.
7.4 No Obligation. Neither this Plan nor any
elections hereunder shall create any obligation on the Company
to continue any existing Award plans or policies or to
establish or continue any other programs, plans or policies of
any kind. Neither this Plan nor any election made pursuant to
this Plan shall give any Participant or other employee any
right with respect to continuance of employment by the Company
or any subsidiary, nor shall there be a limitation in any way
on the right of the Company or any subsidiary by which an
employee is employed to terminate his employment at any time.
7.5 No Assignment. Except by will or the laws of
descent and distribution, no right or interest in any Account
or Deferred Amount under this Plan shall be assignable or
transferable, and no right or interest of any Participant in
any Account hereunder or to any Deferred Amount shall be
subject to any lien, obligation or liability of such Participant.
7.6 Applicable Law. This Plan and the obligations
of the Company hereunder shall be subject to all applicable
federal and state laws, rules and regulations and to such
approvals by any governmental or regulatory agency as may from
time to time be required. The Board of Directors of the
Company may make such changes in this Plan as may be necessary
or desirable, in the opinion of the Board of Directors, to
comply with the laws, rules and regulations of any governmental
or regulatory authority, or to be eligible for tax benefits
under the Internal Revenue Code of 1986, as amended, or any
other laws or regulations of any federal, state, local or
foreign government.
7.7 Governing Law. This Plan and actions taken in
connection herewith shall be governed and construed in
accordance with the laws of the State of New York (regardless
of the law that might otherwise govern under applicable New
York principles of conflict of laws).
7.8 Construction. Wherever any words are used in
this Plan in the masculine gender they shall be construed as
though they were also used in the feminine gender in all cases
where they would so apply, and wherever any words are used
herein in the singular form they shall be construed as though
they were also used in the plural form in all cases where they
would so apply. The titles to sections of this Plan are
intended solely as a convenience and shall not be used as an
aid in construction of any provisions thereof.
7.9 Name. This Plan shall be known as "The Reader's
Digest Association, Inc. Deferred Compensation Plan."
7.10 Effective Date. The Plan, which was originally
effective as of March 8, 1985, was amended and restated
effective as of July 1, 1989 and as of July 8, 1994.
EXHIBIT A
Example of Pay-Out Over Five Years
Balance 01/05/92 50,000.00
Payment - January, 1992 - 10,000.00
40,000.00
Increments to 01/05/93 3,600.00
(assumes 9%) 43,600.00
Payment - January, 1993 10,900.00
32,700.00
Increments to 01/05/94 2,616.00
(assumes 8%) 35,316.00
Payment - January, 1994 11,772.00
23,544.00
Increments to 01/05/95 2,236.68
(assumes 9.5%) 25,780.68
Payment - January, 1995 12,890.34
12,890.34
Increments to 01/05/96 1,031.23
(assumes 8%) 13,921.57
Payment - January, 1996 13,921.57
THE READER'S DIGEST ASSOCIATION, INC.
DEFERRED COMPENSATION PLAN
ELECTION FORM
In accordance with The Reader's Digest Association, Inc.
Deferred Compensation Plan (the "Plan") as amended and restated
as of July 1, 1989, the undersigned hereby elects to defer,
pursuant to Article III of the Plan, the following Designated
Percentage of your Management Incentive Compensation Plan Award
for the following Designated Deferral Period with the following
Designated Pay-Out Schedule:
DESIGNATED PERCENTAGE (Insert whole number not less than 20
nor more than 100):
Percent
DESIGNATED DEFERRAL PERIOD (Choose One):
Until January 1 of designated year (not
later than your
(year)
attainment of age 50); or
Until January 1 following the year of your retirement or
other termination of employment.
DESIGNATED PAY-OUT SCHEDULE (Choose One):
Lump-Sum Pay-Out on January 1 following the above Designated
Deferral Period; or
Annual Installment Pay-Out for one to ten years as described
in the Plan.
Such Deferred Compensation shall not be payable until such
time as payment is made pursuant to the foregoing elections or
otherwise pursuant to the terms of the Plan.
In the event of the undersigned's death, the undersigned
designates as the Beneficiary
under the Plan as defined in Section 2.3 of the Plan. This
designation applies to all Deferred Amounts held from time to
time under the Plan. All of the undersigned's prior
designations of Beneficiary are hereby revoked.
The undersigned accepts all of the terms and conditions of
the Plan and understands that the Company retains the right to
amend and terminate the Plan and that deferred amounts may be
payable otherwise than in accordance with the foregoing
election. All of the terms in this Election Form which are
defined in the Plan are intended to have the same meaning as
they have in the Plan and such definitions are hereby
incorporated by reference.
Participant
Date
RECEIVED:
[Authorized Signature]
Date
Exhibit 10.5
THE READER'S DIGEST ASSOCIATION, INC.
SEVERANCE PLAN FOR SENIOR MANAGEMENT
(Amendment and Restatement as of July 8, 1994)
ARTICLE I
Purpose of Plan and Participation
1.1 The purpose of The Reader's Digest Association, Inc.
Severance Plan for Senior Management (the "Company" and the
"Plan," respectively) is to provide officers and key executives
of the Company with appropriate assurances of continued income
and other benefits for a reasonable period of time in the event
that the participant's employment is terminated by the Company
under any of the circumstances described herein.
1.2 The Chief Executive Officer of the Company, with the
advice of the Company's Senior Vice President, Human Resources,
shall, in his absolute discretion select the participants to be
covered by this Plan from time to time. The Chief Executive
Officer or Senior Vice President, Human Resources may notify each
individual participant of his selection and provide him with a
copy of this Plan.
1.3 Participation in the Plan shall not in any respect be
deemed to grant the participant either a right to continued
participation in the Plan or a right to continued employment and
such employment and participation remain terminable at will by
either the Company or the participant at any time for any reason
or for no reason.
ARTICLE II
Term
2.1 The Compensation Committee (the "Committee") of the
Company's Board of Directors may at any time and from time to
time modify or amend, in whole or in part, any or all of the
provisions of the Plan, or suspend or terminate it entirely.
ARTICLE III
Causes for Termination
3.1 Subject to the terms of the Plan, including, but not
limited to Section 4.1 (involving a release of claims), the
benefits described in Article IV hereof shall become payable to
the participant in the event that the Company shall terminate a
participant's employment involuntarily other than for (a) "Cause"
as defined hereinafter; (b) Total Disability as defined in the
Company's Long Term Disability Plan; (c) mandatory retirement
under the Company's Mandatory Retirement Policy to the extent
such imposed retirement is permitted by law; (d) voluntary
retirement or resignation; (e) death or (f) termination in
connection with a complete divestiture by the Company of the
participant's division, provided that the participant receives a
bona fide offer of any position with the acquiring company or
entity (i) at a rate of base salary and annual bonus opportunity
which is at least equal to the participant's rate of base salary
and annual bonus opportunity with the Company at the time of the
divestiture; and (ii) at a job situs which is not more than fifty
(50) miles from the participant's primary residence at the time
the job offer is made. The exclusion from benefits under this
Plan described in subpart (f) shall not apply if the participant,
after accepting the job offer, shall, within the initial six (6)
months of such employment, be involuntarily terminated other than
for Cause. For the purposes of this Plan, "Cause" shall mean a
discharge from employment occurring by reason of the
participant's embezzlement, chronic unexcused absence, proven
dishonesty, fraud, conviction of felonious or other charge
involving moral turpitude, improper communication of confidential
information obtained in the course of employment material
violation of company rules, including but not limited to a
material violation of the Company's Proprietary and Confidential
Information Policy or a material violation of the Company's Code
of Conduct or action that would have constituted a material
violation of such Policy or Code of Conduct if the participant
had continued to be employed by the Company. The determination
of whether "Cause" has occurred shall be solely in the discretion
of the Chief Executive Officer, with the advice of the Vice
President, Human Resources and the Company's General Counsel.
3.2 No benefits shall be payable under this Plan to a
participant otherwise eligible therefor who refuses a job
assignment with the Company, provided that (a) the base salary,
annual incentive target and benefit eligibility under the
Company's long-term incentive plans of the offered position is
equal to or greater than his then current position; (b) the
participant, in the sole judgment of the Company, may be expected
to perform satisfactorily by reason of his prior training,
experience or education; and (c) the participant's commutation
from his primary residence to the situs of his new position does
not exceed his present commutation by more than fifty (50) miles.
ARTICLE IV
Severance Benefits
4.1 Notwithstanding anything herein to the contrary, no
participant shall be entitled to any payments or benefits
described in this Plan until and unless such participant (i) has
delivered a general release and waiver of claims, in a form
approved by the Company's Senior Vice President, Human Resources
and General Counsel, (ii) returns all Company property and (iii)
repays all debts or other financial obligations owed to the
Company.
4.2. In the event of termination with respect to which
benefits may be payable pursuant to Article III above, the
participant shall be eligible to receive severance benefits in
the amount of one (1) month's base salary for each full year of
continuous service completed prior to termination, but benefits
hereunder shall not in any event be less than twelve (12) or more
than twenty-four (24) months of base salary. All payments
hereunder shall not extend beyond the twenty-fourth (24th) month
following a participant's termination of employment.
4.3 Provided the participant complies with the terms of the
Plan and is otherwise eligible for benefits and payments
hereunder, severance benefits under this Plan shall be payable
commencing immediately after the last day for which the
participant is paid as an active employee and shall be made
periodically according to the Company's normal pay practice. In
the event that the participant shall die before all periodic
payments under this Plan shall have been completed, and has not
designated in writing a beneficiary to receive such payments and
benefits, the participant's spouse or, if none, his personal
representative shall receive the balance of such payments in one
lump sum, payable as promptly as practicable after the date of
death.
4.4 Provided the participant complies with the terms of the
Plan and is otherwise eligible for benefits and payments
hereunder, upon termination with respect to which benefits are
payable under Section 3.1 above, the Company shall make available
outplacement counselling services to the participant in a manner
determined by the Company.
4.5 Provided the participant complies with the terms of the
Plan and is otherwise eligible for benefits and payments
hereunder, upon termination with respect to which benefits are
payable under Section 3.1, the participant shall be entitled to
purchase, at its then Blue Book value, any automobile he then
possesses which had theretofore been provided to him by the
Company.
4.6 The Company may withhold from any benefits payable under
this Plan all federal, state, local or other taxes as shall be
required pursuant to any law or governmental regulation or
ruling.
4.7 Provided the participant complies with the terms of the
Plan and is otherwise eligible for benefits and payments
hereunder, and provided that the participant has not become
eligible for coverage with a successor employer, during the
period of benefit payments being provided under Section 4.2 of
the Plan, the participant and anyone entitled to claim under or
through him shall be entitled to continue participation in the
Company's medical, dental and group term life insurance welfare
plans on the same basis on which the participant or other
individual participated during employment, provided that the
terms of any such welfare benefit plan permits such continued
participation. After such period, such benefits shall be
discontinued except to the extent and on the terms and conditions
required under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
In the event that such continued participation is not permitted,
the Company shall arrange to provide the participant with
benefits during such period substantially similar to those he was
entitled to receive under such welfare benefit plans immediately
prior to his date of termination. Cessation of coverage provided
under this Section 4.7 because the participant has become
eligible for coverage with a successor employer shall in no event
alter the participant's right, by virtue of his status as a
retiree, to coverage under any welfare benefit plan maintained by
the Company.
4.8 (a) Notwithstanding the provisions of Section 4.7,
provided the participant complies with the terms of the Plan and
is otherwise eligible for benefits and payments hereunder, upon
termination with respect to which benefits are payable under
Section 3.1, for purposes of determining the participant's
eligibility for benefits under The Reader's Digest Association,
Inc. Medical and Dental Expense Plan for Retirees and Disabled
Individuals (the "Retiree Health Plan"), the participant shall be
deemed to be a "Retiree who meets the requisite age or age and
service requirements provided by Section 1.34" of the Retiree
Health Plan if: (1) the participant's age plus the period of
benefit payments being provided under Section 4.2 of this Plan,
when added together, would equal sixty (60) years, provided the
participant was employed by the Company on and immediately prior
to January 1, 1990; or (2)(a) the participant's age plus the
period of benefit payments being provided under Section 4.2 of
this Plan, when added together, would equal fifty-five (55) years
and (b) the participant's age plus the period of benefit payments
being provided under Section 4.2 of this Plan, when added
together with the participant's years of service plus the period
of benefit payments being provided under Section 4.2 of this
Plan, would equal seventy (70) years.
(b) To the extent the deemed credit for the period of
benefit payments being provided under Section 4.2 of this Plan
results in a participant's becoming eligible to receive any
amount under this Section 4.8, the Company shall be solely
responsible for the payment of such amount. Any amount payable
under this Section 4.8 shall be provided in any form of payment
offered under the Retiree Health Plan as selected by the
Compensation Committee, in its sole discretion.
(c) Neither the participant nor anyone entitled to claim
under or through the participant shall be entitled to receive any
benefits under Section 4.8 of this Plan during any period that
the participant is eligible for medical or dental coverage with a
successor employer. Cessation of coverage provided under this
Section 4.8 because the participant has become eligible for cov
erage with a successor employer shall in no event alter the
participant's right, by virtue of his status as a retiree, to
coverage under any welfare benefit plan maintained by the
Company.
4.9 Provided the participant complies with the terms of the
Plan and is otherwise eligible for benefits and payments
hereunder, upon termination with respect to which benefits are
payable under Section 3.1, the Company shall pay in addition to
the benefits described above an amount equal to the difference
between his monthly retirement benefit payable under The Reader's
Digest Association, Inc. Retirement Plan (the "Retirement Plan),
the Excess Benefit Retirement Plan of The Reader's Digest
Association, Inc. (the "Excess Benefit Plan") and Executive
Retirement Plan of The Reader's Digest Association, Inc. (the
"Executive Retirement Plan) and the amount that would have been
payable if his age and his aggregate periods of service under the
Retirement Plan, Excess Benefit Plan and Executive Retirement
Plan had included the number of months of benefit payments being
provided under Section 4.2 of this Plan. To the extent the
deemed credit of age and periods of service results in a
participant's becoming eligible to receive any amount under this
Section 4.9, the Company shall be solely responsible for the
payment of such amount. Any amount payable under this Section
4.9 shall be provided in any form of payment offered under the
Retirement Plan as selected by the Compensation Committee, in its
sole discretion, with any attendant actuarial reduction, except
that the Compensation Committee may, in its sole discretion, pay
such amount at any time in a lump sum equal to the equivalent
actuarial value of the benefit. For purposes of determining
benefits payable under this Section 4.9, a benefit shall be
considered payable under the Executive Retirement Plan in the
case of a participant who has not attained age 65 only if the
Compensation Committee has determined under the terms of such
plan that a benefit will be paid.
4.10 (a) Provided the participant complies
with the terms of the Plan and is otherwise eligible for benefits
and payments hereunder, upon termination with respect to which
benefits are payable under Section 3.1, the participant shall be
credited with (1) additional periods of service under Section 7.3
of The Reader's Digest Employees Profit-Sharing Plan (the "Profit-
Sharing Plan") equal to the period of benefit payments being
provided under Section 4.2 of this Plan and (2) for purposes of
determining the participant's Early Retirement Age and Normal
Retirement Age under the Profit-Sharing Plan, additional years of
age equal to the period of benefit payments provided under
Section 4.2 of this Plan.
(b) To the extent the deemed credit for the period of
benefit payments being provided under Section 4.2 of this Plan
results in a participant's becoming eligible to receive any
amount under this Section 4.10, the Company shall be solely
responsible for the payment of such amount. Any amount payable
under this Section 4.10 shall be provided in any form of payment
offered under the Profit-Sharing Plan as selected by the
Compensation Committee, in its sole discretion, and shall be paid
within 60 days after the June 30 following the date payments
under Section 4.2 cease. The amount payable under Section 4.10
shall be determined as of the June 30 following the date payments
under Section 4.2 cease.
(c) The provisions of this Section 4.10 may result in
the Profit-Sharing Plan participant's benefit being deemed non-
forfeitable. However, it shall not result in any additional
amount being deemed contributed to such Profit-Sharing Plan. Any
Profit-Sharing Plan participant receiving benefits under the
Profit-Sharing Plan shall not be eligible to receive benefits
under this Section 4.10.
4.11 If, without the prior written consent of the Chief
Executive Officer, a participant receiving payments or benefits
under this Plan shall become a proprietor, director, partner or
employee of, or otherwise become connected with any business that
is in competition with the Company (other than as a stockholder
with a non-substantial interest in any such business), or if he
shall commit any criminal act against the Company, or any act
that would constitute Cause as defined herein, or if he shall
disclose any information likely to be regarded as confidential
and relating to the Company's business, or if he shall solicit
clients against the interest of the Company or solicits the
Company's employees to work for a competitor of the Company, or
if he performs any other act which is substantially detrimental
to the Company or its employees, including but not limited to
disparaging the Company, its senior management or its products,
all payments and benefits and all rights of the participant under
this Plan shall cease as of the initial date of such conduct.
The determination of whether such conduct has occurred shall be
in the sole discretion of the Chief Executive Officer with the
advice of the Senior Vice President, Human Resources and the
General Counsel.
4.12 Except as otherwise provided herein or in The Reader's
Digest Association, Inc. Income Continuation Plan for Senior
Management, no provision of this Plan or any benefit provided
herein shall reduce any amounts otherwise payable, or in any way
diminish a participant's existing rights, or rights which may
accrue to him solely as a result of the passage of time, under
any pension or welfare plan, incentive plan or other contract,
plan or arrangement maintained by the Company, except that a
participant shall not be eligible for any other severance payment
or benefit (similar to those described in this Plan) otherwise
provided by the Company other than pursuant to any written
agreement between the Company and a participant.
ARTICLE V
General Provisions
5.1 Nothing contained in the Plan shall be construed as a
contract of employment between the Company and any participant,
or as a right of any participant to continue in the employ of the
Company, or as a limitation of the right of the Company to
discharge any participant, with or without cause. No participant
shall have any rights or remedies against the Company arising out
of the Plan or his participation therein, his employment or the
termination of his employment with the Company.
5.2 The Plan shall be administered as an unfunded plan
designed primarily for the purpose of providing benefits to a
select group of members of senior management or highly compen
sated employees of the Company. Payments under the Plan shall at
all times be made solely from the general assets of the Company.
No assets shall be segregated or earmarked in respect of any
amount due hereunder. The Plan and the amounts due hereunder
shall not constitute a trust.
5.3 A participant may not assign, anticipate, transfer,
pledge, hypothecate or alienate in any manner any interest
arising under the Plan, nor shall any such interest be subject to
attachment, bankruptcy proceedings or to any other legal
processes or to the interference or control of creditors or
others.
5.4 Except as otherwise provided in the Plan, the Senior
Vice President, Human Resources shall be responsible for
interpreting and administering the Plan. It is intended that any
decisions of the Committee, the Chief Executive Officer, or the
Senior Vice President, Human Resources regarding any aspect of
the Plan, including but not limited to the interpretation,
application or administration of this Plan, shall be final and
binding on all participants or interested parties. This Plan and
actions taken in connection therewith shall be governed and
construed in accordance with the laws of the State of New York
(regardless of the law that might otherwise govern under appli
cable New York principles of conflicts of laws) except to the
extent ERISA shall apply.
5.5 In the construction of this Plan, the masculine shall
include the feminine and the singular the plural, and vice versa,
in all cases where such meaning would be appropriate.
5.6 In the event any provision of this Plan, if challenged,
would be declared invalid, illegal or unenforceable, such
provision shall be construed and enforced as if it had been more
narrowly drawn so as not to be illegal, invalid or unenforceable
and the validity, legality and enforceability of the remaining
provisions shall not be affected or impaired thereby.
5.7 This Plan was originally adopted effective June 20,
1986, and has been amended and restated as of the following
dates: September 20, 1988, July 1, 1989, March 5, 1993, July 9,
1993 and July 8, 1994.
Exhibit 10.7
EXCESS BENEFIT RETIREMENT PLAN
OF
THE READER'S DIGEST ASSOCIATION, INC.
Amended and Restated as of July 1, 1994
Purpose
Section 415 of the Internal Revenue Code of 1986,
as amended (the "Code"), imposes certain dollar limitations
on the annual retirement benefit payable to an individual on
or after January 1, 1976, under qualified retirement plans
such as The Reader's Digest Association, Inc. Retirement
Plan (the "Retirement Plan"). Section 401(a)(17) of the
Code imposes a certain dollar limitations, as adjusted for
cost of living increases under Section 415(d) of the Code,
on the annual compensation of each individual taken into
account under the Retirement Plan. The Reader's Digest
Association, Inc. (the "Company") has amended the Retirement
Plan to conform to the benefit limitations of the Code and
has further amended the Retirement Plan to conform to the
compensation limitations of the Code, and such amendments
(the "Limitation Amendments") will reduce the benefits that
certain employees and former employees (and their
beneficiaries) of the Company and any other Employer (as
such term is defined in the Retirement Plan) would otherwise
be entitled to receive under the Retirement Plan. The
Company has adopted this Plan so that all employees (and
their beneficiaries) of the Company and any other Employer
(as such term is defined in the Retirement Plan) shall
receive retirement benefits in the same amounts they would
have received under the Retirement Plan were it not for the
Limitation Amendments.
Section 1: Definitions
(a) "Employee" means any person who at any time
before the termination of this Excess Benefit Retirement
Plan (the "Plan"), and on or after January 1, 1976, was an
employee of the Company or any other Employer which shall
have adopted this Plan and while so employed was a
participant in the Retirement Plan.
(b) "Beneficiary" means any person or entity
other than the Employee who is entitled to receive benefits
under the Retirement Plan based upon the Employee's
participation in the Retirement Plan.
(c) "Employee Benefits Committee" means the
committee appointed by the Board of Directors of the Company
pursuant to the Retirement Plan.
Section 2: Benefits
(a) The Company will pay or cause to be paid to
each Employee or his or her Beneficiary, as the case may be,
who is then entitled to receive payments under the
Retirement Plan, an amount which is equivalent to the
excess, if any, of (i) the amount such Employee or
Beneficiary would have been entitled to receive under the
Retirement Plan, taking into account all the provisions of
the Retirement Plan as are from time to time in effect and
applicable to the Employee or Beneficiary except the
Limitation Amendments, over (ii) the amount such Employee or
Beneficiary was entitled to receive under the Retirement
Plan, taking into account the Limitation Amendments.
(b) If an Employee or Beneficiary is entitled to
a benefit pursuant to Section 2(a) hereof, the Company shall
in its sole discretion determine to pay to such Employee or
Beneficiary either (i) a single lump sum, actuarially
equivalent to the amount payable under Section 2(a) hereof,
based on such tables and interest rates as may be adopted
from time to time for the purpose of computing such
actuarial equivalencies under the Retirement Plan, or (ii) a
series of payments in one of the forms of payment permitted
under Article 6 of the Retirement Plan, with the payments
under the selected form having an aggregate value
actuarially equivalent to such amount payable under Section
2(a) hereof. The Company shall determine the times at which
such payments shall be made. In no event shall benefits
hereunder commence later than one year after the participant
attained Normal Retirement Date or Postponed Retirement Date
and is receiving benefits under the Retirement Plan.
Notwithstanding the foregoing, the Company may, in its sole
discretion, accelerate the remaining unpaid portion of such
payments into one or more payments having, in the aggregate,
an equivalent actuarial value, based on such tables and
interest rates as may be adopted from time to time for
purposes of computing such actuarial equivalencies under the
Retirement Plan.
Section 3: Miscellaneous
(a) The Company shall only have a contractual
obligation to make payments to the Employee or Beneficiary
referred to herein when due, and the amounts of such
payments shall not be held in trust for the Employee or
Beneficiary.
(b) Nothing contained herein shall confer any
right of an Employee to be continued in the employ of the
Company or any other Employer or shall affect the right of
the Employee to participate in and receive benefits under
and in accordance with any pension, profit sharing,
incentive compensation or other benefit plan or program of
any Employer.
(c) This Plan shall be binding upon any successor
to substantially all the assets of the Company or an
Employer. The Company may, however, at any time, amend or
terminate the Plan, retroactively or otherwise, if this is
considered necessary or desirable, including any amendment
to require that no additional benefit shall be provided with
respect to any Employee or Beneficiary under the Plan or to
require that no benefit in excess of the benefit that would
be available hereunder if the participant terminated
employment on the date of amendment or termination of this
Plan shall be provided with respect to any Employee or
Beneficiary under the Plan. Upon any such termination of
this Plan, the Company may in its sole discretion pay all
benefits that would be available hereunder if the
participant terminated employment on the date of termination
of this Plan. In no event, however, shall any amendment by
the Company deprive any Employee or Beneficiary of any
amount which is permitted to be payable hereunder under
applicable law and which would have been payable to such
person under the Plan prior to such amendment.
(d) No right or interest of an Employee or
Beneficiary under this Plan shall be subject to voluntary or
involuntary alienation, assignment or transfer of any kind.
(e) The administration of this Plan shall be the
responsibility of the Employee Benefits Committee of the
Retirement Plan, or such other person or entity as the
Company shall designate. Decisions of such administrator of
the Plan shall be final and binding upon each Employer that
shall have adopted this Plan, Employees of such Employers
and the Beneficiaries of such Employees.
(f) The Company shall have the right to deduct
from any payment to be made pursuant to this Plan any
Federal, state or local taxes required by law to be
withheld.
(g) If any payment to be made under this Plan is
to be made on account of an Employee who was employed by an
Employer that shall have adopted this Plan, other than the
Company, the cost of such payment shall be borne in such
proportions as the Company and such Employer shall agree.
(h) This Plan shall be construed, regulated and
administered for all purposes according to the laws of the
State of New York and the United States.
(i) This Plan became effective as of January 1,
1976 and has been amended and restated as of July 1, 1989
and July 1, 1994.
Exhibit 10.13
THE READER'S DIGEST EXECUTIVE RETIREMENT PLAN
(Effective As of July 1, 1992)
(As amended by Amendment No. 1, effective July 8, 1994)
TABLE OF CONTENTS
ITEM ARTICLE PAGE
DEFINITIONS 1 1
ELIGIBILITY AND PARTICIPATION 2 4
TERMINATION OF EMPLOYMENT 3 4
AMOUNT OF RETIREMENT INCOME BENEFIT 4 5
MODES AND TIME OF BENEFIT PAYMENT 5 6
DEATH BENEFIT 6 7
MEDICAL BENEFITS 7 8
GENERAL PROVISIONS 8 9
The Reader's Digest Executive Retirement Plan
Effective as of July 1, 1992, The Reader's Digest
Executive Retirement Plan has been adopted by the Board of
Directors of The Reader's Digest Association, Inc. to read
as follows:
ARTICLE 1
Definitions
The following words and phrases as used herein shall
have the following meanings, unless a different meaning is
plainly required by the context:
BENEFICIARY: The person or persons (including a trust
or estate) who are entitled to receive
any benefits under the Plan by reason of
the death of a Participant.
BOARD: The Board of Directors of The Reader's
Digest Association, Inc.
COMPANY: The Reader's Digest Association, Inc. or
any successor corporation by merger,
purchase, consolidation or otherwise.
COMPENSATION The compensation committee appointed by
the Board.
COMMITTEE:
EARLY RETIREMENT The first day of any month coincident
DATE: with or subsequent to a Participant's
(i) attainment of age fifty-five (55)
and (ii) completion of Periods of
Service plus attainment of an age which,
when added together, equal or exceed
sixty-five (65).
EMPLOYER: The Company and any subsidiary of the
Company which, with the approval of the
Board and subject to such conditions as
the Board may impose, adopts this Plan,
and any successor or successors of any
of them. For purposes of this Plan, a
subsidiary shall include any corporation
at least fifty-one percent (51%) of the
voting stock of which is owned by the
Company or its stockholders or by one or
more corporations fifty-one percent
(51%) of the voting stock of which is
owned by the Company or its
stockholders.
EXCESS PLAN: The Excess Benefit Retirement Plan of
The Reader's Digest Association, Inc.,
effective January 1, 1976 as may be
amended and restated from time to time.
EXCESS PLAN The benefit under the Excess Plan
BENEFIT expressed as a single life annuity for
the life of the Participant calculated
as of the Participant's benefit
commencement date under the Plan.
MANAGEMENT Any compensation award under The
INCENTIVE BONUS: Reader's Digest Association, Inc.
Management Incentive Compensation Plan,
effective as of July 1, 1989 as may be
amended and restated from time to time.
NORMAL The first day of the month coincident
RETIREMENT DATE: with or next following a Participant's
65th birthday.
PLAN: The Reader's Digest Executive Retirement
Plan, effective July 1, 1992 as may be
amended and restated from time to time.
PARTICIPANT: An individual who participates in the
Plan in accordance with the terms
herein.
POSTPONED The first day of the month coincident
RETIREMENT DATE: with or next following a Participant's
termination of employment after his
Normal Retirement Date.
PROFIT SHARING The Reader's Digest Employees Profit-
PLAN: Sharing Plan, effective January 1, 1963
and as restated as of July 1, 1992 and
as may be further amended and restated
from time to time.
PROFIT SHARING Beginning with the fiscal year PLAN
BENEFIT: commencing on July 1, 1989 and for each
fiscal year thereafter, the sum of (1)
the amount of employer contributions
under the Profit Sharing Plan allocated
to the Participant which exceeds 6% of
the sum of the Participant's (i) annual
base salary and (ii) Management
Incentive Bonus and (2) the amount in
(1) above multiplied by 8% per year for
each year prior to the Participant's
benefit commencement date under the
Plan, expressed as a single life annuity
for the life of the Participant based on
an 8% interest rate and the PBGC
mortality tables for healthy males
calculated as of the Participant's
benefit commencement date under the
Plan.
RETIREMENT INCOME The retirement benefits payable to
BENEFIT: Participants and their joint or
contingent annuitants and Beneficiaries
in accordance with the applicable
provisions of this Plan.
RETIREMENT PLAN: The Reader's Digest Association, Inc.
Retirement Plan or QSP, Inc. Retirement
Plan, as restated as of July 1, 1992 and
as such plans may be further amended and
restated from time to time.
RETIREMENT PLAN The benefit payable to the Participant
BENEFIT: under the Retirement Plan expressed as a
single life annuity for the life of the
Participant calculated as of the
Participant's benefit commencement date
under the Plan.
RETIREMENT SALARY: The average annual regular or basic
salary of a Participant and Management
Incentive Bonus including all amounts
contributed by the Employer on behalf of
the Participant under a cafeteria plan
as described in Section 125 of the
Internal Revenue Code of 1986, as
amended (the "Code"), but excluding
severance pay, bonuses which are not
Management Incentive Bonuses,
contributions made under any other
deferred compensation plan on behalf of
a Participant or other extra
compensation, during the three
consecutive years in the last ten years
of employment which are counted under
the Retirement Plan (or fewer, if
applicable) which provides the highest
such average. For purposes of this
definition, the Management Incentive
Bonus shall be determined by reference
to amounts payable with respect to the
same period for which the annual regular
or basic salary is determined.
SERP AGREEMENT: The Supplemental Retirement Benefit
Agreements as pertaining to individual
Participants.
SERP AGREEMENT The retirement benefit payable in the
BENEFIT: form of a 15 year certain annuity
calculated as of the Participant's
benefit commencement date specified in
the SERP Agreement, reduced by the
annual benefit which would be payable in
the form of a 15 year certain annuity
calculated as of the Participant's
benefit commencement date under the Plan
and which is attributable solely to
employee contributions using an annual
interest assumption of 8%.
SPOUSE: The spouse of a Participant who is
legally married to the Participant on
the earlier of (i) the date of the
Participant's death, or (ii) the
Participant's benefit commencement date.
All terms not defined herein shall have the same
meanings as set forth in the Retirement Plan.
ARTICLE 2
Eligibility and Participation
Section 2.1 Unless otherwise determined by the Board
or the Compensation Committee, eligibility to participate in
the Plan shall be determined from time to time by the Senior
Vice President, Human Resources, with the approval of the
Chief Executive Officer, in their discretion, but shall be
limited to senior officers, senior management and other key
employees of an Employer. Each Employee who has been
designated to participate in the Plan shall commence
participation on the date of his designation.
Section 2.2 When an Employee first becomes a
Participant in the Plan, the Senior Vice President, Human
Resources may notify him promptly of that fact and of his
rights hereunder.
ARTICLE 3
Termination of Employment
Section 3.1 If a Participant's employment with the
Employer is terminated prior to his Early Retirement Date
other than by reason of death, no benefits shall be provided
hereunder.
Section 3.2 If a Participant's employment with the
Employer is terminated on or after his Normal Retirement
Date, he shall be entitled to the benefits under the Plan.
If a Participant's employment with the Employer is
terminated on or after his Early Retirement Date but before
his Normal Retirement Date, he shall be entitled to the
benefits under the Plan only with the consent of the
Compensation Committee.
Section 3.3 If a Participant's employment with the
Employer is terminated by reason of death, his Spouse shall
be entitled to the benefits under Article 6.
ARTICLE 4
Amount of Retirement Income Benefit
Section 4.1 Normal Retirement Benefit. A
Participant's annual rate of Retirement Income Benefit in
the form of a single life annuity for the life of the
Participant commencing on his Normal Retirement Date shall
be equal to (1) (i) three percent (3%) of his Retirement
Salary multiplied by his years or fractions of years of
Credited Service for the first fifteen (15) years plus (ii)
one percent (1%) multiplied by his years or fractions of
years of Credited Service for each of the next twenty (20)
years, less (2) the sum of such Participant's (i) Retirement
Plan Benefit, (ii) Excess Plan Benefit, (iii) SERP Agreement
Benefit and (iv) Profit Sharing Plan Benefit.
Section 4.2 Early Retirement Benefit. A Participant
who retires before his Normal Retirement Date but on or
after his Early Retirement Date and who is otherwise
entitled to a benefit under the Plan may elect with the
consent of the Compensation Committee to receive the
Retirement Income Benefit described in this Article prior to
his Normal Retirement Date. The amounts under Section
4.1(1) shall be reduced by .4167 percent (.004167) for each
month by which the Participant's benefits commencement date
under this Plan precedes the Participant's attainment of age
62.
Section 4.3 Postponed Retirement Benefit. Any
Participant who continues in the employ of the Employer
after Normal Retirement Date shall not be entitled to
receive his Retirement Income Benefit until he actually
retires. A Participant who continues in the employ of the
Employer beyond the Normal Retirement Date shall have his
Retirement Income Benefit determined by counting all years
or fractions of years of Credited Service and for purposes
of determining the Retirement Salary of such Participant all
periods of employment with the Employer shall be taken into
account.
ARTICLE 5
Modes and Time of Benefit Payment
Section 5.1 If a Participant or Beneficiary is
entitled to a benefit hereunder, the Compensation Committee
shall in its sole discretion determine to pay to such
Participant a series of payments in one of the forms of
payment permitted under Article 6 of the Retirement Plan
(excluding any lump sum payment option, except as described
herein), with the payments under the selected form having an
aggregate value actuarially equivalent to such amount
payable under Article 4 of this Plan, based on the actuarial
equivalent factors as defined in the Retirement Plan. The
Compensation Committee shall in its sole discretion
determine when such payments shall commence; provided,
however, that in no event shall benefits hereunder commence
later than one year after the Participant terminates
employment with the Employer after attainment of Normal
Retirement Date or Postponed Retirement Date.
Notwithstanding the foregoing, the Compensation Committee
may, in its sole discretion, accelerate the remaining unpaid
portion of such payments into one or more payments having in
the aggregate an equivalent actuarial value, based on the
PBGC mortality tables for healthy males and one hundred
twenty (120) percent of the PBGC immediate interest rate
then in effect. If a Participant who is receiving a
Retirement Income Benefit or who has previously received a
Retirement Income Benefit shall return to the employ of the
Employer as an Employee and such employment is substantial,
the Retirement Income Benefit shall cease for as long as he
continues to be so employed. Upon a subsequent termination
of employment with the Employer, the Retirement Income
Benefit of such Employee shall be recomputed based on his
Retirement Salary and years or fraction of years of Credited
Service prior and subsequent to his re-employment date and
reduced by the Retirement Income Benefit previously received
by him. In determining such previously received benefit,
equivalent actuarial value shall be based on the PBGC
mortality tables for healthy males and one hundred twenty
(120) percent of the PBGC immediate interest rate then in
effect. For purposes of this Article, an Employee's
employment with the Employer shall be substantial if he
renders forty (40) or more Hours of Service (except for
Hours of Service credited as a result of back pay) in a
calendar month.
ARTICLE 6
Death Benefit
Section 6.1 In the event of a married Participant's
death while in the employ of the Employer prior to his
benefit commencement date under the Plan after attainment of
age fifty-five (55) and the completion of a five-year Period
of Service (without regard to any break-in-service rules
applicable under the Retirement Plan), his Spouse shall
receive, commencing on the first working day of the month
following the Participant's death, the benefit under the
Plan in the form and amount such Spouse would otherwise have
received under the 50% qualified joint and survivor annuity
form if the Participant had terminated employment with the
Employer on the day before his death and had been entitled
to benefits under the Plan at the time of termination in the
form of a 50% qualified joint and survivor annuity.
Section 6.2 In the event of a Participant's death
after benefits under the Plan have commenced, his
Beneficiary shall receive any amounts provided under the
form of payment under which the Participant was receiving
such benefits at the time of his death.
ARTICLE 7
Medical Benefits
Section 7.1 If any Participant terminates employment
with the Employer on or after his Early Retirement Date,
such Participant and his Spouse with the consent of the
Compensation Committee shall be eligible to receive the
benefits provided under The Reader's Digest Association,
Inc. Medical and Dental Expense Plan for Retirees and
Disabled Individuals (the "Retiree Health Plan") as if the
Participant had met the eligibility requirements under such
plan, provided that the Participant or Spouse makes the
contributions required under such plan.
Section 7.2 If a married Participant dies while in
the employ of the Employer prior to his benefit commencement
date under the Plan after attaining age fifty-five (55) and
the completion of a five-year Period of Service (without
regard to any break-in-service rules applicable under the
Retirement Plan), his Spouse shall be eligible to receive
the benefits provided under the Retiree Health Plan as if
the Participant had retired prior to his death having
satisfied the eligibility requirements of such plan,
provided that such Spouse makes the contributions required
under such plan.
Section 7.3 If a married Participant dies following
the Participant's retirement from the Employer after
attaining his Early Retirement Date, his Spouse shall be
eligible to receive the benefits provided under the Retiree
Health Plan as if the Participant had retired prior to his
death having satisfied the eligibility requirements of such
plan, provided that such Spouse makes the contributions
required under such plan.
ARTICLE 8
General Provisions
Section 8.1 The Employer shall only have a
contractual obligation to make payments to the Participant
or Beneficiary, as applicable, referred to herein when due,
and the amounts of such payments shall not be held in trust
for the Participant or Beneficiary, as applicable, but shall
be paid from the general assets of the Employer. This Plan
is intended to constitute an unfunded plan and no assets
shall be segregated or earmarked in respect of any amount
due hereunder.
Section 8.2 Nothing contained herein shall confer
any right on a Participant to be continued in the employ of
the Company or any other Employer, or as a limitation of the
right of the Company or Employer to discharge any
Participant with or without cause, nor shall anything herein
affect the right of the Participant to participate in and
receive benefits under and in accordance with any pension,
profit sharing, incentive compensation or other benefit plan
or program of any Employer. Nothing herein shall be
construed as a contract of employment between the Employer
and any Participant.
Section 8.3 This Plan shall be binding upon any
successor to or purchaser of substantially all the assets of
the Company or an Employer with respect to such Employer's
Employees. The Board reserves the right at any time and
from time to time to modify, amend or terminate in whole or
in part any or all of the provisions of the Plan. Upon any
such termination of this Plan, the Company may in its sole
discretion accelerate payment of all benefits that are in
pay status on the date of termination and benefits to which
a Participant or Beneficiary, as applicable, would be
entitled under the terms of the Plan then in effect based on
events which occur prior to the date of termination of the
Plan. In no event, however, shall any modification,
amendment or plan termination by the Board deprive any
Participant or Beneficiary, as applicable, of any amount
which is payable to such person under the Plan by reason of
the Participant's attainment of age 65 or death prior to
such modification, termination or amendment.
Section 8.4 No right or interest of a Participant or
Beneficiary, as applicable, under this Plan shall be subject
to voluntary or involuntary alienation, assignment or
transfer of any kind.
Section 8.5 The administration of this Plan and the
interpretation thereof, including the authority to decide
all questions that arise thereunder, shall be the
responsibility of the Compensation Committee or such other
person or entity as the Company shall designate. The
decisions and interpretations of such administrator of the
Plan shall be final and binding upon each Employer that
shall have adopted this Plan, Employees of such Employers,
each Participant and his Beneficiary, and other interested
parties.
Section 8.6 The Company shall have the right to
deduct from any payment to be made pursuant to this Plan any
Federal, state, local or other taxes required by law to be
withheld.
Section 8.7 If any payment to be made under this
Plan is to be made on account of a Participant who was
employed by an Employer that shall have adopted this Plan,
other than the Company, the cost of such benefit payment
shall be borne by the Employer of the Employee.
Section 8.8 This Plan shall be construed, regulated
and administered for all purposes according to the laws of
the State of New York and the United States.
Section 8.9 No member of the Board, no Employee and
no member of the Compensation Committee (nor the
Compensation Committee itself) shall be liable for any act
or action hereunder, including acts of omission or
commission, by any other member or Employee or by any agent
to whom duties in connection with the administration of the
Plan have been delegated or, except in circumstances
involving bad faith, gross negligence or fraud, for anything
done or omitted to be done by himself.
Section 8.10 Wherever any words are used in this Plan
in the masculine gender they shall be construed as though
they were also used in the feminine gender in all cases
where they would so apply, and wherever any words are used
herein in the singular form they shall be construed as
though they were also used in the plural form in all cases
where they would so apply.
Section 8.11 In the event any provision of this Plan,
if challenged, would be declared invalid, illegal or
unenforceable, such provision shall be construed and
enforced as if it had been more narrowly drawn so as not to
be illegal, invalid or unenforceable and the validity,
legality and enforceability of the remaining provisions
shall not be affected or impaired thereby.
<TABLE>
<CAPTION>
Financial Highlights
Dollars in thousands, except per share data 1994 1993** % Change
<S> <C> <C> <C>
Revenues $ 2,806,412 $ 2,868,637 -2%
Cost of Sales, Fulfillment and Distribution Expense 1,080,139 1,111,198 -3%
Promotion, Selling and Administrative Expense 1,370,391 1,404,787 -2%
Effect of Promotion Accounting Changes, net * (113,864) --- ---
Other Operating Items * 76,001 --- ---
Operating Profit 393,745 352,652 12%
Income Before Cumulative Effect of Changes in
Accounting Principles 272,117 258,250 5%
Cumulative Effect of Changes in Accounting
Principles (25,830) (50,938) N/M
Net Income $ 246,287 $ 207,312 19%
Earnings Per Share Before Cumulative Effect of
Changes in Accounting Principles $ 2.34 $ 2.16 8%
Cumulative Effect of Changes in Accounting
Principles (.23) (.42) N/M
Earnings Per Share $2.11 $ 1.74 21%
Dividends Per Common Share $ 1.35 $ 1.15 17%
Cash and Cash Equivalents, Short-term Investments
and Marketable Securities $ 766,857 $ 723,359 6%
Total Assets $2,049,360 $1,872,408 9%
Stockholders' Equity $ 790,984 $ 806,267 -2%
N/M - Not meaningful.
* See Management's Discussion and Analysis on page 22 and
Note 1 and Note 2 of the accompanying consolidated
financial statements on pages 30-31 for discussion of
Changes in Accounting Principles and Other Operating
Items.
**In accordance with the provisions of Statement of
Position 93-7, Statement of Financial Accounting
Standards No. (SFAS) 112 and SFAS 115, amounts for 1993
have not been restated for 1994 accounting changes.
</TABLE>
Management's Discussion and Analysis
Results of Operations
Fiscal 1994 Compared With Fiscal 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 of the adoption, the company
recognized an after-tax charge of $25.8 million for the
cumulative effect of severance and disability costs related
to prior service. The additional pre-tax operating expense
in 1994 associated with this change was approximately $3.6
million.
During 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 will defer the costs of
direct response advertising (promotion) and amortize 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.
During 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. During 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.
As a result of the accounting changes for promotion,
premiums and product development ("effect of promotion
accounting changes, net"), 1994 results reflect a one-time
increase in operating profit of $113.9 million, or $.60 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 statement of income in 1994. However, as a
result of SFAS 115, the company's short-term investments and
marketable securities were 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.
Other Operating Items In the fourth quarter of 1994, the
company recorded aggregate charges of $76.0 million, or $.51
per share after taxes, for certain other operating items.
These charges relate to losses on lease terminations and
provisions for certain claims against the company.
Revenues/Operating Profit Worldwide revenues for 1994 were
$2.81 billion, a decrease of $62 million, or 2%, compared
with 1993. Excluding the effects of changes in foreign
currency exchange rates, revenues increased about 3%.
Worldwide operating profit for 1994 was $393.7 million.
Worldwide operating profit before the effect of promotion
accounting changes, net and other operating items was $355.9
million, an increase of $3.2 million over 1993. Excluding
the effect of changes in foreign currency exchange rates, as
well as the effect of promotion accounting changes, net and
other operating items, operating profit increased $36.0
million, or 10%, over 1993.
Postage, paper and printing costs are a significant
component of the company's operating expenses. The company
expects that the U.S. government will implement an increase
in postal charges across most classes of mail in early 1995.
International postal rates also are likely to increase over
the next several years. The company is evaluating ways to
reduce postage costs, such as increasing the use of bar
coding, better packaging and improving the sorting of mail.
Industry paper prices per ton have decreased over the past
few years. The company believes that this trend is unlikely
to continue and prices may start to rise in 1995. Worldwide
printing costs rose less than the rate of inflation in 1994.
The company is coordinating many of its supply contracts and
purchasing activities and developing production synergies
between countries with the intention of reducing costs
through economies of scale and improving global quality
standards.
The following discussion of segment results is exclusive of
the effect of the promotion accounting changes, net and
other operating items.
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.
Revenues by Geographic Area
In millions 1994 1993
United States $1,117.8 $1,157.3
Europe 1,301.0 1,322.5
Other Markets 396.8 398.9
Inter-area (9.2) (10.1)
Total revenues $2,806.4 $2,868.6
% Change
% Change Excl. Exchange
United States -3% -3%
Europe -2% 9%
Other Markets 0% 4%
Total revenues -2% 3%
Operating Profit by Geographic Area
In millions 1994 1993
United States $229.3 $196.1
Europe 160.0 169.6
Other Markets 23.5 50.1
Effect of promotion
accounting changes, net 113.9 ---
Other operating items (76.0) ---
Corporate expense (57.0) (63.1)
Total operating profit $393.7 $352.7
% Change
% Change Excl. Exchange
United States 17% 17%
Europe -6% 12%
Other Markets -53% -46%
United States revenues decreased 3% mainly due to planned
lower levels of activity in the books and home entertainment
products business and a decrease in Reader's Digest magazine
advertising revenue. It has been over twelve months since
the company initially discussed performance issues in the
U.S. books and home entertainment business. The measures
put in place since the spring of 1993 are meeting the
company's expectations. Better targeting of mailings and
promotional activity has led to higher response rates, fewer
returns of products and better payment performance. The
company is increasingly confident that it is on track to
return this business to historical growth levels by the end
of fiscal 1995 as planned. United States operating profit
increased 17% over the prior year. This profit increase
primarily came from reduced promotional expenses, which more
than offset the decline in revenues in the U.S books and
home entertainment business.
Revenues and operating profit in Europe decreased 2% and
6%, respectively. Excluding the effect of changes in
foreign currency exchange rates, revenues and operating
profit increased 9% and 12%, respectively. These increases
came primarily from higher books and home entertainment
products sales.
Revenues from Other Markets were approximately the same as
the prior year. Excluding the effect of changes in foreign
currency exchange rates, revenues increased 4%. Operating
profit from Other Markets decreased 53%. Excluding the
effect of changes in foreign currency exchange rates,
operating profit decreased 46%. This 46% decrease was
caused primarily by increased costs associated with a change
in marketing approach at a subsidiary. The remaining
decrease in operating profit is attributable to higher
intercompany royalty expense compared with the prior year.
Operating profit for the United States includes
intercompany royalty income, which is charged annually to
the company's international subsidiaries and which is
designed to compensate the United States for a variety of
intangibles, including utilization of tradenames,
trademarks, copyrights and editorial and marketing know-how.
Without the intercompany royalty, United States operating
profit would have been $135.1 million in 1994 and $115.5
million in 1993, an increase of 17%; operating profit for
Europe would have been $231.3 million in 1994 and $231.7
million in 1993; and operating profit for Other Markets
would have been $46.4 million in 1994 and $68.6 million in
1993, a decrease of 32%.
Other Income, Net Other income, net increased slightly to
$69.5 million compared with $67.3 million a year ago. This
increase was primarily the result of increased gains on
certain investments ($42.6 million in 1994 compared with
$29.4 million in 1993) and lower interest expense ($2.3
million in 1994 compared with $4.7 million in 1993),
partially offset by the effects of foreign exchange
transactions and hedging activity ($5.7 million expense in
1994 compared with $1.4 million expense in 1993) and
decreased interest income ($42.9 million in 1994 compared
with $51.7 million in 1993).
Earnings Per Share
1994 1993
Before cumulative effect of
accounting changes $2.34 $2.16
Cumulative effect of
accounting changes (.23) (.42)
Earnings per share $2.11 $1.74
Earnings per share before the cumulative effect of
accounting changes was $2.34, an increase of 8% from $2.16
in the prior year. Excluding the effect of promotion
accounting changes, net and other operating items, earnings
per share before the cumulative effect of accounting changes
increased 4% to $2.25. This increase exceeded operating
profit growth (before the effect of promotion accounting
changes, net and other operating items) because of higher
gains from certain investments and the reduction in
outstanding shares due to the company's ongoing share
repurchase program. Excluding the combined total effect of
foreign exchange and gains on certain investments, earnings
per share before the cumulative effect of accounting changes
and the effect of the promotion accounting changes, net and
other operating items increased about 10%.
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.
Revenues by Business Segment
In millions 1994 1993
Reader's Digest magazine $689.1 $720.0
Books and home entertainment 1,900.3 1,958.1
products
Special interest magazines 90.6 84.1
Other businesses 129.6 110.4
Inter-segment (3.2) (4.0)
Total revenues $2,806.4 $2,868.6
% Change
% Change Excl. Exchange
Reader's Digest magazine -4% 0%
Books and home entertainment -3% 4%
products
Special interest magazines 8% 8%
Other businesses and inter-
segment sales, net 19% 21%
Total revenues -2% 3%
Operating Profit by Business Segment
In millions 1994 1993
Reader's Digest magazine $78.6 $97.3
Books and home entertainment 310.8 307.2
products
Special interest magazines (3.2) (9.2)
Other businesses 26.6 20.5
Effect of promotion accounting
changes, net 113.9 ---
Other operating items (76.0) ---
Corporate expense (57.0) (63.1)
Total operating profit $393.7 $352.7
% Change
% Change Excl. Exchange
Reader's Digest magazine -19% -15%
Books and home entertainment 1% 11%
products
Special interest magazines 66% 66%
Other businesses 30% 29%
Reader's Digest magazine Reader's Digest magazine revenues
decreased $30.9 million, or 4%. Excluding the effect of
changes in foreign currency exchange rates, revenues were
about equal to those of the prior year. Advertising
revenues declined $25.9 million due to a decrease in
advertising pages in a difficult global advertising
environment. About one-third of the decrease in advertising
revenues caused by the fewer advertising pages was offset
by higher advertising rates. The remaining decrease in
magazine revenues was offset by increased subscription
pricing. For 1994, average circulation levels on a global
basis declined slightly compared with the prior year
principally as a result of the reduction in the U.S. rate
base effective January 1, 1994. Operating profit decreased
$18.7 million, or 19%. Excluding the effect of changes in
foreign currency exchange rates, operating profit decreased
about 15%, primarily because of lower advertising revenues.
Promotion costs also increased in selected markets.
Books and home entertainment products Books and home
entertainment products revenues decreased 3%, or $57.8
million. Excluding the effect of changes in foreign
currency exchange rates, revenues increased about 4%. This
increase was primarily attributable to higher prices and
sales of a higher priced product mix. U.S. revenues
declined compared with the prior year consistent with the
company's strategy of optimizing its U.S. profitability
through lower levels of activity in order to form a solid
customer base for future growth. Lower U.S. revenues were
more than offset by higher international revenues.
Operating profit increased $3.6 million, or 1%. Excluding
the effect of changes in foreign currency exchange rates,
operating profit increased about 11% as a result of higher
U.S. profits caused by decreased promotional spending
related to the lower activity and higher international
profits due to higher revenues.
Special interest magazines Special interest magazines
revenues increased $6.5 million, or 8%. Revenues improved
in all titles compared with the prior year. Approximately
three-fourths of the increase in revenues was caused by
increased advertising revenues due to increased advertising
rates. The balance of the increase was due to higher
subscription pricing. Circulation levels remained
approximately the same as the prior year. Special interest
magazines operating loss was reduced by $6.0 million, or
66%. This improvement was primarily a result of stronger
performance in all titles and lower amortization of
intangible assets. Amortization expense included in
operating costs was $3.2 million and $5.7 million for 1994
and 1993, respectively.
Other businesses Revenues for other businesses, net of
inter-segment sales, increased $20.0 million to $126.4
million in 1994, or 19%. This increase in revenues was
principally attributable to higher unit sales at QSP, Inc.
Operating profit increased $6.1 million to $26.6 million in
1994, or 30%, primarily due to the increased revenues.
Corporate expense Corporate expense declined compared with
the prior year due to lower compensation costs and outside
consulting fees.
Foreign Exchange The effects of changes in foreign currency
exchange rates reduced 1994 earnings per share by about $.20
compared with 1993. In the fourth quarter of 1994, the
company hedged its foreign currency exchange exposure for
fiscal 1995 with the purchase of foreign exchange options.
These hedges were implemented at exchange rates and in
amounts designed to minimize the 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, but expects there will be no
adverse impact on full year earnings per share.
Fiscal 1993 Compared With Fiscal 1992
Changes in Accounting Principles During the fourth quarter
of 1993, the company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS 109, "Accounting for Income Taxes," retroactively
effective July 1, 1992. As a result of the adoption of SFAS
106, the company recognized about $6.4 million of additional
expense in 1993. Results for 1992 were not restated.
Revenues/Operating Profit Worldwide 1993 revenues were
$2,868.6 million, an increase of $254.6 million, or 10%,
over 1992. Worldwide operating profit for 1993 was $352.7
million. Worldwide operating profit before the accounting
changes was $359.1 million, an increase of $28.9 million, or
9%, over 1992. The effect of changes in foreign currency
exchange rates on worldwide revenues and operating profit
was minimal.
Revenues by Geographic Area
In millions 1993 1992
United States $1,157.3 $1,146.7
Europe 1,322.5 1,114.0
Other Markets 398.9 362.0
Inter-area (10.1) (8.7)
Total revenues $2,868.6 $2,614.0
Operating Profit by Geographic Area
1993 1993
After Before
Accounting Accounting
In millions Changes Changes 1992
United States $196.1 $205.4 $197.3
Europe 169.6 169.6 146.5
Other Markets 50.1 50.1 58.7
Corporate expense (63.1) (66.0) (72.3)
Total operating $352.7 $359.1 $330.2
profit
United States revenues increased 1%. United States
operating profit before 1993 accounting changes increased
$8.1 million, or 4%, compared with 1992. In 1993,
intercompany royalty income increased. Without this
increase in intercompany royalty income, operating profit in
the United States decreased by 10%. The decrease primarily
came from lower sales and lower operating profit of books
and home entertainment products. The company addressed the
sequencing of U.S. product offerings, the selection of
customers to receive such offerings and the varying of its
product promotions. Given the long lead time in the direct
mail marketing business, the company estimated that it could
require 12 to 24 months to return U.S. books and home
entertainment to its historic growth. The company also
implemented cost control measures giving it additional
financial leverage during this period.
Revenues and operating profit in Europe increased 19% and
16%, respectively. The increase in operating profit came
primarily from higher books and home entertainment product
sales.
Revenues from Other Markets increased 10%. Operating
profit from Other Markets decreased 15% because of higher
intercompany royalty expense and an unfavorable effect of
changes in foreign currency exchange rates. Excluding these
effects, the operating profit of Other Markets was
essentially flat.
Without the intercompany royalty, United States operating
profit before 1993 accounting changes would have been $124.7
million in 1993 and $144.2 million in 1992, a decrease of
14%; operating profit for Europe would have been $231.7
million in 1993 and $186.0 million in 1992, an increase of
25%; and operating profit for Other Markets would have been
$68.6 million in 1993 and $72.3 million in 1992, a decrease
of 5%.
Other Income, Net Other income, net increased $16.4 million
over 1992. The increase came primarily from gains on the
sales of investments ($29.4 million in 1993 compared with
$20.7 million in 1992) and the effect of foreign exchange
($0.5 million expense in 1993 compared with $12.9 million
expense in 1992).
Earnings Per Share
1993 1992
Before cumulative and current
year effect of 1993 accounting $2.20 $1.95
changes
Incremental current year expense
from SFAS 106 (.04) --
Before cumulative effect of 1993
accounting changes $2.16 $1.95
Cumulative effect of 1993
accounting changes $(.42) --
Earnings per share $1.74 $1.95
Before the effect of the 1993 accounting changes, earnings
per share increased 13% to $2.20 compared with $1.95 in
1992. Excluding the effect of foreign exchange, earnings
per share before 1993 accounting changes increased about 9%
in 1993 compared with 1992.
Revenues by Business Segment
In millions 1993 1992
Reader's Digest magazine $720.0 $685.0
Books and home entertainment 1,958.1 1,744.8
products
Special interest magazines 84.1 75.5
Other businesses 110.4 112.9
Inter-segment (4.0) (4.2)
Total revenues $2,868.6 $2,614.0
Operating Profit by Business Segment
1993 1993
After Before
Accounting Accounting
In millions Changes Changes 1992
Reader's Digest magazine $97.3 $99.9 $96.8
Books and home entertainment
products 307.2 312.4 303.0
Special interest magazines (9.2) (9.2) (19.5)
Other businesses 20.5 22.0 22.2
Corporate expense (63.1) (66.0) (72.3)
Total operating profit $352.7 $359.1 $330.2
Reader's Digest magazine Reader's Digest magazine revenues
increased $35 million, or 5%. About two-thirds of the
increase came from higher subscription pricing. Circulation
levels remained approximately the same. The balance of the
increase was a result of increased advertising revenues
which benefited almost equally from an increase in
advertising pages and higher rates. Operating profit before
the 1993 accounting changes increased $3.1 million, or 3%,
primarily as a result of the higher revenues. The effect of
changes in foreign currency exchange rates on revenues and
operating profit was minimal.
Books and home entertainment products Books and home
entertainment products revenues increased $213.3 million, or
12%. Revenues in the United States were lower compared with
last year. This decrease was more than offset by higher
sales in international locations. Total segment revenues
increased principally because of higher unit sales.
Operating profit before the 1993 accounting changes
increased $9.4 million, or 3%, resulting from increased
international revenues and operating profit, partially
offset by lower sales and operating profit in the United
States. The impact of changes in foreign currency exchange
rates on revenues and operating profit was minimal.
Special interest magazines Special interest magazines
revenues increased $8.6 million, or 11%, over the previous
year primarily because of higher subscription rates and, to
a lesser extent, from increased advertising pages.
Circulation levels remained approximately the same. This
segment generated a lower operating loss of $9.2 million in
1993, compared with an operating loss of $19.5 million in
1992. This $10.3 million improvement came from better
operating performance in all titles and lower amortization
expense.
Corporate expense Corporate expense before 1993 accounting
changes declined principally because of lower compensation
costs.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and
marketable securities increased $44 million to $767 million
at June 30, 1994, compared with $723 million at June 30,
1993. Approximately $19 million of this increase was the
result of the adoption of SFAS 115 under which the company's
current investments are reported at fair value and include
the net unrealized gains on these investments. The
remaining increase was primarily the result of cash provided
from operations ($315 million) partially offset by the
repurchase of 3.6 million shares of Class A nonvoting common
stock in fiscal 1994 ($150 million) and payments for
dividends ($158 million).
The company increased its quarterly dividend on common
stock from $.30 per share to $.35 per share during the year.
The fiscal 1994 full-year dividend payment was $1.35 per
share compared with $1.15 per share in fiscal 1993, an
increase of 17%. The company is currently paying dividends
at an annualized rate of $1.40 per share.
In March 1994, the company announced a third share
repurchase program to acquire up to an additional five
million shares of Class A nonvoting common stock. In fiscal
1994 the company completed its second program, announced in
May 1993, to repurchase three million shares of Class A
nonvoting common stock. During fiscal 1993 the company
completed its first program, announced in February 1992, to
repurchase three million shares of Class A nonvoting common
stock.
Capital expenditures for the year ended June 30, 1994 were
$42 million. Expenditures were primarily for management
information systems equipment.
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.
CONSOLIDATED STATEMENTS OF INCOME
The Reader's Digest Association, Inc.
and Subsidiaries
<TABLE>
<CAPTION>
Years ended June 30,
Amounts in thousands, except per share data 1994 1993 1992
<S> <C> <C> <C>
Revenues $2,806,412 $ 2,868,637 $ 2,613,958
Cost of sales, fulfillment and distribution expense 1,080,139 1,111,198 1,015,116
Promotion, selling and administrative expense 1,370,391 1,404,787 1,268,628
Effect of promotion accounting changes, net (113,864) --- ---
Other operating items 76,001 --- ---
Total operating expenses 2,412,667 2,515,985 2,283,744
Operating profit 393,745 352,652 330,214
Other income, net 69,491 67,267 50,897
Income before provision for income taxes and
cumulative effect of changes in accounting principles 463,236 419,919 381,111
Provision for income taxes 191,119 161,669 146,728
Income before cumulative effect of changes in
accounting principles 272,117 258,250 234,383
Cumulative effect of changes in accounting
principles for:
Postemployment benefits (net of tax benefit of (25,830) --- ---
$16,170)
Income taxes --- 2,375 ---
Postretirement benefits (net of tax benefit of --- (53,313) ---
$33,375)
Net income $246,287 $207,312 $234,383
Earnings per share:
Before cumulative effect of changes in accounting $ 2.34 $ 2.16 $1.95
principles
Cumulative effect of changes in accounting
principles for: (.23) --- ---
Postemployment benefits --- .02 ---
Income taxes --- (.44) ---
Postretirement benefits
Earnings per share $ 2.11 $ 1.74 1.95
Average common shares outstanding 115,716 118,702 119,800
See accompanying notes to consolidated financial statements.
</TABLE>
CONSOLIDATED BALANCE SHEETS
The Reader's Digest Association, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30,
Amounts in thousands 1994 1993
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $183,228 $ 183,526
Short-term investments 211,454 206,585
Receivables, less allowances for returns and bad debts of
$209,472 in 392,849 380,421
1994 and $198,406 in 1993
Inventories 167,282 169,458
Prepaid expenses and other current assets 242,435 134,733
Total current assets 1,197,248 1,074,723
Marketable securities 372,175 333,248
Other long-term investments 51,296 55,533
Property, plant and equipment, net 241,743 235,160
Intangible assets, net 69,712 73,765
Other noncurrent assets 117,186 99,979
Total assets $2,049,360 $1,872,408
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ --- $ 5,253
Accounts payable 205,489 172,508
Accrued expenses 346,706 240,256
Federal and foreign income taxes 84,428 75,845
Unearned revenue 388,833 371,100
Other current liabilities 14,466 16,364
Total current liabilities 1,039,922 881,326
Long-term notes payable 8,698 8,083
Postretirement and postemployment benefits other than 122,125 89,884
pensions
Other noncurrent liabilities 87,631 86,848
Total liabilities 1,258,376 1,066,141
Stockholders' equity:
Capital stock 29,653 29,162
Paid-in capital 90,320 77,320
Retained earnings 1,004,992 916,420
Foreign currency translation adjustment (22,141) (35,906)
Net unrealized gains on certain investments 11,900 ---
Less: Treasury stock, at cost (323,740) (180,729)
Total stockholders' equity 790,984 806,267
Total liabilities and stockholders' equity $2,049,360 $ 1,872,408
See accompanying notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Reader's Digest Association, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended June 30,
Amounts in thousands 1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $246,287 $ 207,312 $ 234,383
Depreciation and amortization 42,167 45,092 43,167
Gain on marketable securities and other investments (42,566) (29,398) (20,729)
Cumulative effect of changes in accounting principles 25,830 50,938 --
Changes in assets and liabilities 43,399 (23,355) 28,801
Net cash provided by operating activities 315,117 250,589 285,622
Cash flows from investing activities:
Proceeds from maturities and sales of marketable
securities
and short-term investments 275,438 128,717 448,278
Purchases of marketable securities and short-term (277,027) (134,889) (490,154)
investments
Capital expenditures (42,194) (47,957) (44,431)
Proceeds from other long-term investments, net 19,575 9,155 (12,236)
Proceeds from sales of property, plant and equipment 3,085 3,926 2,880
Net cash used in investing activities (21,123) (41,048) (95,663)
Cash flows from financing activities:
Dividends paid (157,715) (138,030) (97,111)
Common stock repurchased (150,321) (166,187) (14,764)
Other, net 2,833 7,216 (94)
Net cash used in financing activities (305,203) (297,001) (111,969)
Effect of exchange rate changes on cash 10,911 (21,717) 23,079
Net (decrease) increase in cash and cash equivalents (298) (109,177) 101,069
Cash and cash equivalents at beginning of year 183,526 292,703 191,634
Cash and cash equivalents at end of year $183,228 $183,526 $292,703
Supplemental disclosures regarding cash flows are in Note
14. See accompanying notes to consolidated financial
statements.
</TABLE>
The Reader's Digest Association, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Amounts in thousands, except per share data
Capital Stock Foreign Net
Unamort. Currency Unrealized
Preferred Common Restricted Paid-In Retained Trans. Gains on Treasury
Stock Stock Stock Capital Earnings Adjust. Investments Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1991 $28,846 $1,395 $(1,071) $36,511 $709,866 $(15,725) $ -- $ (200) $759,622
Net income -- -- -- -- 234,383 -- -- -- 234,383
Translation adjustment -- -- -- -- -- 33,695 -- -- 33,695
Common stock repurchased -- -- -- -- -- -- -- (14,764) (14,764)
Common stock issued under
various plans -- 5 (655) 19,849 -- -- -- (146) 19,053
Dividends on common stock
($.80 per share) -- -- -- -- (95,802) -- -- -- (95,802)
Dividends on preferred stock -- -- -- -- (1,309) -- -- -- (1,309)
Balance at June 30, 1992 $28,846 $1,400 $(1,726) $56,360 $847,138 $ 17,970 $ -- $(15,110) $934,878
Net income -- -- -- -- 207,312 -- -- -- 207,312
Translation adjustment -- -- -- -- -- (53,876) -- -- (53,876)
Common stock repurchased -- -- -- -- -- -- -- (166,187) (166,187)
Common stock issued under
various plans -- 5 637 20,960 -- -- -- 568 22,170
Dividends on common stock
($1.15 per share) -- -- -- -- (136,721) -- -- -- (136,721)
Dividends on preferred stock -- -- -- -- (1,309) -- -- -- (1,309)
Balance at June 30, 1993 $28,846 $1,405 $(1,089) $77,320 $916,420 $(35,906) $ -- $(180,729) $806,267
Net income -- -- -- -- 246,287 -- -- -- 246,287
Translation adjustment -- -- -- -- -- 13,765 -- -- 13,765
Common stock repurchased -- -- -- -- -- -- -- (150,321) (150,321)
Common stock issued under
various plans -- 3 488 13,000 -- -- -- 7,310 20,801
Dividends on common stock
($1.35 per share) -- -- -- -- (156,406) -- -- -- (156,406)
Dividends on preferred stock -- -- -- -- (1,309) -- -- -- (1,309)
Net unrealized gains on certain -- -- -- -- -- -- 11,900 -- 11,900
investments, net of tax
Balance at June 30, 1994 $28,846 $1,408 $(601) $90,320 $1,004,992 $(22,141) $11,900 $(323,740) $790,984
See accompanying notes to consolidated financial statements.
</TABLE>
The Reader's Digest Association, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands,
except per share data
1. Summary of Significant Accounting Policies
Basis of Presentation The accompanying consolidated
financial statements include the accounts of The Reader's
Digest Association, Inc. and its United States and
international subsidiaries (the company) after the
elimination of all significant intercompany accounts and
transactions.
Changes in Accounting Principles On July 1, 1993, the
company adopted Statement of Financial Accounting Standards
No. (SFAS) 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect of the change was a pre-
tax charge of $42,000 offset by tax benefits of $16,170 for
a non-cash, after-tax charge of $25,830, or $.23 per share.
The additional pre-tax operating expense recorded in 1994
for SFAS 112 was $3,560. In accordance with the provisions
of SFAS 112, prior years' financial statements have not been
restated for this change.
During 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 will defer the costs of
direct response advertising (promotion) and amortize 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.
During 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. During 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.
As a result of the promotion, premiums and product
development accounting changes, 1994 results reflect a one-
time increase in operating profit of $113,864.
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 statement of income in 1994. However, as a
result of SFAS 115, the company's short-term investments and
marketable securities were 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.
During the fourth quarter of 1993, the company adopted
SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and SFAS 109, "Accounting for Income
Taxes," retroactively effective as of July 1, 1992. The
cumulative effect of these changes resulted in a non-cash,
after-tax charge of $50,938, or $.42 per share.
Foreign Currency Translation The assets and liabilities of
international subsidiaries are translated into United States
dollars at the rates of exchange in effect at the balance
sheet date and resulting adjustments are reflected as a
separate component of stockholders' equity. Revenues and
expenses are translated at the average rates prevailing
during the year.
Cash and Cash Equivalents The company considers all highly
liquid debt instruments with maturities of three months or
less to be cash equivalents.
Inventories The majority of United States inventory is
stated at cost, determined on the last-in, first-out (LIFO)
basis, which is less than market value. The remaining
United States inventory and inventory of international
subsidiaries is stated at the lower of cost, primarily
determined on the first-in, first-out (FIFO) basis, or
market.
Short-Term Investments and Marketable Securities At June
30, 1994, the company adopted SFAS 115. This standard
requires that individual debt and equity securities be
classified into one of three categories: trading, held-to-
maturity or available-for-sale.
The company has short-term investments and marketable
securities that are composed primarily of government and
corporate fixed income securities. While it is the
company's general intent to hold such securities until
maturity, management will occasionally sell particular
securities for cash flow purposes. Therefore, the company's
short-term investments and marketable securities, at June
30, 1994, are classified as available-for-sale and are
carried at fair value with the net unrealized gains or
losses reported as a separate component of stockholders'
equity, net of its related tax effects.
Depreciation and Amortization The costs of buildings and
equipment are depreciated using the straight-line method
over useful lives up to 50 years for buildings and up to 20
years for equipment. Leasehold improvements are amortized
using the straight-line method over the term of the lease or
the life of the improvement, whichever is shorter.
Intangible Assets Intangible assets reflect the acquisition
costs of distribution rights, contracts, subscription lists
and other intangible assets as well as the excess of the
costs over the fair value of the net assets of several
businesses acquired. The acquisition costs of distribution
rights, contracts, subscription lists and other intangible
assets are amortized over the estimated useful lives,
usually not in excess of six years, and the excess of cost
over fair value of businesses acquired is amortized over
varying periods, not in excess of 40 years. All intangible
assets are amortized using the straight-line method. The
company annually evaluates whether there has been a
permanent impairment in the value of its intangible assets.
Factors considered in the valuation of intangible assets
include projected income from operations of businesses
acquired, as well as other economic and market variables.
Revenues Sales of books and home entertainment products,
less provisions for returns, are recorded at the time of
shipment. Sales of magazine subscriptions are recorded as
unearned revenue at the gross subscription price at the time
the orders are received. Proportionate shares of the gross
subscription price are recognized as revenues when the
subscriptions are fulfilled.
Promotion Costs During the fourth quarter of 1994, the
company adopted SOP 93-7, "Reporting on Advertising Costs."
In accordance with SOP 93-7, costs of direct-response
advertising are deferred and amortized over the expected
revenue stream, generally over one to twelve months. Direct-
response advertising consists primarily of promotion costs
incurred in connection with the procurement of subscriptions
to magazines and the sale of books or other products. Prior
to the adoption of SOP 93-7, these costs were generally
expensed as incurred.
For the fiscal year ended June 30, 1994, promotion costs
of $1,003,312 were incurred, of which $124,795 were deferred
as of June 30, 1994 and included in Prepaid expenses and
other current assets in the company's consolidated balance
sheet.
Taxes on Income Effective July 1, 1992, the company adopted
SFAS 109, which changed the method of accounting for income
taxes to an asset and liability approach from the deferred
method, as required under Accounting Principles Board
Opinion No. (APB) 11. The cumulative effect of the change
was a net increase in deferred tax assets as of July 1, 1992
of $2,375, or $.02 per share.
Under the asset and liability method prescribed by SFAS
109, deferred income taxes, net of appropriate valuation
allowances, are provided for the temporary differences
between the financial reporting and tax bases of assets and
liabilities at currently enacted tax rates.
Under APB 11, income taxes are provided on pre-tax
financial statement income with deferred taxes recognized
for timing differences between pre-tax financial statement
income and current taxable income.
For all periods, deferred federal income taxes have not
been provided on undistributed earnings of foreign
subsidiaries because any federal taxes payable would be
substantially offset by foreign tax credits.
Earnings Per Share Earnings per share is based on the
average number of common shares and common share equivalents
outstanding during the year and net income after deducting
preferred stock dividend requirements.
2. Other Operating Items
In the fourth quarter of 1994, the company recorded
aggregate charges of $76,001 for certain other operating
items. These charges relate to losses on lease terminations
and provisions for certain claims against the company.
3. Other Income, Net
1994 1993 1992
Interest income $42,862 $51,728 $52,832
Interest expense (2,253) (4,676) (2,933)
Gains on the sales of 42,566 29,398 20,729
certain investments
Loss on foreign (5,666) (1,395) (12,975)
exchange
Other, net (8,018) (7,788) (6,756)
$69,491 $67,267 $50,897
4. Inventories
1994 1993
Raw materials $17,410 $20,790
Work-in-progress 23,718 42,553
Finished goods 126,154 106,115
$167,282 $169,458
If the first-in, first-out (FIFO) method of inventory
accounting had been used for certain inventory components
rather than the last-in, first-out (LIFO) method,
inventories would have been $9,821 and $8,235 higher than
the amounts reported at June 30, 1994 and 1993,
respectively.
5. Financial Instruments
Off-Balance Sheet Risks The company utilizes various
financial instruments, primarily foreign currency option
contracts, to manage the foreign exchange exposure
associated with anticipated earnings and related cash flows
generated from the operations of its international
subsidiaries. At June 30, 1994, the company held option
contracts for various currencies in which the company
transacts business with face amounts totaling about $310,000
and exercise dates ranging from August 1994 to May 1995.
The market risk associated with these option contracts is
limited to the carrying value of these contracts in the
company's consolidated balance sheet. As these instruments
do not qualify for accounting treatment as hedges, they are
reflected in the company's consolidated balance sheet at
market value which amounted to $5,703 at June 30, 1994. No
such instruments were outstanding at June 30, 1993. The net
gain or loss from these instruments is included in gain
(loss) on foreign exchange in Other income, net in the
company's consolidated statement of income (see Note 3).
Fair Value On June 30, 1994, the company adopted Statement
of Financial Accounting Standards No. (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity
Securities." As stated in Note 1, the company's short-term
investments and marketable securities are classified as
available-for-sale and are reported at fair value on the
company's consolidated balance sheet. Quoted market prices
have been used in determining the fair value of these
investments.
<TABLE>
<CAPTION>
Fair Value of Investments Unrealized Unrealized
at June 30, 1994 Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Debt securities
maturing within :
1 yr. $210,157 $1,242 $ --- $211,399
1 to 10 years. 350,773 666 (14,109) 337,330
Equity securities 3,350 31,550 --- 34,900
$564,280 $33,458 $ (14,109) $583,629
</TABLE>
Proceeds from sales and maturities of securities available-
for-sale were $275,438 in 1994, including realized gains of
$27,356. The cost used to compute the realized gains was
determined by specific identification.
At June 30, 1993, the company's short-term investments were
carried on the consolidated balance sheet at $206,585, which
approximated fair value. Marketable securities were carried
at cost of $333,248, with a fair value at June 30, 1993 of
$446,263.
Quoted market prices were not available for Other long-term
investments held by the company. As a result, estimates of
fair value provided by various outside sources were used to
determine the fair value of these investments. Fair value
approximates the cost at which these investments are carried
in the company's consolidated balance sheet.
6. Property, Plant and Equipment
1994 1993
Land $18,370 $17,354
Buildings and building 207,348 193,944
improvements
Printing and fulfillment 150,872 147,550
equipment
Furniture, fixtures and equipment 149,951 134,233
Leasehold improvements 22,565 23,312
549,106 516,393
Less: Accumulated depreciation
and amortization 307,363 281,233
$241,743 $235,160
7. Intangible Assets
1994 1993
Distribution rights,
contracts, subscription
lists and other $62,046 $62,127
Excess of cost over fair
value of net assets of
businesses acquired 79,071 78,494
141,117 140,621
Less: Accumulated
amortization 71,405 66,856
$69,712 $73,765
8. Pension Plans
The company and certain of its United States and
international subsidiaries have pension plans covering
substantially all permanent employees. The plans' benefits
are based primarily on years of credited service and on
participants' compensation. The plans' assets consist
principally of fixed income and equity securities.
The company's policy for its United States pension plans is
to fund amounts equal to minimum funding requirements of the
Employee Retirement Income Security Act of 1974, plus
additional amounts that may be approved by the company from
time to time. The company's policy for its international
pension plans is to fund amounts that comply with applicable
laws and regulations and are tax deductible. Assumptions
used to determine pension costs and projected benefit
obligations were as follows:
U.S. Plans
1994 1993 1992
Discount rate 8% 8.5% 8.5%
Rate of compensation
increase 5.5% 6% 6%
Long-term rate of
return on plan assets 9.5% 10% 10%
International Plans
1994 1993 1992
Discount rate 4-14% 4-15% 4-15%
Rate of compensation
increase 2-12% 2-13% 2-13%
Long-term rate of
return on plan assets 5-16% 5-16% 5-16%
The company's consolidated net periodic pension cost is
composed of the following:
1994 1993 1992
Service cost $16,943 $15,917 $13,911
Interest cost on
projected benefit
obligation 36,635 35,390 32,455
Actual return on
plan assets (11,215) (60,618) (57,353)
Net amortization and
deferral (36,551) 14,295 11,209
Net periodic pension
cost $ 5,812 $ 4,984 $ 222
The following table sets forth the funded status of the
United States and international plans and amounts recognized
in the company's consolidated balance sheets:
1994 1993
Over- Under- Over- Under-
funded funded funded funded
Plans Plans Plans Plans
Fair value of
plan assets $532,614 $4,819 $533,426 $10,594
Projected benefit
obligation 455,292 33,671 406,151 34,585
Plan assets in
excess of
(less than)
projected
benefit obligation 77,322 (28,852) 127,275 (23,991)
Unrecognized net
gain (19,022) (648) (71,354) (71)
Unrecognized net
(asset) (37,801) 350 (43,189) 2,023
liability
Unrecognized prior
service cost 5,835 8,267 7,833 7,598
Additional minimum
liability --- (3,841) --- (4,309)
Prepaid (accrued)
pension cost $26,334 ($24,724) $20,565 $(18,750)
Accumulated
benefit
obligation $385,247 $25,657 $ 335,633 $ 23,912
Vested benefit
obligation $375,936 $21,349 $ 329,152 $ 19,300
During 1994 the company recognized curtailment gains of
$3,220 resulting from the company's workforce reductions.
These gains are primarily due to the reduction of the
projected benefit obligation associated with severed
employees' pension benefits offset by the recognition of the
prior service costs related to those employees.
9. Postretirement and Postemployment Benefits
In the fourth quarter of 1993, the company adopted,
effective July 1, 1992, the provisions of Statement of
Financial Accounting Standards No. (SFAS) 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
This standard requires the accrual of the expected costs of
postretirement medical and other nonpension benefits during
an employee's period of service. The company provides
medical and dental benefits to United States retired
employees and their dependents. Substantially all of the
company's employees become eligible for these benefits when
they meet minimum age and service requirements. The company
has the right to modify or terminate these unfunded
benefits.
The company elected to recognize the cumulative effect of
this accounting change by recording the postretirement
benefits liability as a one-time accounting adjustment as of
July 1, 1992. The cumulative effect of adopting SFAS 106
was a pre-tax charge of $86,688 offset by tax benefits of
$33,375 for a net after-tax charge of $53,313, or $.44 per
share. The incremental expense recorded by the company in
1993 as a result of the adoption of SFAS 106 was $6,447
before taxes and $3,965 after taxes, or $.04 per share.
Costs before taxes for postretirement benefits included in
the company's consolidated statements of income in 1994 and
1993 were composed of the following:
1994 1993
Service costs during the period $3,616 $3,120
Interest cost on postretirement
benefits liability 7,285 7,178
Net periodic postretirement
benefits cost $10,901 $10,298
The postretirement benefits liability recognized in the
company's consolidated balance sheets as of June 30, 1994
and 1993 included the following components:
1994 1993
Retirees (including covered $53,054 $51,496
dependents)
Fully eligible active plan 14,446 13,410
participants
Other active participants 30,851 29,478
Unrecognized net gain 2,226 ---
Postretirement benefits liability $100,577 $94,384
The health care inflation assumption used to determine the
postretirement benefits liability was 14% for 1994 and 15%
for 1993, decreasing to 8% by the year 2000 with respect
to medical benefits and 11.5% for 1994 and 12% for 1993,
decreasing to 8% by the year 2001 with respect to dental
benefits. Increasing the assumed health care cost rates by
one percentage point in each year would increase the
accumulated postretirement benefits liability as of June 30,
1994 by about $14,700 and increase the related interest and
service costs before taxes for 1994 by about $2,100. A
discount rate of 8% for 1994 and 8.5% for 1993 was used in
determining the accumulated postretirement benefits
liability. Prior to 1993, expenses for postretirement
benefits were charged to income as incurred and amounted to
$3,674 in 1992.
During 1994, the company recognized curtailment gains of
$1,711 resulting from the company's workforce reductions.
These gains are primarily due to the reduction of the
liability associated with severed employees' postretirement
benefits.
During the first quarter of 1994, the company adopted SFAS
112, "Employers' Accounting for Postemployment Benefits."
The cumulative effect of the change was a pre-tax charge of
$42,000 offset by tax benefits of $16,170 for a non-cash,
after-tax charge of $25,830, or $.23 per share. 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. Prior to adoption, the company generally
accrued for these benefits on the date of incident. The
incremental pre-tax operating expense in 1994 associated
with the adoption of this new standard was $3,560.
10. Employee Compensation Plans
The 1989 and 1994 Key Employee Long Term Incentive Plans
provide that the Compensation & Nominating Committee of the
Board of Directors may grant stock options, stock
appreciation rights, restricted stock, performance units and
other awards to eligible employees. The Committee may grant
certain stock-based awards up to a maximum of 5,420,000 and
6,000,000 underlying shares of Class A nonvoting common
stock (Class A) under the 1989 and 1994 plans, respectively.
No awards may be granted with respect to Class B voting
common stock (Class B).
In 1994, 1993 and 1992 the company granted non-qualified
stock options to purchase Class A shares to certain officers
and key employees. The following table sets forth the
status of these options:
Shares Subject to Price Per Share
Options
Outstanding at June 30, 1991 1,864,725 $20.00 to $29.44
Granted 994,700 $36.31 to $46.63
Exercised (145,875) $20.00 to $29.44
Canceled (97,150) $20.00 to $46.63
Outstanding at June 30, 1992 2,616,400 $20.00 to $46.63
Granted 1,035,000 $48.00 to $55.13
Exercised (274,050) $20.00 to $46.63
Canceled (73,000) $20.00 to $48.00
Outstanding at June 30, 1993 3,304,350 $20.00 to $55.13
Granted 1,749,000 $41.06 to $41.50
Exercised (121,992) $20.00 to $29.44
Canceled (178,425) $20.00 to $48.00
Outstanding at June 30, 1994 4,752,933 $20.00 to $55.13
Options exercisable at
June 30, 1994 1,726,633 $20.00 to $55.13
In 1992, the company also granted 36,000 restricted shares
of Class A with a value of $1,336 to certain officers at no
cost to them. No grants were made in 1994 or 1993. The
market value of shares awarded under the plan is recorded as
unamortized restricted stock which is included in capital
stock in the company's consolidated balance sheets.
Restricted stock is amortized over the term of the
restriction period ($488, $637 and $681 for the years ended
June 30, 1994, 1993 and 1992, respectively).
The company's 1994 financial statements reflect an accrual
for an anticipated contribution to its profit-sharing plan
related to 1994 and the issuance of 329,144 shares of Class
B with a value of $12,569 in fulfillment of its 1993
contribution obligation. In 1993, the company contributed
201,241 shares of Class B with a
value of $10,590 to its profit-sharing plan in fulfillment
of its 1992 contribution obligation.
11. Income Taxes
Income before income taxes and cumulative effect of changes
in accounting principles in the United States and outside
the United States, along with the components of the
provision for income taxes, is shown below:
1994 1993 1992
Income before income
taxes and cumulative
effect of changes in
accounting principles:
United States $231,871 $187,599 $150,987
International 231,365 232,320 230,124
Total $463,236 $419,919 $381,111
Provision for income
taxes:
Current tax expense
Federal $54,007 $84,466 $64,697
State and local 14,098 18,948 12,482
International 98,256 105,396 90,170
Total current 166,361 208,810 167,349
Deferred tax expense
(benefit)
Federal 8,582 (37,661) (11,182)
State and local 498 (6,481) (1,477)
International 15,678 (2,999) (7,962)
Total deferred 24,758 (47,141) (20,621)
Total provision $191,119 $161,669 $146,728
The differences between the effective income tax rate and
the statutory federal income tax rate are as follows:
1994 1993 1992
Provision for tax at
U.S. statutory rate 35.0 % 34.0 % 34.0 %
International 0.7 1.1 1.3
operations
State income taxes, net
of federal income tax
benefit 2.0 2.0 1.9
Other operating items 2.8 --- ---
Other, net 0.8 1.4 1.3
Provision at effective
tax rate 41.3% 38.5 % 38.5 %
The net amounts of deferred tax assets and liabilities are
included in other current and other noncurrent assets in the
company's consolidated balance sheet. The major components
of deferred tax assets (liabilities) as of June 30, 1994 and
1993 are as follows:
1994 1993
Current
Deferred compensation and other
employee benefits $8,829 $5,629
Accounts receivable and other 48,658 49,325
allowances
Deferred promotion costs (27,921) --
Other, net (660) 3,136
$28,906 $58,090
Noncurrent
Deferred compensation and other
employee benefits $64,746 $50,796
Other, net 5,063 4,189
$69,809 $54,985
The major components of the deferred tax provision
determined in accordance with
APB 11 in 1992 are as follows:
1992
Deferred compensation and other
employee benefits $ (1,298)
Accounts receivable and other (10,468)
allowances
Other, net (8,855)
$(20,621)
12. Accrued Expenses
1994 1993
Compensation and other
employee benefits $114,784 $85,613
Royalties and copyrights
payable 41,319 35,910
Taxes, other than federal and
international income taxes 31,219 37,026
Other, principally operating
expenses 159,384 81,707
$346,706 $240,256
13. Capital Stock
The company's capital stock consists of preferred,
preference, common and restricted stock, as follows:
1994 1993
First Preferred Stock, par value
$1.00 per share; authorized 40,000
shares; issued and outstanding $2,972 $2,972
29,720 shares in 1994 and 1993
Second Preferred Stock, par value
$1.00 per share; authorized
120,000 shares; issued and outstanding 10,372 10,372
issued and outstanding 103,720
shares in 1994 and 1993
Third Subordinated Preferred
Stock, par value $1.00 per share;
authorized 230,000 shares; issued and 15,502 15,502
outstanding 155,022 shares in
1994 and 1993
Preference stock, par value $.01
per share; authorized 25,000,000 -- --
shares; issued and outstanding none
Class A nonvoting common stock,
par value $.01 per share; authorized
200,000,000 shares; issued 1,194 1,194
119,428,472 shares in 1994 and
1993
Class B voting common stock, par
value $.01 per share; authorized
25,000,000 shares; issued 21,386,907 214 211
shares in 1994 and 21,057,763
shares in 1993
Unamortized restricted stock (601) (1,089)
$29,653 $29,162
Common stock in treasury, at cost;
26,861,116 and 23,517,829 shares
of Class A in 1994 and 1993,
respectively; 146,560 shares of $(323,740) $(180,729)
Class B in 1994 and 1993
All shares of preferred stock have a preference in
liquidation of $100 per share. The difference between the
aggregate par value and preference in liquidation has been
appropriated from retained earnings. Further, all preferred
stock is redeemable at any time at the option of the company
at $105 per share plus accrued dividends. The terms of the
First Preferred Stock and the Second Preferred Stock provide
for annual cumulative dividends of $4.00 per share. The
terms of the Third Subordinated Preferred Stock provide for
annual cumulative dividends of $5.00 per share.
In 1992, the company offered 4,500,000 shares of Class B
voting common stock for sale to the public on behalf of
certain selling stockholders. The company did not receive
any of the proceeds from the sales of these shares.
In 1994, the company announced its third share repurchase
program to acquire up to 5,000,000 shares of Class A
nonvoting common stock in open market transactions on the
New York Stock Exchange or otherwise. The company completed
its second program, announced in 1993, to repurchase
3,000,000 shares of Class A nonvoting common stock. In
1993, the company completed its first program, announced in
1992, to repurchase 3,000,000 shares of Class A nonvoting
common stock. In 1994, 1993 and 1992, the company
repurchased 3,580,900, 3,414,400 and 316,900 shares,
respectively, for prices ranging from $36.25 to $56.38.
14. Cash Flows
The changes in assets and liabilities consist of the
following:
1994 1993 1992
Increase in accounts
receivable, net $(3,617) $(15,901) $(50,978)
Decrease (increase) in
inventories 6,237 (33,004) (8,050)
Increase in other
current assets (137,363) (17,402) (9,856)
Decrease (increase) in
deferred tax assets 23,825 (12,792) (21,363)
Increase in unearned
revenue 10,904 8,633 20,907
Increase in accounts
payable and
accrued expenses 120,603 55,015 62,889
Increase (decrease) in
income taxes payable 5,201 (2,655) 26,388
Increase in other
liabilities 14,238 6,326 5,972
Other, net 3,371 (11,575) 2,892
$43,399 $(23,355) $28,801
Supplemental disclosures of cash flow information:
1994 1993 1992
Interest paid $2,332 $2,677 $2,114
Income taxes paid $157,030 $168,136 $133,307
15. Commitments and Contingencies
The company and its subsidiaries are defendants in several
lawsuits and claims arising in the regular course of
business. Based on the opinions of management and counsel
for such matters, recoveries, if any, by plaintiffs and
claimants would not materially affect the financial position
of the company or its results of operations.
Additionally, on December 21, 1993, the Roman Catholic
Bishop of San Diego and the Chino Unified School District
commenced a lawsuit in the U.S. District Court for the
Southern District of California against a subsidiary of the
company, QSP, Inc., and the company, alleging violation of
the federal antitrust laws and seeking treble damages in an
unspecified amount and certain injunctive relief. The
complaint alleges that QSP, Inc. is unlawfully monopolizing
the school and youth group magazine fund raising market.
The suit was certified as a class action on July 1, 1994.
The company believes that the suit is without merit and,
accordingly, no provision for loss has been made in the
accompanying consolidated financial statements. The company
intends to defend this action vigorously.
The company and its subsidiaries occupy certain facilities
under lease arrangements and lease certain equipment.
Rentals amounted to $32,986, $32,140 and $30,590 in 1994,
1993 and 1992, respectively, and sublease income amounted to
$6,993, $6,489 and $6,300 in 1994, 1993 and 1992,
respectively.
Future minimum rental commitments, net of sublease income,
for operating leases with non-cancelable terms in excess of
one year are as follows:
Minimum Minimum
Rental Sublease
Payments Income Net
1995 $24,072 $6,146 $17,926
1996 20,032 5,971 14,061
1997 19,309 5,887 13,422
1998 13,802 5,410 8,392
1999 4,858 649 4,209
Later years 33,239 15 33,224
16. Segment Information
The company's operations consist of the following business
segments: Reader's Digest magazine, books and home
entertainment products, special interest magazines and other
businesses. The books and home entertainment products
segment includes books, music and video products. The
special interest magazine segment includes magazines
acquired or launched since 1987.
Operating profit by segment is total revenues less expenses
related to the segment. Operating profit in the United
States includes intercompany royalty income which is charged
annually to the company's international subsidiaries and
which is designed to compensate the United States for a
variety of intangibles, including utilization of tradenames,
trademarks, copyrights and know-how. United States
operating profit includes intercompany royalty income of
$94,171 for 1994, $80,651 for 1993 and $53,065 for 1992.
Operating profit in Europe is reduced by intercompany
royalty expense of $71,306 for 1994, $62,127 for 1993 and
$39,478 for 1992. Operating profit in Other Markets is
reduced by intercompany royalty expense of $22,865 for 1994,
$18,524 for 1993 and $13,587 for 1992. Identifiable assets
by segment are those assets that are used in the operation
of that business. Corporate assets consist primarily of
cash and cash equivalents, short-term investments,
marketable securities, and other long-term investments.
Inter-segment sales are included in the company's other
businesses segment. Inter-area revenues by geographic area
were as follows:
1994 1993 1992
United States $4,625 $5,145 $3,721
Europe 3,460 3,540 4,081
Other Markets 1,112 1,382 980
Total inter-area
revenues $9,197 $10,067 $8,782
1994 1993 1992
Business segments
Revenues
Reader's Digest
magazine $689,089 $720,047 $685,044
Books and home
entertainment
products 1,900,297 1,958,066 1,744,769
Special interest
magazines 90,607 84,140 75,471
Other businesses 129,634 110,405 112,883
Inter-segment (3,215) (4,021) (4,209)
Total revenues $2,806,412 $2,868,637 $2,613,958
Operating profit
Reader's Digest
magazine $78,555 $97,310 $96,839
Books and home
entertainment
products 310,846 307,216 302,951
Special interest
magazines (3,153) (9,242) (19,468)
Other businesses 26,609 20,536 22,198
Effect of promotion
accounting
changes, net 113,864 --- ---
Other operating
items (76,001) --- ---
Corporate expense (56,975) (63,168) (72,306)
Total operating profit $393,745 $352,652 $330,214
Identifiable assets
Reader's Digest
magazine $348,387 $275,602 $281,219
Books and home
entertainment
products 928,860 828,332 854,518
Special interest
magazines 80,069 78,460 85,647
Other businesses 39,212 31,600 27,076
Corporate 652,832 658,414 683,849
Total assets $2,049,360 $1,872,408 $1,932,309
1994 1993 1992
Amortization of
intangible assets
Special interest
magazines $3,155 $5,660 $10,873
All other 1,303 1,304 1,350
Total amortization of
intangible assets $4,458 $6,964 $12,223
Depreciation and
amortization of
fixed assets
Reader's Digest
magazine $11,234 $10,410 $9,492
Books and home
entertainment
products 22,880 23,434 17,464
All other 3,595 4,284 3,988
Total depreciation
and amortization of
fixed assets $37,709 $38,128 $30,944
Capital expenditures
Reader's Digest
magazine $12,072 $12,781 $16,396
Books and home
entertainment
products 26,743 30,100 25,881
All other 3,379 5,076 2,154
Total capital
expenditures $42,194 $47,957 $44,431
Geographic areas
Revenues
United States $1,117,750 $1,157,326 $1,146,746
Europe 1,301,032 1,322,471 1,113,966
Other Markets 396,827 398,907 362,028
Inter-area (9,197) (10,067) (8,782)
Total revenues $2,806,412 $2,868,637 $2,613,958
Operating profit
United States $229,337 $196,103 $197,296
Europe 159,963 169,604 146,490
Other Markets 23,557 50,113 58,734
Effect of promotion
accounting
changes, net 113,864 --- ---
Other operating
items (76,001) --- ---
Corporate expense (56,975) (63,168) (72,306)
Total operating profit $393,745 $352,652 $330,214
Identifiable assets
United States $525,270 $497,404 $421,998
Europe 660,699 532,023 637,068
Other Markets 210,559 184,567 189,394
Corporate 652,832 658,414 683,849
Total assets $2,049,360 $1,872,408 $1,932,309
17. Quarterly Financial Data (Unaudited)
The following represents the company's quarterly financial
results. For the first three quarters of 1994, amounts have
been restated to reflect the adoption of the promotion,
premiums and product development accounting changes
retroactive to July 1, 1993 (see Note 1).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
1994*
Revenues $637,237 $802,143 $709,170 $657,862 $2,806,412
Operating profit (loss)
158,591 170,823 99,455 (35,124) 393,745
Income (loss) before
cumulative effect of 118,334 117,913 69,608 (33,738) 272,117
accounting changes
Cumulative effect of
accounting changes (25,830) --- --- --- (25,830)
Net income (loss) 92,504 117,913 69,608 (33,738) 246,287
Earnings per share before
cumulative effect of
accounting changes $1.01 $1.01 $.61 $(.29) $2.34
Earnings per share $.78 $1.01 $.61 $(.29) $2.11
1993
Revenues $679,963 $806,700 $737,617 $644,357 $2,868,637
Operating profit 88,126 103,032 135,938 25,556 352,652
Income before cumulative
effect of accounting changes 67,609 70,365 94,512 25,764 258,250
Cumulative effect of
accounting changes (50,938) --- --- --- (50,938)
Net income 16,671 70,365 94,512 25,764 207,312
Earnings per share before
cumulative effect of accounting $.56 $.59 $.79 $.22 $2.16
changes
Earnings per share $.14 $.59 $.79 $.22 $1.74
*The net effect of the 1994 adoption of the promotion,
premiums and product development accounting changes on
operating profit and earnings per share was as follows:
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
Operating profit $90,350 $ 47,263 $ (37,504) $ 13,755 $113,864
Earnings per share $.47 $.25 $(.19) $.07 $ .60
</TABLE>
18. Dividend and Market Information (Unaudited)
The company's restated certificate of incorporation provides
that cash dividends on common stock, when declared, must be
declared and paid share and share alike on the Class A
nonvoting common stock (Class A) and on the Class B voting
common stock (Class B). During fiscal 1994, the company
declared and paid cash dividends totaling $1.35 per share on
its Class A and Class B common stock, an increase of 17%
over 1993. The 1994, 1993 and 1992 dividend payments per
share were as follows:
1994 1993 1992
Fourth quarter ended
June 30 $ .35 $ .30 $ .25
Third quarter ended
March 31 .35 .30 .20
Second quarter ended
December 31 .35 .30 .20
First quarter ended
September 30 .30 .25 .15
$1.35 $1.15 $ .80
The company's Class A and Class B common stock are listed on
the New York Stock Exchange under the symbols RDA and RDB,
respectively. As of June 30, 1994, there were approximately
4,100 holders of record of the company's Class A common
stock, and 335 holders of record of the company's Class B
common stock.
The high and low per share market prices of the Class A
common stock by quarter were as follows:
High Low
1994
Fourth quarter ended June 30 $44 1/8 $40 1/8
Third quarter ended March 31 47 3/4 39 7/8
Second quarter ended December 31 46 37 3/8
First quarter ended September 30 43 3/4 36 1/8
1993
Fourth quarter ended June 30 47 39 5/8
Third quarter ended March 31 55 7/8 46 3/8
Second quarter ended December 31 56 3/8 50 1/4
First quarter ended September 30 55 3/8 46
1992
Fourth quarter ended June 30 49 43
Third quarter ended March 31 50 43
Second quarter ended December 31 49 36 1/4
First quarter ended September 30 39 7/8 34 3/8
The high and low per share market prices of the Class B
common stock by quarter following the initial public
offering of the stock on March 5, 1992 were as follows:
High Low
1994
Fourth quarter ended June 30 $ 40 3/4 $ 37
Third quarter ended March 31 44 3/8 37 3/8
Second quarter ended December 31 44 1/2 37 3/4
First quarter ended September 30 39 7/8 35 7/8
1993
Fourth quarter ended June 30 44 3/4 37
Third quarter ended March 31 53 1/2 44
Second quarter ended December 31 54 48 3/8
First quarter ended September 30 53 1/2 45 3/8
1992
Fourth quarter ended June 30 48 1/8 42 1/4
Third quarter ended March 31 47 7/8 46 1/8
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Reader's Digest Association, Inc.
We have audited the accompanying consolidated balance sheets
of The Reader's Digest Association, Inc. and subsidiaries as
of June 30, 1994 and 1993, and the related consolidated
statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period
ended June 30, 1994. These consolidated financial
statements are the responsibility of the company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of The Reader's Digest Association,
Inc. and subsidiaries at June 30, 1994 and 1993, and the
results of their operations and their cash flows for each of
the years in the three-year period ended June 30, 1994, in
conformity with generally accepted accounting principles.
As discussed in the Notes to Consolidated Financial
Statements, the company adopted the provisions of the
Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits," and the American
Institute of Certified Public Accountants' Statement of
Position No. 93-7, "Reporting on Advertising Costs,"
effective July 1, 1993 and the provisions of the Financial
Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective June
30, 1994. As discussed in the Notes to Consolidated
Financial Statements, the company adopted the provisions of
the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
and No. 109, "Accounting for Income Taxes," effective July
1, 1992.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
September 7, 1994
REPORT OF MANAGEMENT
The company has prepared the accompanying financial
statements and other related financial information contained
in this annual report in conformity with generally accepted
accounting principles, applying certain estimates and
judgments as required.
The company maintains a system of internal accounting
controls designed to provide reasonable assurance, at
reasonable cost, that transactions and events are recorded
properly and that assets are safeguarded. The internal
control system is supported by written policies and
procedures and by the careful selection, training and
supervision of qualified personnel, and is monitored by an
internal audit program.
The company's financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants,
as stated in their report which is presented herein.
The Audit Committee of the Board of Directors, comprised
entirely of outside directors, meets periodically with
management, internal auditors and the independent certified
public accountants to review accounting, auditing, financial
reporting and other related matters. The internal auditors
and independent certified public accountants have full and
unrestricted access to the Audit Committee.
JAMES P. SCHADT
James P. Schadt
President and Chief Executive Officer
ANTHONY W. RUGGIERO
Anthony W. Ruggiero
Senior Vice President and
Chief Financial Officer
The Reader's Digest Association, Inc.
and Subsidiaries
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
In thousands, except per share 1994 1993 1992 1991
data
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues $2,806,412 $2,868,637 $2,613,958 $2,345,068
% change -2% 10% 11% 17%
Cost of sales, fulfillment and
distribution expense 1,080,139 1,111,198 1,015,116 915,902
Promotion, selling and
administrative expense 1,332,528* 1,404,787 1,268,628 1,137,164
Operating profit 393,745 352,652 330,214 292,002
% of revenues 14% 12% 13% 12%
% change 12% 7% 13% 22%
Other income, net 69,491 67,267 50,897 48,061
Income before provision for 463,236 419,919 381,111 340,063
income taxes
Provision for income taxes 191,119 161,669 146,728 130,923
Cumulative effect of accounting
changes/ extraordinary items ** (25,830) (50,938) -- --
Net income $246,287 $207,312 $234,383 $ 209,140
Earnings per share before
cumulative effect of accounting
changes / extraordinary items $2.34* $2.16 $1.95 $1.74
Cumulative effect of accounting
changes/ extraordinary items ** (.23) (.42) -- --
Earnings per share $2.11 $1.74 $1.95 $1.74
Dividends per common share $1.35 $1.15 $.80 $.57
Balance Sheet Data:
Cash and cash equivalents, short-
term investments and
marketable securities $766,857 $723,359 $804,032 $649,733
Total assets $2,049,360 $1,872,408 $1,932,309 $1,605,250
Stockholders' equity $790,984 $806,267 $ 934,878 $759,622
Average common shares outstanding 115,716 118,702 119,800 119,413
Book value per share $6.70 $6.65 $7.56 $6.12
* Amount for 1994 includes the effect of promotion
accounting changes, net (pre-tax benefit of $113,864, or
$.60 per share after taxes) and other operating items
(aggregate pre-tax charge of $76,001, or $.51 per share
after taxes).
** Amount for 1994 reflects the cumulative effect of the
adoption of SFAS 112. Amount for 1993 reflects the
cumulative effect of the adoption of SFAS 106 and SFAS
109. Amounts for 1987, 1986, 1985 and 1984 reflect
extraordinary tax credits.
</TABLE>
<TABLE>
1990 1989 1988 1987 1986 1985 1984
<C> <C> <C> <C> <C> <C> <C>
$2,009,704 $1,832,013 $1,712,037 $1,420,120 $1,254,753 $1,216,636 $1,303,747
10% 7% 21% 13% 3% -7% 1%
786,554 697,654 655,140 542,426 504,307 522,930 599,265
983,017 927,644 843,557 727,917 652,709 636,731 660,902
240,133 206,715 213,340 149,777 97,737 56,975 43,580
12% 11% 12% 11% 8% 5% 3%
16% -3% 42% 53% 72% 31% 21%
44,326 28,110 25,094 20,162 27,272 7,865 2,518
284,459 234,825 238,434 169,939 125,009 64,840 46,098
108,439 83,277 96,171 82,901 60,235 34,094 25,264
-- -- -- 7,699 8,355 20,827 134
$ 176,020 $ 151,548 $ 142,263 $ 94,737 $ 73,129 51,573 20,968
$ 1.48 $1.28 $1.19 $.72 $.52 $.24 $.16
-- -- -- .06 .07 .17 --
$ 1.48 $1.28 $1.19 $.78 $.59 $.41 $.16
$ .38 $.28 $.22 $.17 $.10 $.10 $.10
$ 588,392 $505,070 $411,722 $370,200 $258,126 $180,139 $130,846
$1,434,334 $1,173,696 $1,054,243 $881,357 $706,536 $603,298 $562,493
$ 634,083 $449,240 $345,440 $238,365 $171,869 $103,514 $ 69,152
118,343 117,796 118,052 119,229 121,152 121,954 123,291
$ 5.07 $3.57 $2.69 $1.77 $1.18 $.61 $.33
</TABLE>
<TABLE>
FIVE YEAR SUMMARY OF OTHER FINANCIAL DATA
<CAPTION>
In thousands, except per share 1994 1993 1992 1991 1990
data
<S> <C> <C> <C> <C> <C>
Cash flows from operations $315,117 $250,589 $285,622 $201,505 $217,040
Capital expenditures 42,194 47,957 44,431 38,699 61,133
Depreciation 37,709 38,128 30,944 37,580 32,793
Operating profit per employee 58,768 48,308 44,624 39,460 32,450
Effective tax rate 41.3% 38.5% 38.5% 38.5% 38.1%
Return on equity* 34.1% 29.7% 27.7% 30.0% 32.5%
Dividend payout ratio* 57.7% 53.2% 41.0% 32.8% 25.7%
Dividend yield 3.3% 2.7% 1.7% 1.6% 1.5%
Stock price (Class A)
High $47 3/4 $56 3/8 $50 $36 3/4 $26 5/8
Low 36 1/8 39 5/8 34 3/8 21 5/8 21
Close 41 1/2 42 1/8 46 1/4 34 5/8 25 5/8
* For 1994 and 1993, amounts calculated excluding the
cumulative effect of changes in accounting principles.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF
THE READER'S DIGEST ASSOCIATION, INC.
Argentina
Reader's Digest Argentina S.A.
Australia
The Reader's Digest Association Pty. Limited
Reader's Digest (Australia) Pty. Ltd.
Seven Seas Stamps Pty. Ltd.
Austria
Verlag Das Beste GmbH
Belgium
N.V. Reader's Digest S.A.
Reader's Digest World Services, S.A.
Canada
The Reader's Digest Association (Canada) Ltd.
Quality Service Plan, Inc. Canada (Joint Venture)
Reader's Digest Magazines Limited (25% ownership)
Reader's Digest Foundation of Canada
Chile
Reader's Digest Chile, Limitada
Czechoslovakia
Reader's Digest Vyber s.r.o.
Denmark
Forlaget Det Beste A/S
England
The Reader's Digest Association Limited
Berkeley Magazine Ltd.
Reader's Digest Publishing Limited
Reader's Digest Database Marketing Limited
Money Magazine Limited
Ninecolt Limited
Reader's Digest (Family Insurance Services) Limited
The Reader's Digest Association (Ireland) Limited
David & Charles plc
David & Charles Writer College
Great Western Mail Company Limited
Reader's Union Limited
St. John Thomas Booksellers
Reader's Digest (Personal Finance) Limited
Reader's Digest European Systems, Limited
Victoria House Publishing, Ltd.
Finland
Oy Valitut Palat - Reader's Digest Ab
Kustannus Oy Valitut Kirjavaliot
France
Selection du Reader's Digest S.A.
Germany
Verlag Das Beste GmbH
Optimail/Direcktwerbeservice GmbH
Hong Kong
Reader's Digest Association Far East Limited
Asian Qualiproducts Service Limited
Reader's Digest Asia, Ltd. [Singapore operation]
Reader's Digest (East Asia) Limited [Taiwan operation]
Pegasus Publishing Company Limited
R. D. Properties, Ltd.
Reader's Digest (Malaysia) Sdn. Bhd - Shareholders are RDEA &
RDAsia Ltd.
Hungary
Reader's Digest KFT
Italy
Selezione Dal Reader's Digest S.p.A.
Mexico
Caribe Condor S.A. de C.V.
Reader's Digest Mexico, S.A. de C.V.
Netherlands
Uitgeversmaatschappij The Reader's Digest N.V.
Distrimedia Services B.V.
New Zealand
The Reader's Digest Association (New Zealand) Limited
Norway
Det Beste A/S
Philippines
Reader's Digest (Philippines) Inc.
Poland
Reader's Digest Wybor
Portugal
Seleccoes do Reader's Digest (Portugal) S.A.
Russia
Reader's Digest Publishing House, Inc.
South Africa
The Reader's Digest Association South Africa Pty. Limited
Reader's Digest Investments (Pty.) Limited
AA The Motorists Publications (Pty.) Limited
Spain
Reader's Digest Selecciones S.A.
Sweden
Reader's Digest Aktiebolag
Switzerland
Das Beste aus Reader's Digest AG
United States*
Ardee Music Publishing, Inc.
Pleasantville Music Publishing, Inc.
QSP, Inc.
VideOvation, Inc.
QSP Distribution Services, Inc.
Family Reading Program Corp.
Pegasus Sales, Inc.
Reader's Digest Entertainment, Inc.
Reader's Digest Latinoamerica, S.A.
R.D. Manufacturing Corporation
RD Publications, Inc.
Travel Publications, Inc.
Home Service Publications, Inc.
Retirement Living Publishing Company, Inc.
RD Member Services, Inc.
Reader's Digest Sales and Services, Inc.
Reader's Digest Sub Six, Inc.
Reader's Digest Young Families, Inc.
SMDDMS, Inc.
The Reader's Digest Association (Russia) Incorporated
W. A. Publications, Inc.
Joshua Morris Publishing, Inc.
_____________________
* All are Delaware corporations except W.A. Publications, Inc., a
New York corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors of The Reader's Digest
Association, Inc.:
We consent to incorporation by reference in the registration
statement (Registration No. 33-37434) on Form S-8 of The
Reader's Digest Association, Inc. and subsidiaries of our
reports dated September 7, 1994, relating to the
consolidated balance sheets of The Reader's Digest
Association, Inc. and subsidiaries as of June 30, 1994 and
1993, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of
the years in the three-year period ended June 30, 1994 and
related consolidated financial statement schedules, which
reports appear in or are incorporated by reference in the
June 30, 1994 Annual Report on Form 10-K of The Reader's
Digest Association, Inc.
As discussed in the notes to consolidated financial
statements, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits," and the American
Institute of Certified Public Accountants' Statement of
Position No. 93-7, "Reporting on Advertising Costs,"
effective July 1, 1993, and the provisions of Financial
Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective June
30, 1994. As discussed in the notes to consolidated
financial statements, the Company adopted the provisions of
the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions,"
and No. 109, "Accounting for Income Taxes," effective July
1, 1992.
KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
New York, New York
September 26, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the fiscal year ended June 30,
1994 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-END> JUN-30-1994
<CASH> 183,228
<SECURITIES> 211,454
<RECEIVABLES> 602,321
<ALLOWANCES> 209,472
<INVENTORY> 167,282
<CURRENT-ASSETS> 1,197,248
<PP&E> 549,106
<DEPRECIATION> 307,363
<TOTAL-ASSETS> 2,049,360
<CURRENT-LIABILITIES> 1,039,922
<BONDS> 8,698
<COMMON> 807
0
28,846
<OTHER-SE> 761,331
<TOTAL-LIABILITY-AND-EQUITY> 2,049,360
<SALES> 2,806,412
<TOTAL-REVENUES> 2,806,412
<CGS> 1,080,139
<TOTAL-COSTS> 1,080,139
<OTHER-EXPENSES> 76,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,253
<INCOME-PRETAX> 463,236
<INCOME-TAX> 191,119
<INCOME-CONTINUING> 272,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (25,830)
<NET-INCOME> 246,287
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
</TABLE>
