14/02/94
08:25 AM
-2-
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of January 31, 1994, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 94,376,811
shares
Class B Voting Common Stock, $0.01 par value: 21,240,347 shares
Page 1 of 13 pages.
END COVER (PAGE 1)
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
December 31, 1993
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month and six-month periods
ended December 31, 1993 and 1992 3
Consolidated Condensed Balance Sheets
as of December 31, 1993 and June 30, 1993 4
Consolidated Condensed Statements of Cash Flows
for the six-month periods ended
December 31, 1993 and 1992 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 12
END PAGE 2
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three-month and Six-month periods ended December 31, 1993 and
1992
(in thousands, except per share data)
(unaudited)
Three-month period ended Six-month period ended
December 31, December 31,
1993 1992 1993 1992
Revenues $ 802,143 $ 806,700 $ 1,439,380 $ 1,486,663
Cost of sales,
fulfillment and
distribution expense 297,876 302,271 541,875 561,247
Promotion, selling
and administrative
expense 380,707 401,397 705,704 734,258
678,583 703,668 1,247,579 1,295,505
Operating profit 123,560 103,032 191,801 191,158
Other income, net 20,906 11,382 54,728 33,190
Income before
provision
for income taxes and
cumulative effect of
changes in accounting
principles 144,466 114,414 246,529 224,348
Provision for income
taxes 55,620 44,049 94,914 86,374
Income before cumulative
effect of changes in
accounting principles 88,846 70,365 151,615 137,974
Cumulative effect of
changes in
accounting principles
net of tax benefit --- --- (25,830) (50,938)
Net income $ 88,846 $ 70,365 $ 125,785 $ 87,036
Earnings per share
before cumulative
effect of changes in
accounting principles $ .76 $ .59 $ 1.30 $ 1.15
Cumulative effect of
changes in accounting
principles --- --- ( .23) ( .42)
Earnings per share $ .76 $ .59 $ 1.07 $ .73
Average common shares
outstanding 116,310 119,299 116,485 119,470
See accompanying notes to consolidated condensed financial
statements.
END PAGE 3
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of December 31, 1993 and June 30, 1993
(in thousands)
(unaudited)
December 31, June 30,
1993 1993
Assets
Cash and cash equivalents $ 180,563 $ 183,526
Short-term investments, at cost which
approximates market 248,987 206,585
Receivables, less allowances for
returns and bad debts 569,259 380,421
Inventories 167,904 169,458
Prepaid expenses and other current assets 154,761 134,733
Total current assets 1,321,474 1,074,723
Marketable securities, at cost 273,430 333,248
Property, plant and equipment, net 226,890 235,160
Other noncurrent assets 231,133 229,277
Total assets $ 2,052,927 $1,872,408
Liabilities and stockholders' equity
Notes payable $ --- $ 5,253
Accounts payable 178,830 172,508
Accrued expenses 275,815 240,256
Federal and foreign income taxes 105,422 75,845
Unearned revenue 456,395 371,100
Other current liabilities 15,397 16,364
Total current liabilities 1,031,859 881,326
Long-term notes payable 7,947 8,083
Other noncurrent liabilities 206,843 176,732
Total liabilities 1,246,649 1,066,141
Capital stock 29,329 29,162
Paid-in capital 90,112 77,320
Retained earnings 965,806 916,420
Foreign currency translation adjustment ( 40,966) ( 35,906)
Less: Treasury stock, at cost (238,003) ( 180,729)
Total stockholders' equity 806,278 806,267
Total liabilities and stockholders'
equity $ 2,052,927 $ 1,872,408
See accompanying notes to consolidated condensed financial
statements.
END PAGE 4
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six-month periods ended December 31, 1993 and 1992
(in thousands)
(unaudited)
Six-month period ended
December 31,
1993 1992
Cash flows from operating activities:
Net income $ 125,785 $ 87,036
Depreciation and amortization 21,033 20,880
Cumulative effect of changes in
accounting principles 25,830 50,938
Other, net (74,540) (120,188)
Net cash provided by operating activities 98,108 38,666
Cash flows from investing activities:
Proceeds from maturities and sales of
marketable securities and
short-term investments 147,127 48,357
Purchases of marketable securities
and short-term investments (111,383) (2,625)
Capital expenditures (14,747) (23,302)
Proceeds from sales of other long-term
investments, net 16,570 6,638
Other, net 2,302 3,821
Net cash provided by investing activities 39,869 32,889
Cash flows from financing activities:
Dividends paid (76,399) (66,408)
Common stock repurchased (60,298) (61,077)
Other, net (1,983) 7,748
Net cash used in financing activities (138,680) (119,737)
Effect of exchange rate changes on cash (2,260) (25,167)
Net decrease in cash and cash equivalents (2,963) (73,349)
Cash and cash equivalents at beginning
of period 183,526 292,703
Cash and cash equivalents at end of period $ 180,563 $ 219,354
See accompanying notes to consolidated condensed financial
statements.
END PAGE 5
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended December 31, 1993 and 1992 are the second
fiscal quarters of fiscal year 1994 and fiscal year 1993,
respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting
principles applying certain judgments and estimates which include
all adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information.
Operating results for any interim period are not necessarily
indicative of the results for an entire year due to the
seasonality of the company's business.
(2) Changes in Accounting Principles
The company adopted Statement of Financial Accounting Standards
No. (SFAS) 112, "Employers' Accounting For Postemployment
Benefits," on July 1, 1993. SFAS 112 requires the accrual of
benefits such as disability, severance and health insurance
provided to former or inactive employees prior to retirement over
an employee's period of service. The cumulative effect of the
change was a pre-tax charge of $42,000 offset by tax benefits of
$16,170 for a net after-tax charge of $25,830, or $.23 per share.
The incremental expense in the three-month and six-month periods
associated with the adoption of SFAS 112 was not significant.
Results for the three-month and six-month periods ended
December 31, 1992 have not been restated for SFAS 112.
In the fourth quarter of fiscal 1993, the company adopted SFAS
106, "Employers' Accounting For Postretirement Benefits," and
SFAS 109, "Accounting For Income Taxes," retroactively to the
first quarter of fiscal 1993. SFAS 106 requires the accrual of
the expected costs of postretirement medical and other nonpension
benefits during an employee's period of service. SFAS 109
changes the method of accounting for income taxes to an asset and
liability approach from the deferred method required under
Accounting Principles Board Opinion No. 11. Results for the
first half of fiscal 1993 have been restated to reflect the
cumulative effect of these changes, a pre-tax charge of $84,313
offset by tax benefits of $33,375 for a net after-tax charge of
$50,938, or $.42 per share, as well as incremental expense
associated with SFAS 106. Fiscal 1994 first-half results include
a comparable current period expense associated with SFAS 106.
(3) Earnings Per Share
Earnings per share is based on the average number of common
shares outstanding for the period and net income after deducting
preferred stock dividend requirements of $327 in each of the
three-month periods ended December 31, 1993 and 1992 and $654 in
each of the six-month periods ended December 31, 1993 and 1992.
END PAGE 6
(4) Inventories
December 31, June 30,
1993 1993
Raw materials $ 18,095 $ 20,790
Work-in process 33,632 42,553
Finished goods 116,177 106,115
$ 167,904 $ 169,458
(5) Segment Information
The company's operations consist of the following segments:
Reader's Digest magazine, books and home entertainment products,
special interest magazines and other operations. The books and
home entertainment products segment includes books and music and
video products. The special interest magazines segment includes
magazines acquired or launched since 1987. A summary of revenues
by business segments and major geographic areas for the three-
month and six-month periods ended December 31, 1993 and 1992, is
as follows:
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
BUSINESS SEGMENTS 1993 1992 1993 1992
Revenues
<S> <C> <C> <C> <C>
Reader's Digest magazine $ 178,341 $ 189,832 $ 343,215 $ 364,738
Books and home
entertainment products 516,604 526,053 956,486 1,001,308
Special interest magazines 23,141 21,586 40,987 37,887
Other operations 84,057 69,229 98,692 82,730
Total revenues $ 802,143 $ 806,700 $1,439,380 $1,486,663
</TABLE>
<TABLE>
GEOGRAPHIC AREAS
Revenues
<S> <C> <C> <C> <C>
United States $ 342,669 $ 349,109 $ 600,071 $ 603,685
International 459,474 457,591 839,309 882,978
Total revenues $ 802,143 $ 806,700 $1,439,380 $1,486,663
</TABLE>
END PAGE 7
The Reader's Digest Association, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Changes in Accounting Principles
On July 1, 1993 the company adopted Statement of Financial
Accounting Standards No. (SFAS) 112, "Employers' Accounting For
Postemployment Benefits." As a result, the company recognized a
one-time, after-tax non-cash charge for the cumulative effect of
this change of $25.8 million, or $.23 per share. The incremental
expense associated with this change was not significant. Results
for the second quarter and six-month period ended December 31,
1992 have not been restated for SFAS 112.
Results for the second quarter and first half of fiscal 1993 have
been restated to reflect the adoption in the fourth quarter of
fiscal 1993 of SFAS 106, "Employers' Accounting For
Postretirement Benefits," and SFAS 109, "Accounting For Income
Taxes." Results for the six-month period ended December 31, 1992
reflect the one-time, non-cash, after-tax cumulative effect
charge of $50.9 million, or $.42 per share, and additional
expense related to SFAS 106 for the second quarter and fiscal
year-to-date period. Fiscal 1994 second quarter and six-month
period results include a comparable current period expense
associated with SFAS 106.
Three-Month Period Ended December 31, 1993 Compared with Three-
Month Period Ended December 31, 1992
Revenues/Operating Profit
The company's worldwide revenues for the three-month period ended
December 31, 1993 decreased $4.6 million, or 1%, to $802.1
million compared with revenues for the same period a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 6%. For the second quarter, U.S.
revenues decreased 2% and international revenues were even with
the prior year. Excluding the effect of changes in foreign
currency exchange rates, international revenues increased about
12%. Operating profit for the company increased 20% to $123.6
million in the second quarter of fiscal 1994 compared with $103.0
million in the second quarter of fiscal 1993. Excluding the
effect of changes in foreign currency exchange rates, operating
profit increased about 30%. This 30% increase was primarily
because of planned lower promotional spending in the company's
U.S. books and home entertainment products business and increased
international revenues (excluding the effect of changes in
foreign currency exchange rates).
Other Income, Net
Other income, net for the quarter increased $9.5 million to $20.9
million compared with $11.4 million a year ago. This increase
was primarily a result of higher gains on the sales of certain
investments ($12.3 million in fiscal 1994 compared with $1.6
million in fiscal 1993). Other income, net also includes the
effects of foreign exchange transactions and hedging activity
($.1 million income in fiscal 1994 compared with $2.4 million
expense in fiscal 1993) and interest income ($10.6 million in
fiscal 1994 compared with $13.1 million in fiscal 1993).
Earnings Per Share
Earnings per share for the quarter increased 29% to $.76 from
$.59 in the comparable period last year. This increase exceeded
operating profit growth primarily because of higher capital gains
from the sales of certain investments. Excluding the combined
effect of foreign exchange on operating profit and on other
income, net, earnings per share increased about 35%. Excluding
the combined total effect of foreign exchange and gains on the
sales of certain investments, earnings per share increased about
25%.
END PAGE 8
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
operations.
Reader's Digest magazine revenues decreased $11.5 million, or 6%,
to $178.3 million compared with $189.8 million a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues decreased about 1%. The decrease was
attributable to lower worldwide advertising revenues caused by a
decrease in advertising pages in a difficult global advertising
environment. This was partially offset by increased subscription
pricing with circulation levels remaining approximately the same.
Operating profit decreased primarily because of the decrease in
revenues.
Books and home entertainment products revenues decreased $9.4
million, or 2%, to $516.6 million compared with $526.0 million
for the same period a year ago. Excluding the effect of changes
in foreign currency exchange rates, revenues increased about 6%.
About two-thirds of this increase was attributable to higher
prices and sales of a higher priced product mix. The remaining
increase was attributable to higher unit sales. 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. Operating profit in this segment
increased primarily as a result of decreased promotional spending
related to the lower activity in the U.S.
Special interest magazines revenues increased $1.5 million, or
7%, to $23.1 million from $21.6 million a year ago. Excluding
the effect of changes in foreign currency exchange rates,
revenues increased about 8%. The increase in revenues was caused
almost entirely by higher advertising revenues due to increased
advertising rates. Circulation levels were approximately the
same as the prior year. Special interest magazines operating
loss increased compared with the prior year primarily because of
increased promotional spending due to the timing of promotions.
Workforce Reduction
In November 1993, the company announced a reduction in its U.S.
workforce of about 200 people. This reduction was designed to
bring the cost structure of U.S. operations in line with
revenues, and staffing levels in line with business activities.
The costs of the workforce reduction have been charged against
the SFAS 112 accrual.
Six-Month Period Ended December 31, 1993 Compared with Six-Month
Period Ended
December 31, 1992
Revenues/Operating Profit
The company's worldwide revenues for the six-month period ended
December 31, 1993 decreased $47.3 million, or 3%, to $1.44
billion compared with revenues for the same period a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 6%. United States revenues
decreased 1% and international revenues were 5% less than the
prior year. Excluding the effect of changes in foreign currency
exchange rates, international revenues increased about 10%.
Operating profit of $191.8 million was up slightly compared with
the prior year. Excluding the effect of changes in foreign
currency exchange rates, operating profit increased about 15%.
This 15% increase was primarily because of increased
international revenues (excluding the effect of changes in
foreign currency exchange rates) and lower promotional spending
in the U.S. books and home entertainment products business. The
company does not expect the profit growth rate achieved in the
first half to continue in the second half of fiscal 1994.
Other Income, Net
Other income, net for the six-month period increased $21.5
million to $54.7 million compared with $33.2 million a year ago.
This increase was primarily the result of increased gains on the
sales of certain investments ($36.9 million in fiscal 1994
compared with $13.0 million in fiscal 1993). Given a recent
decline in the market price of an investment held by the company,
the company may decide not to sell further shares of this
investment in fiscal 1994 and, therefore, may not realize further
capital gains from this investment in fiscal 1994. Other income,
net also includes the effects of foreign exchange transactions
and hedging activity ($.4 million expense in fiscal 1994 compared
with $3.4 million expense in fiscal 1993) and interest income
($21.0 million in fiscal 1994 compared with $28.0 million in
fiscal 1993).
END PAGE 9
Earnings Per Share
Earnings per share before the cumulative effect of changes in
accounting principles increased 13% to $1.30 from $1.15 in the
comparable period last year. This increase exceeded operating
profit growth primarily because of higher capital gains from the
sales of certain investments. Excluding the combined effect of
foreign exchange on operating profit and on other income, net,
earnings per share before the cumulative effect of changes in
accounting principles increased about 24%. Excluding the
combined total effect of foreign exchange and gains on the sales
of certain investments, earnings per share before the cumulative
effect of changes in accounting principles increased about 15%.
The company does not expect the earnings growth rate achieved in
the first half to continue in the second half of fiscal 1994.
For the six-month period, comparative earnings were reduced by
$.13 per share from the adverse impact of foreign exchange. The
company has hedged a substantial portion of its exchange exposure
from its international businesses for the remainder of fiscal
1994 in order to limit the negative impact on full-year earnings
to about $.20 per share. Contingent upon the market price of a
certain investment, the company may not realize further capital
gains from this investment in fiscal 1994. In the second half of
fiscal 1993, the company realized capital gains from the sales of
certain investments of about $16.4 million or $.08 per share.
Business Segments
Reader's Digest magazine revenues decreased $21.5 million, or 6%,
to $343.2 million compared with $364.7 million a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 1%. The increase was primarily
attributable to increased subscription pricing with circulation
levels remaining approximately the same. This increase was
almost entirely offset by lower worldwide advertising revenues
caused by a decrease in advertising pages in a difficult global
advertising environment. Operating profit decreased primarily
because of the decrease in revenues and an increase in
promotional spending.
Books and home entertainment products revenues decreased 4%, or
$44.8 million, to $956.5 million compared with $1.0 billion for
the same period a year ago. Excluding the effect of changes in
foreign currency exchange rates, revenues increased about 6%.
This increase was primarily attributable to higher prices and
sales of a higher priced product mix and, to a lesser extent,
increased unit sales. 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.
Operating profit in this segment increased primarily as a result
of decreased promotional spending related to the lower activity
in the U.S.
Special interest magazines revenues increased $3.1 million, or
8%, to $41.0 million from $37.9 million a year ago. Excluding
the effect of changes in foreign currency exchange rates,
revenues increased about 9%. The increase in revenues was caused
almost evenly by higher subscription pricing with circulation
levels remaining approximately the same as the prior year and
increased advertising revenues. The increased advertising
revenue was primarily because of increased advertising rates and,
to a lesser extent, increased pages. Special interest magazines
operating loss was reduced primarily because of increased
revenues and lower amortization of intangible assets.
Liquidity and Capital Resources
December 31, 1993 Compared with June 30, 1993
Cash and cash equivalents, short-term investments and marketable
securities decreased $20 million to $703 million at December 31,
1993, compared with $723 million at June 30, 1993. The decrease
was primarily the result of payments for dividends ($76 million)
and the repurchase of 1,444,500 shares of Class A nonvoting
common stock ($60 million) which exceeded cash provided from
operations of
$98 million.
The company paid a $.35 per share dividend on its common stock in
the second quarter of fiscal 1994 compared with $.30 per share a
year ago. This represents a 17% increase over the prior year's
quarterly dividend payment. At the current rate, the company
will pay a total dividend of $1.35 in fiscal 1994 compared with
$1.15 in fiscal 1993. The company has continued its share
repurchase program under which more than five million shares have
been repurchased since its inception in February 1992.
END PAGE 10
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.
New Accounting Standards
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. (SFAS) 115,
"Accounting For Certain Investments in Debt and Equity
Securities." This standard expands the use of fair value
accounting and addresses reporting requirements for certain
investments in debt and equity securities. SFAS 115 must be
applied by the company no later than the first quarter of fiscal
1995. The company is currently assessing the effect of this
standard.
In December 1993, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 93-7, "Reporting
on Advertising Costs." This statement sets forth the guidelines
for the recognition and reporting of advertising costs. Under
these guidelines, the costs of direct-response advertising should
be capitalized and amortized over the period during which future
benefit is expected to be received. Presently, the company
generally expenses these costs as they are incurred. SOP 93-7
must be applied by the company no later than the first quarter of
fiscal 1995. The company is currently assessing the impact of
this statement.
END PAGE 11
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
In January 1994, the Board of Directors of the company
elected the following officers of the company to the offices set
forth opposite their respective names:
Peter J.C. Davenport Senior Vice President, Global Direct Marketing
Kenneth A.H. Gordon Senior Vice President and President,
Reader's Digest U.S.A.
Joseph M. Grecky Senior Vice President, Human Resources
Anthony W. Ruggiero Senior Vice President and Chief Financial Officer
In addition, William H. Willis was elected Vice President and
President, Special Markets Group.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter for
which this report is filed.
END PAGE 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
(Registrant)
Date: February 14, 1994 By: Anthony W. Ruggiero
Anthony W. Ruggiero
Senior Vice President and
Chief Financial Officer
Sean F. Orr
Sean F. Orr
Vice President and Controller
Chief Accounting Officer
END PAGE 13
