FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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.
incorporation or organization) Employer
Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1995, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 86,098,181 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
Page 1 of 13 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
September 30, 1995
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month periods ended September 30, 1995 and 1994 3
Consolidated Condensed Balance Sheets
as of September 30, 1995 and June 30, 1995 4
Consolidated Condensed Statements of Cash Flows
for the three-month periods ended September 30, 1995 and 1994 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
Part II - Other Information 10
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three-Month periods ended September 30, 1995 and 1994
(In millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three-Month period ended
September 30,
1995 1994
<S> <C> <C>
Revenues $ 730.5 $ 710.8
Product, distribution and editorial expense 250.9 229.9
Promotion, marketing and administrative expense 397.8 379.3
Operating profit 81.8 101.6
Other income, net 3.1 6.2
Income before provision for income taxes 84.9 107.8
Provision for income taxes 31.0 40.5
Net income $ 53.9 $ 67.3
Earnings per share $ 0.50 $ 0.59
Average common shares outstanding 108.0 113.5
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 1995 and June 30, 1995
(In millions)
(unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 184.8 $ 214.6
Short-term investments 83.8 93.0
Receivables, net 546.4 396.4
Inventories 221.6 188.6
Prepaid expenses and other current assets 233.1 218.5
Total current assets 1,269.7 1,111.1
Marketable securities 130.0 224.5
Property, plant and equipment, net 256.2 256.6
Other noncurrent assets 374.4 366.5
Total assets $2,030.3 $ 1,958.7
Liabilities and stockholders' equity
Accounts payable $ 227.5 $ 224.8
Accrued expenses 340.0 340.2
Income taxes payable 106.8 97.5
Unearned revenue 456.6 391.7
Other current liabilities 21.6 17.9
Total current liabilities 1,152.5 1,072.1
Other noncurrent liabilities 242.0 245.8
Total liabilities 1,394.5 1,317.9
Capital stock 27.8 29.5
Paid-in capital 129.6 118.3
Retained earnings 1,103.8 1,093.5
Net unrealized gains on certain investments 5.1 5.1
Foreign currency translation adjustment (1.6) (0.3)
Treasury stock, at cost (628.9) (605.3)
Total stockholders' equity 635.8 640.8
Total liabilities and stockholders' equity $2,030.3 $ 1,958.7
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three-Month periods ended September 30, 1995 and 1994
(In millions)
(unaudited)
<TABLE>
<CAPTION>
Three-Month period ended
September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net income $ 53.9 $ 67.3
Depreciation and amortization 11.7 10.4
Other, net (97.7) (68.2)
Net change in cash due to operating activities (32.1) 9.5
Cash flows from investing activities
Proceeds from maturities and sales of
short-term investments and marketable securities 181.2 94.7
Purchases of short-term investments and marketable (76.6) (19.2)
securities
Other, net (25.4) (3.7)
Net change in cash due to investing activities 79.2 71.8
Cash flows from financing activities
Dividends paid (43.6) (40.1)
Common stock repurchased (26.0) (31.3)
Other, net (6.7) 2.6
Net change in cash due to financing activities (76.3) (68.8)
Effect of exchange rate changes on cash (0.6) 4.2
Net change in cash and cash equivalents (29.8) 16.7
Cash and cash equivalents at beginning of period 214.6 183.2
Cash and cash equivalents at end of period $ 184.8 $ 199.9
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended September 30, 1995, and 1994 are the first
fiscal quarters of fiscal year 1996 and fiscal year 1995,
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) Change in Presentation
In the current year the company reclassified certain costs and
expenses in the Consolidated Condensed Statements of Income to more
closely reflect its business and internal reporting practices. There
was no impact on operating profit. Additionally, certain assets and
liabilities in the company's Consolidated Condensed Balance Sheets
have been reclassified to conform with the current year's
presentation.
(3) Earnings Per Share
Earnings per share is computed by dividing net income, less
preferred stock dividend requirements, of $0.3 in each of the three-
month periods ended September 30, 1995 and 1994 by the weighted
average number of common shares outstanding during the period.
(4) Inventories
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
<S> <C> <C>
Raw materials $ 34.9 $ 32.4
Work-in process 23.5 24.7
Finished goods 163.2 131.5
$ 221.6 $ 188.6
</TABLE>
(5) Segment Information
<TABLE>
<CAPTION>
Three-Month period ended
September 30,
1995 1994
<S> <C> <C>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 177.4 $ 171.9
Books and Home Entertainment Products 515.5 502.1
Special Interest Magazines 20.0 18.7
Other Businesses 17.6 18.1
Total revenues $ 730.5 $ 710.8
GEOGRAPHIC AREAS
United States $ 289.7 $ 268.7
Europe 337.7 343.5
Other Markets 103.1 98.6
Total revenues $ 730.5 $ 710.8
</TABLE>
The Reader's Digest Association, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(In millions, except per share data)
Results of Operations
Three-Month Period Ended September 30, 1995 Compared With Three-
Month Period Ended September 30, 1994
Financial Statement Presentation
In the current year, the company reclassified certain costs and
expenses in the Consolidated Condensed Statements of Income to more
closely reflect its business and internal reporting practices.
There was no impact on operating profit. Additionally, certain
assets and liabilities in the company's Consolidated Condensed
Balance Sheets have been reclassified to conform with the current
year's presentation.
Revenues/Operating Profit
Worldwide revenues for the three-month period ended September 30,
1995 increased 3%, to $730.5 compared with the three-month period
ended September 30, 1994. Higher revenues in the United States and
Other Markets were offset by lower revenues in Europe which were
impacted by the favorable effect of changes in foreign currency
exchange rates. The segments that were the primary contributors to
this 3% increase were Books and Home Entertainment Products and
Reader's Digest Magazine representing approximately 2% and 1%,
respectively.
Worldwide operating profit decreased 19% to $81.8 in the first
quarter of 1996, compared with $101.6 in the first quarter of 1995.
This $19.8 decrease was primarily because of approximately $14.0 in
higher global paper and postage costs and lower response rates in
Europe which were partially offset by the favorable effect of
changes in foreign currency exchange rates.
Other Income, Net
Other income, net for the first quarter of 1996 decreased to $3.1
compared with $6.2 a year ago. This decrease was primarily because
of lower interest income ($6.2 in 1996 compared with $11.0 in 1995),
partially offset by lower expense related to losses on foreign
exchange transactions and hedging activity ($2.1 in 1996 compared
with $4.2 in 1995).
Income Taxes
The company reduced its overall effective tax rate to 36.5% in the
first quarter of 1996 from 37.5% in the first quarter of 1995. This
decrease was attributable to a favorable settlement relating to
prior years. The company anticipates that the effective tax rate
will remain at 36.5% for the remainder of the year.
Earnings Per Share
Earnings per share declined 15% to $0.50 in the first quarter 1996,
compared with $0.59 for the same period in 1995. The decline in
earnings per share was lower than the decline in net income due to
the reduction in outstanding shares under the company's ongoing
share repurchase program.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine increased 3%, to $177.4, for
the first quarter of 1996 from $171.9 in the first quarter of 1995.
This increase was due equally to increases in circulation and
advertising revenue. Subscription pricing and circulation levels
remained consistent with the prior year. Circulation revenue
benefited from the favorable effect of changes in foreign currency
exchange rates. The increase in advertising revenues was
attributable to increased advertising pages primarily in the United
States. Operating profit for Reader's Digest Magazine decreased
significantly during the first quarter of 1996 compared with the
same period a year ago. The effect of higher revenues was more than
offset by higher paper and postage costs and increased promotional
spending to retain high-quality subscribers who purchase other
products.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products increased 3%, to
$515.5, for the first quarter of 1996 from $502.1 for the first
quarter of 1995. Excluding the effect of changes in foreign currency
exchange rates, revenues decreased 1% compared with the prior year.
This decrease was due to a moderate decline in unit sales, partially
offset by slightly higher prices and sales of a higher priced
product mix. Increased unit sales in the United States were more
than offset by lower sales in Europe. Notably, revenues for series
books and video products reported healthy gains while general books
reported substantially lower revenues in the first quarter of 1996
compared with 1995. Operating profit for Books and Home
Entertainment Products decreased in 1996 compared with 1995
principally due to lower response rates and performance in Europe.
Special Interest Magazines
Revenues for Special Interest Magazines increased 7%, to $20.0 for
the first quarter of 1996 from $18.7 for the first quarter of 1995.
This increase was primarily attributable to an increase in
circulation revenues. The increase in circulation revenues is due
about equally to higher pricing and higher paid subscriptions. The
operating loss increased in 1996 compared with 1995 due to higher
paper and postage costs which more than offset the increase in
revenues.
Geographic Areas
United States
Revenues in the United States increased from $268.7 to $289.7, or by
8%, in 1996 compared with 1995 of which approximately 7% and 1% was
attributable to Books and Home Entertainment Products and Reader's
Digest Magazine, respectively. Within Books and Home Entertainment
Products, all product lines reported revenue increases. The revenue
increase in the Reader's Digest Magazine was due to higher
advertising pages. Video products performed particularly well this
quarter. Operating profit decreased substantially in 1996 compared
with 1995, due to higher paper and postage costs.
Europe
Revenues in Europe decreased from $343.5 to $337.7, or by 2%, in
1996 compared with 1995. Excluding the favorable effects of foreign
currency exchange rates, revenues declined 10%. Operating profit
decreased considerably in 1996 compared with 1995. These decreases
were due primarily to lower sales of Books and Home Entertainment
Products caused by a declining customer base and weakened customer
response rates in certain markets, including the company's three
largest markets: Germany, France and the United Kingdom. The company
believes that the lower response rates in Europe were due to various
reasons, including the number and sequencing of product offerings
and the appeal of promotion formats. Higher paper costs also
contributed to the operating profit decline.
Other Markets
Revenues in Other Markets increased from $98.6 to $103.1, or by 5%,
in 1996 compared with 1995. Excluding the unfavorable effects of
foreign exchange, revenues increased 12% due to sales of Books and
Home Entertainment Products, most notably music products. This
segment reported gains across all product lines, primarily due to a
higher priced product mix. Operating profit increased in 1996
compared with 1995. The increase in operating profit was primarily
attributable to the increase in revenues.
Corporate Expense
Corporate expense decreased to $11.7 compared with $16.7 in the
first quarter of 1995 due to the timing of certain expenses and a
reduction in outside consulting fees.
Forward-Looking Information
The company previously reported that it will incur up to $50.0 in
higher paper and postage costs in fiscal 1996. The company
continues to develop new ways to offset part of these higher costs
through a combination of prudent pricing and productivity
improvements. The company has elected not to fully and immediately
pass these increases on to its customers through higher prices.
Higher paper and postage costs and increased investment spending are
expected to affect results through the remainder of fiscal 1996.
The company has implemented a program to restore customer and
revenue growth in Europe by modifying its promotional mailings and
moderating the rate of price increases. Initial benefits from these
actions are expected to be realized by the end of fiscal 1996 and in
fiscal 1997. Issues relating to the effectiveness of mailings to
outside lists are also being addressed by the company. The company
expects that results through this fiscal year and through fiscal
1997 will be impacted by the softness in Europe.
The company seeks to maximize total long-term return to shareholders
and believes that through a combination of investment in existing
businesses and new strategic ventures and alliances it will be able
to achieve double digit earnings per share growth over the long
term.
Liquidity and Capital Resources
September 30, 1995 Compared With June 30, 1995
Cash and cash equivalents, short-term investments and marketable
securities decreased $133.5 to $398.6 at September 30, 1995. The
decrease results from dividend payments of $43.6, the repurchase of
Class A nonvoting common stock, at a cost of $26.0, and cash used by
operations of $32.1. In addition, the Company also expended $25.9
for investments in strategic alliances and capital expenditures.
Unrealized gains on short-term investments and marketable securities
remained at $8.1 at June 30, 1995, and September 30, 1995.
In the first quarter of fiscal 1996, the company paid a $0.40 per
share dividend on its common stock, representing a 14% increase,
compared with $0.35 per share a year ago. In October 1995, the
Board of Directors raised the quarterly dividend to $0.45 per share.
At the current rate, the company will pay a total dividend of $1.75
per share in fiscal 1996 compared with $1.55 in fiscal 1995.
The company repurchased 0.6 shares of Class A nonvoting common stock
in the first quarter of 1996. The Company expects to complete its
fourth share repurchase program by the end of fiscal 1996. The
company has repurchased approximately 14.2 shares, through September
30, 1995, since its first program was announced in February 1992.
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, to
identify and develop new products and markets and to enter into
strategic alliances and make small acquisitions.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1995 Annual Meeting of Stockholders of the Company, held on
November 10, 1995, the following matters were voted on by the
stockholders:
Proposal 1: Election of Directors to hold office until the next
Annual Meeting or until their successors are duly elected and
qualified. Each nominee was elected by the votes cast as follows:
For Withheld
James P. Schadt 21,114,226 45,760
Kenneth A. Gordon 21,121,831 38,155
Melvin R. Laird 21,096,018 63,968
William G. Bowen 21,119,226 40,762
Lynne V. Cheney 21,107,843 52,143
M. Christine DeVita 21,108,424 51,562
James E. Preston 21,115,592 44,394
Robert G. Schwartz 21,117,025 42,961
Walter V. Shipley 21,110,556 49,430
C.J. Silas 21,124,028 35,958
Proposal 2: Approval of the business criteria, maximum amount and
eligible employees for performance-based restricted stock under The
Reader's Digest Association, Inc. 1994 Key Employee Long Term
Incentive Plan. Proposal 2 was approved by the votes cast as follows:
Broker
For Against Abstain Non-Votes
20,745,735 273,492 140,759 0
Item 5. OTHER INFORMATION
At the meeting of the Board of Directors of the Company held on
November 10, 1995, the following individuals were elected to the new
or additional offices indicated:
Name Title
Robert J. Aubin Vice President; President, Reader's Digest U.S.A.
Gregory G. Coleman Vice President; General Manager, U.S. Magazines and
Publisher, U.S. Reader's Digest Magazine
Thomas M. Kenney Vice President; President Global Magazine and
Corporate Development
Martin J. Pearson Vice President; President, Reader's Digest Europe
Jack A. Smith Senior Vice President, Reader's Digest Television
and New Media
William H. Willis Vice President; President, Reader's Digest Pacific
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule. [1 page]
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Reader's Digest Association,Inc.
(Registrant)
Date: November 13, 1995 By: Stephen R. Wilson
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
George S. Scimone
George S. Scimone
Vice President and Controller
Chief Accounting Officer
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the quarter ended September 30,
1995.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 184,800
<SECURITIES> 83,800
<RECEIVABLES> 767,200
<ALLOWANCES> 220,800
<INVENTORY> 221,600
<CURRENT-ASSETS> 1,269,700
<PP&E> 600,100
<DEPRECIATION> 343,900
<TOTAL-ASSETS> 2,030,300
<CURRENT-LIABILITIES> 1,152,500
<BONDS> 0
<COMMON> (1,000)
0
28,800
<OTHER-SE> 608,000
<TOTAL-LIABILITY-AND-EQUITY> 2,030,300
<SALES> 730,500
<TOTAL-REVENUES> 730,500
<CGS> 250,900
<TOTAL-COSTS> 250,900
<OTHER-EXPENSES> 397,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 400
<INCOME-PRETAX> 84,900
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 53,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,900
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
