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 March 31, 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. 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 April 30, 1995, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 89,285,108 shares
Class B Voting Common Stock, $0.01 par value:21,515,159 shares
Page 1 of 21 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
March 31, 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 and nine-month periods
ended March 31, 1995 and 1994 3
Consolidated Condensed Balance Sheets
as of March 31, 1995 and June 30, 1994 4
Consolidated Condensed Statements of Cash Flows
for the nine-month periods ended
March 31, 1995 and 1994 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 14
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and nine-month periods ended March 31, 1995 and 1994
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three-month period ended Nine-month period ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $ 793.0 $ 709.2 $ 2,359.4 $ 2,148.6
Cost of sales,
fulfillment and 296.5 260.3 875.8 802.2
distribution expense
Promotion, selling and
administrative expense 397.8 311.9 1,122.4 1,017.6
Effect of promotion
accounting changes, net -- 37.5 -- ( 100.1)
Total operating expenses 694.3 609.7 1,998.2 1,719.7
Operating profit 98.7 99.5 361.2 428.9
Other income, net 7.0 13.8 20.2 68.5
Income before provision
for income taxes and
cumulative effect of
change in accounting
principle 105.7 113.3 381.4 497.4
Provision for income 39.7 43.7 143.0 191.6
taxes
Income before cumulative
effect of change in
accounting principle 66.0 69.6 238.4 305.8
Cumulative effect of
change in accounting
principle, net tax benefit -- -- -- ( 25.8)
Net income $ 66.0 $ 69.6 $ 238.4 $ 280.0
Earnings per share before
cumulative effect of
change in accounting
principle $ 0.59 $ 0.61 $ 2.11 $ 2.63
Cumulative effect of change
in accounting principle,
net of tax benefit -- -- -- ( 0.23)
Earnings per share $ 0.59 $ 0.61 $ 2.11 $ 2.40
Average common shares
outstanding 111.7 115.4 112.7 116.1
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 1995 and June 30, 1994
(in millions)
(unaudited)
March 31, June 30,
1995 1994
Assets
Cash and cash equivalents $ 223.1 $ 183.2
Short-term investments 119.0 211.5
Receivables, less allowances for
returns and bad debts 524.3 392.8
Inventories 182.7 167.3
Prepaid expenses and other current 323.2 242.4
assets
Total current assets 1,372.3 1,197.2
Marketable securities 333.6 372.2
Property, plant and equipment, net 252.7 241.8
Other noncurrent assets 266.4 238.2
Total assets $2,225.0 $2,049.4
Liabilities and stockholders' equity
Accounts payable $ 210.0 $ 205.5
Accrued expenses 372.2 346.7
Federal and foreign income taxes 127.0 84.4
Unearned revenue 475.7 388.8
Other current liabilities 17.5 14.5
Total current liabilities 1,202.4 1,039.9
Other noncurrent liabilities 238.2 218.5
Total liabilities 1,440.6 1,258.4
Capital stock 29.9 29.7
Paid-in capital 102.7 90.3
Retained earnings 1,112.6 1,005.0
Net unrealized gains on certain 6.6 11.9
investments
Foreign currency translation adjustment 3.0 ( 22.1 )
Less: Treasury stock, at cost ( 470.4 ) ( 323.8 )
Total stockholders' equity 784.4 791.0
Total liabilities and stockholders' $2,225.0 $2,049.4
equity
See accompanying notes to consolidated condensed financial
statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine-month periods ended March 31, 1995 and 1994
(in millions)
(unaudited)
Nine-month period ended
March 31,
1995 1994
Cash flows from operating activities:
Net income $ 238.4 $ 280.0
Depreciation and amortization 32.5 31.0
Cumulative effect of change in accounting -- 25.8
principle
Other, net ( 59.7 ) ( 81.9 )
Net cash provided by operating activities 211.2 254.9
Cash flows from investing activities:
Proceeds from maturities and sales of
short-term investments and
marketable securities 244.6 241.1
Purchases of short-term investments and
marketable securities ( 123.9 ) ( 230.8 )
Capital expenditures ( 32.9 ) ( 24.0 )
(Purchases of) proceeds from other
long-term investments, net ( 0.2 ) 20.3
Other, net 1.1 2.5
Net cash provided by investing activities 88.7 9.1
Cash flows from financing activities:
Dividends paid ( 130.8 ) ( 117.2 )
Common stock repurchased ( 155.0 ) ( 99.2 )
Other, net 10.0 0.5
Net cash used in financing activities ( 275.8 ) ( 215.9 )
Effect of exchange rate changes on cash 15.8 1.8
Net increase in cash and cash equivalents 39.9 49.9
Cash and cash equivalents at beginning of 183.2 183.5
period
Cash and cash equivalents at end of period $ 223.1 $ 233.4
See accompanying notes to consolidated condensed financial
statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in millions, except per share data)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended March 31, 1995 and 1994 are the third fiscal
quarters of fiscal year 1995 and fiscal year 1994, respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting
principles applying certain judgments and estimates which include
all adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information. Operating
results for any interim period are not necessarily indicative of
the results for an entire year due to the seasonality of the
company's business.
(2) Changes in Accounting Principles
The company adopted Statement of Financial Accounting Standards No.
(SFAS) 112, "Employers' Accounting for Postemployment Benefits," on
July 1, 1993. SFAS 112 requires the accrual of benefits such as
disability, severance and health insurance provided to former or
inactive employees prior to retirement over an employee's period of
service. The cumulative effect of the change was a net after-tax
charge of $25.8 million, or $.23 per share.
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs," retroactive
to July 1, 1993. Effective with the adoption of SOP 93-7, the
company defers the costs of direct response advertising (promotion)
and amortizes such costs over the period the related revenues are
expected to be earned. The company's former practice was to
expense these costs as incurred. As required by the provisions of
SOP 93-7, there were no adjustments to prior years' reported
results or to the company's consolidated balance sheet as of July
1, 1993.
In the fourth quarter of 1994 and retroactive to July 1, 1993, the
company changed its accounting for premiums to defer and amortize
such costs over the period of the related revenues. The company's
former practice was to expense these costs as incurred. In the
fourth quarter of 1994 and retroactive to July 1, 1993, the company
changed its accounting policy to expense external product
development costs as incurred. The company's former practice was
to defer and expense such costs against the initial revenues
generated. The impact of the product development costs and
premiums accounting changes on prior years was not significant.
Results for fiscal 1994 were restated to reflect the promotion,
premiums and product development costs accounting changes ("effect
of promotion accounting changes, net"). As a result of these
accounting changes, the third quarter 1994 results reflect a one-
time decrease in operating profit of $37.5 million, or $.19 per
share after taxes, and results for the nine-month period ended
March 31, 1994 reflect a one-time increase in operating profit of
$100.1 million, or $.53 per share after taxes.
As of June 30, 1994, the company adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," which affects
the value at which certain investments are recorded in the
company's consolidated balance sheet. This adoption had no effect
on the company's consolidated statements of income. However, as a
result of SFAS 115, the company's short-term investments and
marketable securities are recorded in the consolidated balance
sheet at fair value with the net unrealized gains and losses on
these investments shown as a separate component of stockholders'
equity, net of its related tax effects.
(3) Earnings Per Share
Earnings per share is based on the average number of common shares
outstanding for the period and net income after deducting preferred
stock dividend requirements of $0.3 in each of the three-month
periods ended March 31, 1995 and 1994 and $0.9 in each of the nine-
month periods ended March 31, 1995 and 1994.
(4) Inventories
March 31, June 30,
1995 1994
Raw materials $ 27.2 $ 17.4
Work-in process 20.6 23.7
Finished goods 134.9 126.2
$ 182.7 $ 167.3
(5) Stockholders' Equity
On March 10, 1995, the company announced that it plans to
repurchase up to five million shares of Class A nonvoting common
stock from time to time in open market transactions. This is the
company's fourth such program since it became public in February,
1990. The company completed its third program, announced in March
1994, to repurchase five million shares in the fourth quarter of
1995.
(6) Segment Information
The company's operations consist of the following segments: (1)
Reader's Digest Magazine, (2) Books and Home Entertainment
Products, (3) Special Interest Magazines and (4) Other Businesses.
The Books and Home Entertainment Products segment includes books
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 nine-month periods ended March 31, 1995 and
1994, is as follows:
<TABLE>
<CAPTION>
Three-month Nine-month period ended
period ended
March 31, March 31,
BUSINESS SEGMENTS 1995 1994 1995 1994
Revenues
<S> <C> <C> <C> <C>
Reader's Digest Magazine $ 180.7 $ 167.6 $ 539.2 $ 510.8
Books and Home
Entertainment Products 569.4 502.5 1,627.6 1,459.0
Special Interest Magazines 23.3 21.5 66.7 62.5
Other Businesses 19.6 17.6 125.9 116.3
Total revenues $ 793.0 $ 709.2 $2,359.4 $2,148.6
GEOGRAPHIC AREAS
Revenues
United States $ 321.2 $ 278.5 $ 945.2 $ 878.6
Europe 371.6 329.8 1,098.2 975.7
Other Markets 100.2 100.9 316.0 294.3
Total revenues $ 793.0 $ 709.2 $2,359.4 $2,148.6
</TABLE>
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
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs," which
affected the timing of recognition of promotion costs, and changed
its accounting for premiums and external product development costs
retroactive to July 1, 1993. Results for the third quarter and
nine-month period ended March 31, 1994 were restated to reflect the
promotion, premium and product development costs accounting changes
("effect of promotion accounting changes, net"). As a result of
these accounting changes, third quarter 1994 results reflect a one-
time decrease in operating profit of $37.5 million, or $.19 per
share after taxes, and results for the nine-month period ended
March 31, 1994 include a one-time increase in operating profit of
$100.1 million, or $.53 per share after taxes.
While the accounting change for promotion costs has no effect on
revenues, the matching of these expenses with revenues should
provide somewhat more consistent quarterly operating margins for
the company's Reader's Digest Magazine, Books and Home
Entertainment Products and Special Interest Magazines segments.
The operating margins, though, will still be affected by other
factors such as product mix. The company's Other Businesses
segment is very seasonal, with substantially all of its operating
profit recognized in the company's second quarter, which results in
the company's operating margin being higher than in other quarters.
Three-Month Period Ended March 31, 1995 Compared With Three-Month
Period Ended March 31, 1994
Revenues/Operating Profit
The company's worldwide revenues for the three-month period ended
March 31, 1995 increased $83.8 million, or 12%, to $793.0 million
compared with revenues for the same period a year ago. Excluding
the effect of changes in foreign currency exchange rates, revenues
increased about 7% primarily due to higher Books and Home
Entertainment Products revenues.
Operating profit for the company was $98.7 million in the third
quarter of 1995 compared with $99.5 million in 1994. Because the
accounting changes for promotion, premium and product development
costs were adopted, as required, on a prospective basis, operating
profit for 1994 is not comparable to that of 1995. Adjusting 1994
results to reflect the accounting practices of 1995 ("comparable
basis"), worldwide operating profit would have increased about 12%.
Excluding the effect of changes in foreign currency exchange rates,
operating profit on a comparable basis increased about 5%.
Other Income, Net
Other income, net for the third quarter of 1995 decreased $6.8
million to $7.0 million compared with $13.8 million a year ago
primarily because of lower capital gains on the sales of certain
investments ($0.3 million in 1995 compared with $5.3 million in
1994). Interest income was $10.3 million in the quarter compared
with $10.6 million in 1994. Other income, net also includes the
effect of foreign exchange ($1.5 million expense in 1995 compared
with $1.6 million expense in 1994).
Earnings Per Share
Earnings per share was $.59 in 1995 compared with $.61 in 1994. On
a comparable basis, earnings per share increased about 9%,
principally due to higher operating profits. The effect of capital
gains on the sales of certain investments was minimal in 1995
compared with $.03 per share in 1994. The effect of foreign
exchange increased 1995 earnings per share by $.04 per share
compared with 1994. Excluding the combined total effect of foreign
exchange and capital gains on the sales of certain investments,
earnings per share on a comparable basis increased about 8%.
Earnings per share growth was favorably affected by the reduction
in outstanding shares due to the company's ongoing share repurchase
program and by a lower effective income tax rate.
Business Segments
The company's operations are divided into four business segments:
(1) Reader's Digest Magazine, (2) Books and Home Entertainment
Products, (3) Special Interest Magazines and (4) Other Businesses.
Reader's Digest Magazine revenues increased $13.1 million, or 8%,
to $180.7 million for the third quarter of 1995 compared with
$167.6 million for the same period a year ago. Excluding the
effect of changes in foreign currency exchange rates, revenues
increased about 5% due to higher advertising revenues. The
increase in advertising revenues was attributable to increased
advertising pages as the worldwide advertising environment improved
compared with the prior year. Worldwide circulation revenues
declined slightly as the effects of higher pricing were more than
offset by lower paid circulation levels. Excluding the effect of
changes in foreign currency exchange rates, operating profit on a
comparable basis decreased compared with the prior year. This
decrease is due largely to rising paper and postage costs and
increased spending to maintain the company's current level of high-
quality subscribers who are prospective customers for the company's
books, music and video products. These factors are expected to
have a continuing negative effect in the fourth quarter of 1995 and
in 1996.
Books and Home Entertainment Products revenues increased $66.9
million, or 13%, to $569.4 million compared with $502.5 million a
year ago. Excluding the effect of changes in foreign currency
exchange rates, revenues increased about 8%. This 8% increase was
principally attributable to sales of a higher priced product mix
and, to a lesser extent, higher unit sales as the effect of higher
units sales in the U.S. was moderated by lower unit sales in
Europe. While revenues in Europe increased, there was weakness in
customer response to mailing programs in certain countries, as
discussed below. Excluding the effect of changes in foreign
currency exchange rates, worldwide operating profit on a comparable
basis increased because of higher revenues and a more profitable
product mix.
Special Interest Magazines revenues increased $1.8 million, or 8%,
to $23.3 million from $21.5 million a year ago. The effect of
changes in foreign currency exchange rates on revenues was minimal.
About three-fourths of the increase in revenues was due to higher
circulation revenue primarily caused by higher subscription
pricing. Circulation levels were about the same as the prior year.
Advertising revenues increased primarily due to increased
advertising pages. On a comparable basis, the operating
performance for special interest magazines declined primarily
because of increased promotional spending.
Geographic Areas
The company has operations in the United States and in various
international locations. International locations are divided
between operations in Europe and Other Markets.
United States revenues increased 15%, to $321.2 million, in the
third quarter of 1995 compared with $278.5 million for the same
period a year ago. The increase in revenues came primarily from
higher unit sales of Books and Home Entertainment Products due to a
variety of factors including the appeal of products offered and the
number and timing of promotional mailings. Operating profit, which
includes intercompany royalty income charged to the company's
international subsidiaries, increased on a comparable basis by 15%
to $67.2 million. Without the intercompany royalty income, United
States operating profit on a comparable basis increased 22% to
$43.3 million. This strong third quarter performance is partially
due to the timing of mailings in the second half of the fiscal year
compared to last year. Mailings in the second half of fiscal year
1995 were more heavily weighted in the third quarter, while in 1994
comparable mailings were in the fourth quarter. This will result
in a decline in revenues and operating profit in the fourth
quarter, as planned.
Revenues for Europe increased 13%, to $371.6 million, compared with
$329.8 million a year ago. Excluding the effect of changes in
foreign currency exchange rates, revenues for Europe increased
about 1% compared with last year. Operating profit for Europe,
including intercompany royalty expense, was $35.7 million, an
increase of 1% compared with the prior year on a comparable basis.
Excluding the effect of changes in foreign currency exchange rates,
operating profit for Europe was $29.8 million, a decline of 15%
compared with the prior year on a comparable basis. Without the
intercompany royalty expense, operating profit for Europe increased
3%, compared with the prior year on a comparable basis, to $54.2
million. Revenues and operating profit continued to be adversely
affected by various factors such as the introduction of a national
lottery in the United Kingdom, which impacted the effectiveness of
the company's sweepstakes promotion mailings in that market, and
the curtailment of a relationship with an automotive association in
Germany with whom the company had large joint mailings in the past.
In addition, the company is experiencing weakness in customer
response to mailing programs in certain markets, including the
three largest markets, Germany, the United Kingdom and France. The
company attributes this weakness to increases in the number of
product offerings over the past few years. As a result, it appears
the increased product offerings led to customer fatigue and reduced
order rates.
Revenues for the company's Other Markets were $100.2 million
compared with $100.9 a year ago. Excluding the effect of changes in
foreign currency exchange rates, revenues increased about 5%
compared with last year. The increase in revenues came primarily
from a higher priced mix of Books and Home Entertainment Products.
Operating profit for Other Markets, including intercompany royalty
expense, was $9.9 million, an increase of 52% compared with the
prior year on a comparable basis. Excluding the effect of changes
in foreign currency exchange rates, operating profit for Other
Markets was $9.4 million, an increase of 44% compared with the
prior year on a comparable basis. Without the intercompany royalty
expense, operating profit for Other Markets increased 28%, compared
with the prior year on a comparable basis, to $15.3 million.
Revenues and operating profit benefited from improved results in
the company's Mexican subsidiary primarily due to its return to a
more successful marketing approach.
Corporate expense totaled $14.1 million, an increase of 18%
compared with the prior year. This increase was primarily due to
additional research spending.
Nine-Month Period Ended March 31, 1995 Compared With Nine-Month
Period Ended
March 31, 1994
Revenues/Operating Profit
The company's worldwide revenues for the nine-month period ended
March 31, 1995 increased $210.8 million, or 10%, to $2,359.4
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%. This 6% increase was primarily due to
higher sales of Books and Home Entertainment Products.
Operating profit for the company was $361.2 million compared with
$428.9 million a year ago. Because the accounting changes for
promotion, premium and product development costs were adopted, as
required, on a prospective basis, operating profit for 1994 is not
comparable to that of 1995. Adjusting 1994 results to reflect the
accounting practices of 1995 ("comparable basis"), worldwide
operating profit would have increased about 15%. Excluding the
effect of changes in foreign currency exchange rates, operating
profit on a comparable basis increased about 9%.
Other Income, Net
Other income, net for the nine-month period ended March 31, 1995
decreased $48.3 million to $20.2 million compared with $68.5
million a year ago primarily because of lower capital gains on the
sales of certain investments ($1.7 million in 1995 compared with
$42.2 million in 1994) and the effect of foreign exchange ($7.9
million expense in 1995 compared with $1.8 million expense in
1994). Interest income was $30.7 million in 1995 compared with
$31.6 million in 1994.
Income Taxes
The effective income tax rate for the company declined to 37.5% in
1995 from 38.5% in 1994 due to effective global tax planning. The
company anticipates that the effective tax rate will remain at
37.5% throughout 1995.
Earnings Per Share
Earnings per share before the cumulative effect of change in
accounting principle was $2.11 in 1995 compared with $2.63 in 1994.
On a comparable basis, earnings per share increased about 4%. This
4% increase was due to higher operating profits, partially offset
by the effect of minimal capital gains on the sales of certain
investments in 1995 compared with $.23 per share in 1994. The
effect of foreign exchange increased 1995 earnings per share by
$.08 per share compared with 1994. Excluding the combined total
effect of foreign exchange and capital gains on the sales of
certain investments, earnings per share, on a comparable basis,
increased about 13%. Earnings per share growth was favorably
affected by the reduction in outstanding shares due to the
company's ongoing share repurchase program and a lower effective
income tax rate.
Business Segments
The company's operations are divided into four business segments:
(1) Reader's Digest Magazine, (2) Books and Home Entertainment
Products, (3) Special Interest Magazines and (4) Other Businesses.
Reader's Digest Magazine revenues increased $28.4 million, or 6%,
to $539.2 million in the nine-month period ended March 31, 1995
compared with $510.8 million in the same period a year ago.
Excluding the effect of changes in foreign currency exchange rates,
revenues increased about 3%. This 3% revenue increase was
attributable to higher advertising revenues, due to increased
advertising pages as the worldwide advertising environment
improved. Worldwide circulation revenues declined slightly as the
effects of higher pricing were more than offset by a decline in
circulation levels due to the decrease in the U.S. magazine's rate
base to 15 million from 16.25 million effective January 1, 1994.
Excluding the effect of changes in foreign currency exchange rates,
operating profit on a comparable basis decreased. This decrease is
due largely to rising paper and postage costs and increased
spending to maintain the company's current level of high-quality
subscribers who are prospective customers for the company's books,
music and video products. These factors are expected to have a
continuing negative effect in the fourth quarter of 1995 and in
1996.
Books and Home Entertainment Products revenues increased $168.6
million, or 12%, to $1,627.6 million compared with $1,459.0 million
a year ago. Excluding the effect of changes in foreign currency
exchange rates, revenues increased about 6%. More than two-thirds
of this 6% increase was attributable to sales of a higher priced
product mix, with the remainder due to higher unit sales. Higher
unit sales in the United States and the company's Other Markets
were moderated by lower unit sales in Europe. While revenues in
Europe increased, there was weakness in customer response to
mailing programs in certain countries, as discussed below.
Excluding the effect of changes in foreign currency exchange rates,
operating profit on a comparable basis increased 12% due to higher
revenues and a more profitable product mix.
Special Interest Magazines revenues increased $4.2 million, or 7%,
to $66.7 million from $62.5 million a year ago. Excluding the
effect of changes in foreign currency exchange rates, revenues
increased about 6%. Almost two-thirds of the increase in revenues
was due to higher advertising revenue principally as a result of
higher advertising rates. The remaining increase was due to
increased advertising pages. Circulation revenues increased
primarily due to higher subscription pricing. Circulation levels
were about the same as the prior year. On a comparable basis, the
operating loss for Special Interest Magazines declined because of
lower amortization expense.
Geographic Areas
The company has operations in the United States and in various
international locations. International locations are divided
between operations in Europe and Other Markets.
United States revenues in the nine-month period ended March 31,
1995 increased 8% compared with the same period a year ago, to
$945.2 million. Operating profit in the United States, which
includes intercompany royalty income charged to the company's
international subsidiaries, was $234.4 million, an increase of 20%
compared with the prior year on a comparable basis. Without the
intercompany royalty income, United States operating profit on a
comparable basis increased 25% to $163.8 million. The increases in
revenues and operating profit are primarily due to higher and more
profitable unit sales of Books and Home Entertainment Products.
Additionally, mailings in the second half of fiscal year 1995 were
more heavily weighted in the third quarter, while in 1994
comparable mailings were in the fourth quarter. This will result
in a decline in revenues and operating profit in the fourth
quarter, as planned.
Revenues for Europe increased 13% compared with the prior year, to
$1,098.2 million. Excluding the effect of changes in foreign
currency exchange rates, revenues for Europe increased about 3%.
Operating profit for Europe, including intercompany royalty
expense, was $141.0 million, an increase of 2% compared with the
prior year on a comparable basis. Excluding the effect of changes
in foreign currency exchange rates, operating profit for Europe was
$122.7 million, a decline of 11% compared with the prior year on a
comparable basis. Without the intercompany royalty expense,
operating profit for Europe increased 4% compared with the prior
year on a comparable basis, to $195.8 million. Revenues and
operating profit were adversely affected by various factors such as
the introduction of a national lottery in the United Kingdom, which
impacted the effectiveness of our sweepstakes promotion mailings in
that market, and the curtailment of a relationship with an
automotive association in Germany with whom we had large joint
mailings in the past. In addition, the company also is
experiencing weakness in customer response to mailing programs in
certain markets, including the three largest markets, Germany, the
United Kingdom and France. The company attributes this weakness to
increases in the number of product offerings over the past few
years. As a result, it appears the increased product offerings led
to customer fatigue and reduced order rates.
Revenues for Other Markets increased 7% compared with the prior
year, to $316.0 million. Excluding the effect of changes in
foreign currency exchange rates, revenues for Other Markets
increased about 9%. Operating profit for Other Markets, including
intercompany royalty expense, was $33.0 million, an increase of 63%
compared with the prior year on a comparable basis. Excluding the
effect of changes in foreign currency exchange rates, operating
profit for Other Markets was $31.9 million, a increase of 58%
compared with the prior year on a comparable basis. Without the
intercompany royalty expense, operating profit for Other Markets
increased 41% compared with the prior year on a comparable basis to
$48.8 million. Revenues and operating profit benefited from
improved results in the company's Mexican subsidiary primarily due
to its return to a more successful marketing approach.
Corporate expense amounted to $47.2 million, an increase of 19%
compared with the prior year. This increase was primarily due to
additional research spending and the timing of certain expenses.
Foreign Exchange and Capital Gains
In the fourth quarter of 1994, the company purchased foreign
currency options to hedge its foreign currency exposure. These
hedges were implemented at exchange rates and in amounts designed
to minimize any unfavorable effect of currency fluctuations on 1995
earnings per share. As these options are required to be reported
at fair value, the company may experience some impact on 1995
quarterly results from currency fluctuations. Since the company
hedged with options, results for 1995 will continue to benefit if
the U.S. dollar continues to weaken. While the company does not
predict movements in foreign currency exchange rates, if exchange
rates remained as they were in mid-April for the remainder of the
year, the company's 1995 results would benefit from a positive
impact on earnings per share of $.10 to $.15 per share compared
with 1994. Additionally, 1994 earnings per share included $.23 per
share attributable to capital gains on the sales of certain
investments. The recognition of further capital gains in 1995 is
contingent upon the market value of the company's investments, the
company's estimates of anticipated returns from these investments
and the effect of sales of such investments on the earnings and
financial position of the company.
In the third quarter of 1995, the company purchased foreign
currency options to hedge its foreign currency exposure. These
hedges were implemented at exchange rates and in amounts designed
to minimize any unfavorable effect of currency fluctuations on 1996
earnings per share. As certain of these options are required to be
reported at fair value, the company may experience some impact on
1995 and 1996 quarterly results from currency fluctuations. The
company's market risk over the life of these options is limited to
their initial cost of approximately $11 million.
Forward-Looking Information
The company believes that, as a result of several factors, the
projected 10% to 15% target operating profit growth on a comparable
basis will not be achieved in fiscal 1995 or 1996. Despite
continued revenue growth in the United States and Other Markets,
rapid increases in paper costs, weakness in Europe and increased
investment spending for long-term growth is expected to lead to
single-digit earnings per share growth on a comparable basis.
The company estimates that paper costs could increase approximately
$50 million over the next 15 months, which the company does not
expect to fully and immediately pass on to customers. In order to
offset part of the increased price of paper, the company will
attempt to lower expenses, including possibly by continuing to
regionalize and consolidate certain purchasing and printing
operations and reducing less profitable promotional mailings. The
company believes that the decline in operating profit for Europe
will continue through 1995 and stabilize in 1996.
Further, the company estimates that it will make additional
investments to expand its customer base, enter new markets, improve
its information systems and enter into strategic alliances and
small acquisitions in order to achieve sustainable long-term
growth. The costs of these additional investments could approach
$20 million per year.
The company is confident in its ability to achieve 10-15% earnings
per share growth over the long term. The company anticipates
continuing its current dividend practices and its share repurchase
program.
Liquidity and Capital Resources
March 31, 1995 Compared With June 30, 1994
Cash and cash equivalents, short-term investments and marketable
securities decreased $91 million to $676 million at March 31, 1995,
compared with $767 million at June 30, 1994. The decrease was
primarily the result of payments of dividends ($131 million) and
the repurchase of 3,388,200 shares of Class A nonvoting common
stock ($155 million) exceeding cash provided by operations ($211
million). Unrealized gains on the company's short-term investments
and marketable securities decreased $8 million to $11 million at
March 31, 1995.
The company paid a $.40 per share dividend on its common stock in
the third quarter of fiscal 1995 compared with $.35 per share a
year ago. This represents a 14% increase in the third quarter
dividend payment. At the current rate, the company will pay a
total dividend of $1.55 per share in fiscal 1995 compared with
$1.35 per share in fiscal 1994.
The company repurchased 1,398,800 shares of Class A nonvoting
common stock in the third quarter of 1995. In the fourth quarter
of 1995, the company completed its third program, announced in
March 1994 to acquire 5,000,000 shares. On March 10, 1995 the
company announced its fourth share repurchase program to acquire up
to 5,000,000 shares of Class A nonvoting common stock. This fourth
program is expected to be completed by the end of fiscal 1996. The
company has repurchased approximately 11,000,000 shares 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 and to
identify and develop new products and markets.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
On February 11, 1995, Paul A. Soden joined the Company as Senior
Vice President and General Counsel. Effective April 3, 1995,
Kenneth A. Gordon became an Executive Vice President of the Company
and Barbara J. Morgan and Kenneth Y. Tomlinson became Senior Vice
Presidents of the Company. Also on April 3, 1995, Stephen R.
Wilson joined the Company as Executive Vice President and Chief
Financial Officer.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.17 Agreement dated as of February 17, 1995 between
the registrant and an executive officer.*
27 Financial Data Schedule. [1 page]
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter for which this
report is filed.
*Denotes a management contract or compensatory plan.
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: May 12, 1995 By: Stephen R. Wilson
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
Joseph G. NeCastro
Joseph G. NeCastro
Vice President and Controller
Chief Accounting Officer
EXHIBIT INDEX
Exhibit Page
10.17 Agreement dated as of February 17, 1995 between
the registrant and an executive officer.
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 March 31,
1995.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 223,100
<SECURITIES> 119,000
<RECEIVABLES> 782,900
<ALLOWANCES> 258,600
<INVENTORY> 182,700
<CURRENT-ASSETS> 1,372,300
<PP&E> 583,700
<DEPRECIATION> 331,000
<TOTAL-ASSETS> 2,225,000
<CURRENT-LIABILITIES> 1,202,400
<BONDS> 0
<COMMON> 1,100
0
28,800
<OTHER-SE> 754,500
<TOTAL-LIABILITY-AND-EQUITY> 2,225,000
<SALES> 2,359,400
<TOTAL-REVENUES> 2,359,400
<CGS> 875,800
<TOTAL-COSTS> 875,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 381,400
<INCOME-TAX> 143,000
<INCOME-CONTINUING> 238,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,400
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
</TABLE>
February 10, 1995
Mr. Anthony W. Ruggiero
White Oak
40 Aiken Road
Greenwich, Connecticut 06831
Dear Tony:
This letter serves to confirm payments and benefits and the
terms thereof relating to your separation from The Reader's
Digest Association Inc. (the "Company") which will become
effective July 31, 1995.
1. You will remain in your position as Senior Vice
President and Chief Financial Officer of the Company until such
time as the Company determines and continue to perform your
duties in accordance with the Company's policies and continue to
participate in all Company benefits. You will remain on the
payroll and receive your bi-weekly salary payment until your
separation on July 31, 1995. Upon the Company's determination,
you will be relieved of your responsibilities as Senior Vice
President and Chief Financial Officer and will immediately
execute letters of resignations of such offices of the Company
and its affiliates as required by the Company.
2. Subject to the terms of The Reader's Digest
Association, Inc. Severance Plan for Senior Management
("Severance Plan"), you are eligible to receive one (1) month's
base salary for each full year of continuous service completed
prior to termination, but not less than twelve (12) months of
base salary, subject to appropriate deductions -- in your case,
twelve (12) months. These severance payments will be made on a
bi-weekly basis, commencing upon your separation from the
Company. As a condition to severance pay eligibility, you must
sign the General Waiver and Release of Claims Form, repay any
outstanding advances or loans due the Company and return all
Company property. No payment will be made until at least seven
(7) days have elapsed following the Company's receipt of your
signed General Waiver and Release of Claims Form. Additional
information regarding the General Waiver and Release of Claims
Form and other severance procedures is attached to this letter.
3. For 1995 you will receive a payment of $173,000 under
The Reader's Digest Association, Inc. Management Incentive
Compensation Plan ("Management Incentive Plan") provided you
execute the General Waiver and Release of Claims Form. Payment
will be made at the time all awards are made under the Management
Incentive Plan or in any event no later than September 30, 1995.
Provided you execute the General Waiver and Release of
Claims Form, you will receive an additional payment of $173,000,
no later than September 30, 1996.
4. Pursuant to the terms of The Reader's Digest
Association, Inc. Key Employee Long Term Incentive Plans ("Key
Employee Plans"), you will receive one hundred percent (100%) of
the value of the Performance Units awarded for Fiscal Years 1993-
95 (210,000 units) and for Fiscal Years 1994-96 (226,000 units).
You will also be eligible to receive 24/36ths of the value of the
Performance Units awarded for Fiscal Years 1995-97 (240,000
units). Payment will be made at the time all awards are made
under the Key Employee Plans. Payment of each of these amounts
is conditioned upon your execution of the General Waiver and
Release of Claims Form.
5. Pursuant to the Severance Plan, provided you execute
the General Waiver and Release of Claims Form, the Company shall
pay to you an amount equal to the difference between your monthly
retirement benefit payable under The Reader's Digest Association,
Inc. Retirement Plan ("RDA Retirement Plan"), the Excess Benefit
Retirement Plan of The Reader's Digest Association, Inc. and
Executive Retirement Plan of The Reader's Digest Association,
Inc. and the amount that would have been payable if your age and
aggregate periods of service under those plans included the
number of months of severance payments set forth in paragraph 2
of this letter. Such amount shall be made by the Company as
provided in the Severance Plan. Further information regarding
your benefits under the RDA Retirement Plan, Excess Benefit
Retirement Plan and Executive Retirement Plan is available from
Bill Coplin.
6. Your medical and/or dental coverage will continue
through July 31, 1995. Pursuant to the Severance Plan, effective
August 1, 1995, provided you execute the General Waiver and
Release of Claims Form, you will be entitled to continued
participation in the Company's medical, dental and group term
insurance plans for the duration of your severance payments
(until July 31, 1996), unless those plans do not so permit. In
such event, the Company will arrange to provide you with the
benefits during that period substantially similar to those you
were entitled to receive under such plans immediately prior to
your date of termination. For that period, your share of the
cost will be automatically deducted from your severance pay. For
the following six (6) months, you will have the option to
continue your medical and dental coverage at your own expense
(see COBRA information attached). If you elect not to sign the
General Waiver and Release of Claims Form, you will have the
option to continue your medical and dental coverage at your own
expense (see COBRA information attached) for a period of eighteen
(18) months following your separation. If you select this option
of elect to extend your benefits following July 31, 1996 as
provided above, you must make the election to continue coverage
within sixty (60) days of when your coverage ends.
7. Provided you execute the General Waiver and Release of
Claims Form, pursuant to the Severance Plan, you are eligible for
outplacement counseling services for a period of up to one (1)
year. Please let me know if you are desirous of such services.
8. Provided you execute the General Waiver and Release of
Claims Form, you will continue to receive financial counseling
services until July 31, 1996, under the identical circumstances
and terms as currently provided to you.
-2-
9. Following your separation, you will receive a lump-sum
payment reflecting any earned and unused vacation and floating
personal days for the period ending July 31, 1995.
Provided you execute the General Waiver and Release of
Claims Form, by December 31, 1995, the Company will pay you
$11,000 in cash, constituting the amount that you would have
received as compensation for the elimination of company car and
club membership perquisites previously provided by the Company.
10. You will be eligible for a contribution to The Reader's
Digest Association, Inc. Employees Profit-Sharing Plan ("Profit
Sharing Plan") for Plan Year 1995 (based upon your 1995 Plan Year
earnings) to the extent a contribution is made for that period.
Your account will be settled on or around September, 1996, based
on a June 30, 1996 valuation. All of the preceding is subject to
the precise terms of the Profit Sharing Plan, as are requirements
regarding repayment of any outstanding loans to the Profit
Sharing Plan.
Provided you execute the General Waiver and Release of
Claims Form, the Company will make a cash payment to you in the
amount that would have been contributed to your account under the
Profit Sharing Plan had you been a participant in the Profit
Sharing Plan on June 30, 1996. The payment shall be made
promptly after the contribution, if any, in respect of the fiscal
year ended June 30, 1996 is made to the Profit Sharing Plan.
11. Your currently outstanding stock options (a) will
continue to be exercisable and will continue to vest until July
31, 1996 in accordance with the other terms of the applicable
stock option grant and the Key Employee Plans, and (b) will vest
on July 1, 1996 and continue to be exercisable thereafter as if
your employment terminated on that date by reason of Retirement
(as defined in the Key Employee Plans).
12. You are also eligible to receive benefits under your
Supplemental Retirement Benefit Agreement executed on March 6,
1990 ("SRBA"), subject to and in accordance with the SRBA's
terms.
13. Any amounts that you have deferred under the Deferred
Compensation Plan will be paid to you under the terms of the
plan.
Bill Coplin is also available to provide you with additional
information regarding your benefits under the Profit Sharing
Plan, The Reader's Digest Employee Stock Purchase Plan, Group
Universal Life Insurance and SRBA.
We expect that you will continue to adhere to all of the
Company's policies, practices and procedures, during and
following your separation, including but not limited to the
Company's Proprietary Information Policy, Code of Conduct and
Policy on Insider Trading. Furthermore, you should be aware that
the benefits set forth in the Severance Plan are subject to all
of the terms of the Severance Plan, including but not limited to
Section 4.11, which provides as follows:
"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
-3-
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."
We have determined, for your purposes only, that your
employment by a direct competitor of the Company will not violate
the above provisions of the Severance Plan and the General Waiver
and Release of Claims. Additionally, the above Section 4.11
applies solely with respect to the benefits provided in the
Severance Plan and referred to in paragraphs 2, 5 and 7.
Tony, please indicate your acceptance of these arrangements
by signing and dating the letter below and returning a copy of
the letter and executed General Waiver and Release of Claims Form
to me no later than March 3, 1995. This letter and the
attachments set forth the entire arrangement between you and the
Company and may not be changed except in writing. In all
instances, the precise terms of the particular benefit plan and
this letter shall govern in the event of an inconsistency between
them and the attachments.
Very truly yours,
JOSEPH M. GRECKY
Joseph M. Grecky
Agreed to and Accepted as of February 17, 1995
ANTHONY W. RUGGIERO
Anthony W. Ruggiero
_________________________________
Date
Attachments: SEVERANCE PROCEDURES
GENERAL WAIVER AND RELEASE OF CLAIMS FORM
COBRA INFORMATION
