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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pleasantville, New York 10570-7000
(Address of principal executive offices) (Zip Code)
(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, 1995, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 90,450,383
shares
Class B Voting Common Stock, $0.01 par value: 21,515,159 shares
Page 1 of 14 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
December 31, 1994
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three and six-month periods
ended December 31, 1994 and 1993 3
Consolidated Condensed Balance Sheets
as of December 31, 1994 and June 30, 1994 4
Consolidated Condensed Statements of Cash Flows
for the six-month periods ended
December 31, 1994 and 1993 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 13
<TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and six-month periods ended December 31, 1994 and 1993
(in millions, except per share data)
(unaudited)
<CAPTION>
Three-month period ended Six-month period ended
December 31, December 31,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues $ 855.6 $ 802.2 $1,566.4 $1,439.4
Cost of sales, fulfillment and
distribution expense 312.3 297.9 579.3 541.9
Promotion, selling and
administrative expense 382.4 380.7 724.6 705.7
Effect of promotion accounting
changes, net --- ( 47.2 ) --- ( 137.6)
Total operating expenses 694.7 631.4 1,303.9 1,110.0
Operating profit 160.9 170.8 262.5 329.4
Other income, net 7.0 20.9 13.2 54.7
Income before provision for
income taxes and
cumulative effect of change
in accounting principle 167.9 191.7 275.7 384.1
Provision for income taxes 62.8 73.8 103.3 147.9
Income before cumulative
effect of change in
accounting principle 105.1 117.9 172.4 236.2
Cumulative effect of change
in accounting principle, net
of tax benefit --- --- --- ( 25.8)
Net income $ 105.1 $ 117.9 $ 172.4 $ 210.4
Earnings per share before
cumulative effect of
change in accounting
principle $ .93 $ 1.01 $ 1.52 $ 2.02
Cumulative effect of change
in accounting principle --- --- --- ( .23)
Earnings per share $ .93 $ 1.01 $ 1.52 $ 1.79
Average common shares
outstanding 113.0 116.3 113.2 116.5
See accompanying notes to consolidated condensed financial
statements.
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of December 31, 1994 and June 30, 1994
(in millions)
(unaudited)
December 31, June 30,
1994 1994
Assets
Cash and cash equivalents $ 172.0 $ 183.2
Short-term investments 131.2 211.5
Receivables, less allowances for
returns and bad debts 600.2 392.8
Inventories 187.8 167.3
Prepaid expenses and other current assets 315.0 242.4
Total current assets 1,406.2 1,197.2
Marketable securities 346.1 372.2
Property, plant and equipment, net 244.3 241.8
Other noncurrent assets 264.5 238.2
Total assets $2,261.1 $ 2,049.4
Liabilities and stockholders' equity
Accounts payable $ 231.8 $ 205.5
Accrued expenses 375.3 346.7
Federal and foreign income taxes 129.6 84.4
Unearned revenue 473.3 388.8
Other current liabilities 20.4 14.5
Total current liabilities 1,230.4 1,039.9
Other noncurrent liabilities 227.7 218.5
Total liabilities 1,458.1 1,258.4
Capital stock 29.8 29.7
Paid-in capital 102.0 90.3
Retained earnings 1,091.6 1,005.0
Net unrealized gains on certain investments 3.6 11.9
Foreign currency translation adjustment ( 16.1) ( 22.1)
Less: Treasury stock, at cost ( 407.9) (323.8)
Total stockholders' equity 803.0 791.0
Total liabilities and stockholders' equity $2,261.1 $2,049.4
See accompanying notes to consolidated condensed financial
statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six-month periods ended December 31, 1994 and 1993
(in millions)
(unaudited)
Six-month period ended
December 31,
1994 1993
Cash flows from operating activities:
Net income $ 172.4 $ 210.4
Depreciation and amortization 21.7 21.0
Cumulative effect of change in --- 25.8
accounting principle
Other, net (113.9) (158.8)
Net cash provided by operating 80.2 98.4
activities
Cash flows from investing activities:
Proceeds from maturities and sales of
short-term investments and
marketable securities 202.9 147.1
Purchases of short-term investments
and marketable securities ( 109.8) ( 111.4)
Capital expenditures ( 21.8) ( 14.7)
Proceeds from sales of other long-term 1.3 16.6
investments, net
Other, net 0.6 2.3
Net cash provided by investing 73.2 39.9
activities
Cash flows from financing activities:
Dividends paid ( 85.8) ( 76.4)
Common stock repurchased ( 88.9) ( 60.3)
Other, net 5.6 ( 2.0)
Net cash used in financing activities ( 169.1) ( 138.7)
Effect of exchange rate changes on cash 4.5 ( 2.5)
Net decrease in cash and cash ( 11.2) ( 2.9)
equivalents
Cash and cash equivalents at beginning 183.2 183.5
of period
Cash and cash equivalents at end of $ 172.0 $ 180.6
period
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 December 31, 1994 and 1993 are the second fiscal
quarters of fiscal year 1995 and fiscal year 1994, respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting
principles applying certain judgments and estimates which include
all adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information.
Operating results for any interim period are not necessarily
indicative of the results for an entire year due to the
seasonality of the company's business.
(2) Changes in Accounting Principles
The company adopted Statement of Financial Accounting Standards
No. (SFAS) 112, "Employers' Accounting For Postemployment
Benefits," on July 1, 1993. SFAS 112 requires the accrual of
benefits such as disability, severance and health insurance
provided to former or inactive employees prior to retirement over
an employee's period of service. The cumulative effect of the
change was a net after-tax charge of $25.8 million, or $.23 per
share.
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs,"
retroactive to July 1, 1993. Effective with the adoption of SOP
93-7, the company defers the costs of direct response advertising
(promotion) and amortizes such costs over the period the related
revenues are expected to be earned. The company's former
practice was to expense these costs as incurred. As required by
the provisions of SOP 93-7, there were no adjustments to prior
years' reported results or to the company's consolidated balance
sheet as of July 1, 1993.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting for premiums to defer and
amortize such costs over the period of the related revenues. The
company's former practice was to expense these costs as incurred.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting policy to expense external
product development costs as incurred. The company's former
practice was to defer and expense such costs against the initial
revenues generated. The impact of the product development and
premium accounting changes on prior years was not significant.
Results for fiscal 1994 were restated to reflect the promotion,
premium and product development accounting changes ("effect of
promotion accounting changes, net"). As a result of these
accounting changes, the results for the three and six-month
periods ended December 31, 1993 reflect a one-time increase in
operating profit of $47.2 million, or $.25 per share after taxes,
and $137.6 million, or $.72 per share after taxes, respectively.
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 $.3 million in each of
the three-month periods ended December 31, 1994 and 1993 and $.7
million in each of the six-month periods ended December 31, 1994
and 1993.
(4) Inventories
December 31, June 30,
1994 1994
Raw materials $ 28.7 $ 17.4
Work-in process 19.9 23.7
Finished goods 139.2 126.2
$ 187.8 $ 167.3
(5) Segment Information
The company's operations consist of the following segments: (1)
Reader's Digest magazine, (2) books and home entertainment
products, (3) special interest magazines and (4) other
businesses. The books and home entertainment products segment
includes books, music and video products. The special interest
magazines segment includes magazines acquired or launched since
1987. A summary of revenues by business segments and major
geographic areas for the three and six-month periods ended
December 31, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
December 31, December 31,
BUSINESS SEGMENTS 1994 1993 1994 1993
Revenues
<S> <C> <C> <C> <C>
Reader's Digest magazine $ 186.7 $ 178.3 $ 358.5 $ 343.2
Books and home
entertainment products 556.0 516.6 1,058.2 956.5
Special interest 24.6 23.2 43.4 41.0
magazines
Other businesses 88.3 84.1 106.3 98.7
Total revenues $ 855.6 $ 802.2 $1,566.4 $1,439.4
GEOGRAPHIC AREAS
Revenues
United States $ 355.3 $ 342.7 $624.0 $ 600.1
Europe 383.2 357.0 726.6 645.9
Other Markets 117.1 102.5 215.8 193.4
Total revenues $ 855.6 $ 802.2 $1,566.4 $1,439.4
</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
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 charge for the cumulative effect of this
change of $25.8 million, or $.23 per share.
In the fourth quarter of 1994, the company adopted Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs,"
retroactive to July 1, 1993. Effective with the adoption of SOP
93-7, the company defers the costs of direct response advertising
(promotion) and amortizes such costs over the period the related
revenues are expected to be earned. The company's former
practice was to expense these costs as incurred. As required by
the provisions of SOP 93-7, there were no adjustments to prior
years' reported results or to the company's consolidated balance
sheet as of July 1, 1993.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting for premiums to defer and
amortize such costs over the period of the related revenues. The
company's former practice was to expense these costs as incurred.
In the fourth quarter of 1994 and retroactive to July 1, 1993,
the company changed its accounting policy to expense external
product development costs as incurred. The company's former
practice was to defer and expense such costs against the initial
revenues generated. The impact of the product development and
premium accounting changes on prior years was not significant.
Results for the second quarter and first half of 1994 were
restated to reflect the promotion, premium and product
development accounting changes ("effect of promotion accounting
changes, net"). As a result of these accounting changes, second
quarter 1994 results reflect a one-time increase in operating
profit of $47.2 million, or $.25 per share after taxes, and results for the
first half of 1994 include a one-time increase in operating
profit of $137.6 million, or $.72 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.
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.
Three-Month Period Ended December 31, 1994 Compared With Three-
Month Period Ended December 31, 1993
Revenues/Operating Profit
The company's worldwide revenues for the three-month period ended
December 31, 1994 increased $53.4 million, or 7%, to $855.6
million compared with revenues for the same period a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 3% as revenues improved in all
business segments compared with the prior year.
Operating profit for the company was $160.9 million in the second
quarter of 1995 compared with $170.8 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 15%. Excluding the effect of changes in
foreign currency exchange rates, operating profit on a comparable
basis increased about 10%. Operating profit growth exceeded
revenue growth because of a more profitable product mix. This
resulted in better operating margins than the company expects for
the full year.
The recent devaluation of the Mexican peso had a slight negative
effect on 1995 second quarter results. The company does not
believe that the devaluation of the peso to its current level
will materially impact the company's 1995 full year results.
Other Income, Net
Other income, net for the quarter decreased $13.9 million to $7.0
million compared with $20.9 million a year ago primarily because
of lower capital gains on the sales of certain investments ($0.7
million in 1995 compared with $12.2 million in 1994). Interest
income was $9.4 million in the second quarter of 1995 compared
with $10.6 million in 1994. Other income, net also includes the
effect of foreign exchange ($2.2 million expense in 1995 compared
with $0.3 million expense in 1994).
Earnings Per Share
Earnings per share was $.93 in 1995 compared with $1.01 in 1994.
On a comparable basis, earnings per share increased about 11%.
This 11% increase was principally due to higher operating
profits, partially offset by the effect of minimal capital gains
on the sales of certain investments in 1995 compared with $.06
per share in 1994. The effects 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 14%. This earnings
per share growth exceeded operating profit growth primarily
because of a lower effective income tax rate and the effect of
the reduction in outstanding shares due to the company's ongoing
share repurchase program.
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 $8.4 million, or 5%,
to $186.7 million compared with $178.3 million a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 2%. This 2% revenue increase was
attributable to higher advertising revenues. The increase in
advertising revenues was attributable 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 increased
compared with the prior year. For the company's third quarter,
the advertising environment continues to improve in the U.S. as
advertising pages for the January, February and March issues
combined increased more than 50% over the prior year. However,
the mix of advertising pages sold in 1995 is less profitable and
the company expects to continue investing to achieve customer
growth for the long-term benefit of the company.
Books and home entertainment products revenues increased $39.4
million, or 8%, to $556.0 million compared with $516.6 million
for the same period a year ago. Excluding the effect of changes
in foreign currency exchange rates, revenues increased about 2%.
This 2% increase was attributable to sales of a higher priced
product mix. Revenues increased in the U.S. and other
international markets due to higher unit sales. In the U.S.
there were higher unit sales in general books and video product
lines and an increase in Condensed Books membership of almost 20%
from a year ago. Overall in the U.S., customer responses and
payment performance improved and product returns declined.
Revenues decreased in Europe due to lower unit sales, partially
offset by sales of a higher priced product mix, for a variety of
reasons including decisions made to reduce activity levels in
certain markets (see "Geographic Areas"). Excluding the effect
of changes in foreign currency exchange rates, worldwide
operating profit growth on a comparable basis exceeded revenue
growth because of a more profitable product mix.
Special interest magazines revenues increased $1.4 million, or
6%, to $24.6 million from $23.2 million a year ago. Excluding
the effect of changes in foreign currency exchange rates,
revenues increased about 6%. The increase in revenues was due to
higher advertising revenue. The increase in advertising revenues
was equally caused by higher advertising rates and increased
advertising pages. Circulation levels were about the same as the
prior year. On a comparable basis, the operating performance for
special interest magazines improved because of increased revenues
and lower amortization expense.
Geographic Areas
The company has operations in the United States and in various
international locations. International locations are divided
between operations in Europe and Other Markets.
United States revenues increased 4% compared with the prior year.
Revenues for Other Markets increased 14% compared with the prior
year. Excluding the effect of changes in foreign currency
exchange rates, revenues for Other Markets increased about 13%.
The increases in revenues for the U.S. and Other Markets were
primarily due to higher unit sales of books and home
entertainment products.
Revenues for Europe increased 7% for the second quarter.
Excluding the effect of changes in foreign currency exchange
rates, revenues for Europe decreased about 2% compared with a
strong quarter last year. This 2% decrease is attributable to
lower sales of book and home entertainment products for a variety
of reasons such as variances in product mix, mail quantities and
the timing of mailings, as well as decisions made to reduce
activity levels in certain markets. In one of the company's
major European markets, the company curtailed a relationship it
had with a local automobile association because of local
management's concern that the association would evolve from a
partner to a competitor. In the second quarter of 1994, the
company had a particularly large joint mailing with this
association but no similar mailing in 1995. In a smaller market,
revenues for the second quarter of 1994 grew more than 60%. The
company reduced the level of mailing activity in this market in
1995 to better manage and control growth.
The company expects European revenue growth in 1995 to be
somewhat lower than the prior year's 9% currency-neutral growth
rate. In addition to the items noted above, there are other
external events that could impact growth in the second half of
1995. In another of the company's major European markets, the
government began a new national lottery and their continuous
television advertising has generated a great deal of publicity.
The popularity of this new lottery could detract from the success
of the company's sweepstakes promotion mailings and, therefore,
negatively impact results in this market. Additionally, in a
medium-size market, there has been a postal disruption resulting
from a large work force reduction associated with a change in
pension law. It is the company's understanding that the
remaining postal workers are in a "slow down" to protest the
decision to discontinue overtime pay.
Six-Month Period Ended December 31, 1994 Compared With Six-Month
Period Ended
December 31, 1993
Revenues/Operating Profit
The company's worldwide revenues for the six-month period ended
December 31, 1994 increased $127.0 million, or 9%, to $1,566.4
million compared with revenues for the same period a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 5%. This 5% increase was
primarily due to higher sales of books and home entertainment
products.
Operating profit for the company was $262.5 million in the first
half of 1995 compared with $329.4 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 16%. Excluding the effect of changes in foreign
currency exchange rates, operating profit on a comparable basis
increased about 11%. This 11% increase was primarily because of
higher revenues and a more profitable product mix. The company
believes that the revenue growth of 5% and operating profit
growth of 11% for the first half of 1995 may be reasonably
indicative of growth for full year results over comparable full
year 1994 results. Comparable full year 1994 results approximate
the results reported in the company's 1994 annual report
excluding the "effect of promotion accounting changes, net",
"other operating items" and cumulative effect of change in
accounting principle.
Other Income, Net
Other income, net for the six-month period ended December 31,
1994 decreased $41.5 million to $13.2 million compared with $54.7
million a year ago primarily because of lower capital gains on
the sales of certain investments ($1.4 million in 1995 compared
with $36.9 million in 1994). Interest income was $20.4 million
in the first half of 1995 compared with $21.0 million in 1994.
Other income, net also includes the effect of foreign exchange
($6.4 million expense in 1995 compared with $0.2 million expense
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 $1.52 in 1995 compared with $2.02 in
1994. On a comparable basis, earnings per share increased about
3%. This 3% 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 $.19 per share
in 1994. The effects of foreign exchange increased 1995 earnings
per share by $.05 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 15%. This earnings per share
growth was favorably affected by the reduction in outstanding
shares due to the company's ongoing share repurchase program and
a lower effective income tax rate.
In the fourth quarter of 1994 the company purchased foreign
currency options to hedge its foreign currency exposure. These
hedges were implemented at exchange rates and in amounts designed
to minimize any unfavorable effect of currency fluctuations on
1995 earnings per share. As these options are required to be
reported at fair value, the company may experience some impact on
1995 quarterly results from currency fluctuations. Since the
company hedged with options, results for 1995 will continue to
benefit if the U.S. dollar continues to weaken. While the
company does not predict movements in foreign currency exchange
rates, if exchange rates remained as they were in early February
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 company believes that
capital gains may add less than $.05 per share to 1995 earnings
per share.
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 $15.3 million, or 4%,
to $358.5 million compared with $343.2 million a year ago.
Excluding the effect of changes in foreign currency exchange
rates, revenues increased about 2%. This 2% revenue increase was
attributable to higher advertising revenues. The increase in
advertising revenues was attributable 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 increased.
Books and home entertainment products revenues increased $101.7
million, or 11%, to $1,058.2 million compared with $956.5 million
for the same period a year ago. Excluding the effect of changes
in foreign currency exchange rates, revenues increased about 6%.
More than half of this 6% increase was attributable to sales of a
higher priced product mix. The remaining increase was due to
higher unit sales. Revenues in the U.S. and in international
markets increased compared with the prior year. Excluding the
effect of changes in foreign currency exchange rates, operating
profit on a comparable basis increased due to higher revenues and
a more profitable product mix.
Special interest magazines revenues increased $2.4 million, or
6%, to $43.4 million from $41.0 million a year ago. Excluding
the effect of changes in foreign currency exchange rates,
revenues increased about 5%. This 5% increase in revenues was
due to higher advertising revenue. Approximately three-quarters
of the increase in advertising revenues was caused by higher
advertising rates. The remaining increase was due to increased
advertising pages. Circulation levels were about the same as the
prior year. On a comparable basis, the operating loss for
special interest magazines declined because of increased revenues
and lower amortization expense.
Geographic Areas
The company has operations in the United States and in various
international locations. International locations are divided
between operations in Europe and Other Markets.
United States revenues increased 4% compared with the prior year.
Revenues for Europe increased 12% compared with the prior year.
Excluding the effect of changes in foreign currency exchange
rates, revenues for Europe increased about 4%. Revenues for
Other Markets increased 12% compared with the prior year.
Excluding the effect of changes in foreign currency exchange
rates, revenues for Other Markets increased about 11%. The
increases in revenues for the U.S., Europe and Other Markets were
primarily due to higher books and home entertainment products
sales.
Liquidity and Capital Resources
December 31, 1994 Compared With June 30, 1994
Cash and cash equivalents, short-term investments and marketable
securities decreased $118 million to $649 million at December 31,
1994, compared with $767 million at June 30, 1994. The decrease
was primarily the result of payments of dividends ($86 million)
and the repurchase of 1,989,400 shares of Class A nonvoting
common stock ($89 million) exceeding cash provided by operations
($80 million). Unrealized gains on the company's short-term
investments and marketable securities decreased $13 million to $6
million at December 31, 1994.
The company paid a $.40 per share dividend on its common stock in
the second quarter of fiscal 1995 compared with $.35 per share a
year ago. This represents a 14% increase in the second 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 1,253,800 shares of Class A nonvoting
common stock in the second quarter of 1995. The company
anticipates that its current program, announced in March 1994 to
acquire five million shares, should be completed in fiscal 1995.
The company has repurchased more than nine million 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1994 Annual Meeting of Stockholders of the Company, held
on November 11, 1994, 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
George V. Grune 21,072,204 50,399
James P. Schadt 21,087,382 35,221
Melvin R. Laird 21,067,096 55,507
William G. Bowen 21,072,717 49,886
Lynne V. Cheney 21,084,856 37,747
M. Christine DeVita 21,083,079 39,524
James E. Preston 21,078,843 43,760
Robert G. Schwartz 21,082,917 39,686
Walter V. Shipley 21,081,378 41,225
C.J. Silas 21,087,052 35,551
Proposal 2: Approval of 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
19,703,373 677,325 101,726 640,179
Proposal 3: Approval of the business criteria, maximum amount
and eligible employees for performance units under The Reader's
Digest Association, Inc. 1994 Key Employee Long Term Incentive
Plan. Proposal 3 was approved by the votes cast as follows:
Broker
For Against Abstain Non-Votes
20,072,877 289,479 120,068 640,179
Proposal 4: Approval of The Reader's Digest Association, Inc.
Employee Stock Purchase Plan (Amendment and Restatement as of
July 8, 1994). Proposal 4 was approved by the votes cast as
follows:
Broker
For Against Abstain Non-Votes
20,362,534 58,398 61,492 640,179
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: February 13, 1995 By: Anthony W. Ruggiero
Anthony W. Ruggiero
Senior Vice President and
Chief Financial Officer
Joseph G. NeCastro
Joseph G. NeCastro
Vice President and Controller
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the quarter ended December 31,
1994.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 172,000
<SECURITIES> 131,200
<RECEIVABLES> 818,800
<ALLOWANCES> 218,600
<INVENTORY> 187,800
<CURRENT-ASSETS> 1,406,200
<PP&E> 562,100
<DEPRECIATION> 317,800
<TOTAL-ASSETS> 2,261,100
<CURRENT-LIABILITIES> 1,230,400
<BONDS> 0
<COMMON> 1,000
0
28,800
<OTHER-SE> 773,200
<TOTAL-LIABILITY-AND-EQUITY> 2,261,100
<SALES> 1,566,400
<TOTAL-REVENUES> 1,566,400
<CGS> 579,300
<TOTAL-COSTS> 579,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 275,700
<INCOME-TAX> 103,300
<INCOME-CONTINUING> 172,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,400
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
</TABLE>
