ITEM 1.BUSINESS
The Reader's Digest Association, Inc. ("RDA" and, together with its subsidiaries, the "Company") is a preeminent global leader in publishing and direct marketing, creating and delivering products, including magazines, books, recorded music collections, home videos and other products, that inform, enrich, entertain and inspire.
RDA is a Delaware corporation that was originally incorporated in New York in 1926 and was reincorporated in Delaware in 1951. The mailing address of its principal executive offices is Pleasantville, New York 10570 and its telephone number is (914) 238-1000.
The Company's operations are reported in four business segments: (1) Reader's Digest magazine, (2) books and home entertainment products, (3) special interest magazines and (4) other businesses. For financial information by business segment, see Note 15 to the Company's consolidated financial statements appearing in the Company's 1995 Annual Report to Stockholders, which note is incorporated herein by reference.
The Company's businesses are organized in four operating groups. The organization of the Company's three geographic groups- - -Reader's Digest Europe, Reader's Digest U.S.A. and Reader's Digest Pacific--recognizes the distinct business needs and strategies appropriate in different markets throughout the world. The Company's fourth operating group--Special Markets--operates the Company's school and youth group fundraising business and focuses on developing new products and entering new marketing channels. (Reported geographic results for the Special Markets Group are included in the United States segment and reported business segment results are included in the Other Businesses segment.) For financial information by geographic area, see Note 15 to the Company's consolidated financial statements appearing in the Company's 1995 Annual Report to Stockholders.
Reader's Digest Magazine
Reader's Digest magazine is a monthly, general interest magazine consisting of original articles and previously published articles in condensed form, a condensed version of a previously published or soon-to-be published full-length book, monthly humor columns, such as "Laughter, The Best Medicine(r)," "Life In These United States(r)," "Humor In Uniform(r)," "Campus Comedy(r)" and "All In A Day's Work(r)," and other regular features, including "Heroes For Today(r)," "It Pays To Enrich Your Word Power(r)," "News From The World Of Medicine(r)" and "The Verbal Edge(tm)." DeWitt and Lila Wallace founded Reader's Digest magazine in 1922. Today, Reader's Digest has a worldwide circulation of approximately 27 million and an estimated 100 million readers each month, generating revenues of $732.9 million in fiscal 1995, as compared with $689.1 million in fiscal 1994 and $720.0 million in fiscal 1993. Reader's Digest is published in 47 editions and 18 languages. The Company began publication of a Polish edition in May 1995 and over the next few years plans to launch several new editions of Reader's Digest, with principal emphasis on Asia and Latin America. The Company announced in September 1995 that it will publish a new edition in Thailand beginning in April 1996.
Circulation
Based on the most recent audit report issued by the Audit Bureau of Circulation, Inc. ("ABC"), a not-for-profit organization that monitors circulation in the United States and Canada, the Company has determined that the United States edition of Reader's Digest has the largest circulation of any United States magazine, other than one that is automatically distributed to all members of the American Association of Retired Persons. Approximately 94% of the United States circulation of Reader's Digest consists of subscriptions. The balance consists of single copy sales at newsstands and in supermarkets and similar establishments.
Reader's Digest is truly a global magazine. Most of its international editions have the largest paid circulation both in the individual countries and in the regions in which they are published. For most international editions of Reader's Digest, subscriptions comprise about 90% of circulation. The balance is attributable to newsstand and other retail sales.
The Company maintains its circulation rate base through annual subscription renewals and new subscriptions. The global circulation rate base for Reader's Digest of 26,923,810 includes a circulation rate base of 15,000,000 for the United States-- English language edition. In the United States, the Company sells approximately five million new subscriptions each year in order to maintain its circulation rate base. New subscriptions are sold primarily by direct mail, with extensive use of sweepstakes entries and, in some cases, premium merchandise offers. The largest percentage of subscriptions is sold between July and December of each year. Subscriptions to Reader's Digest may be canceled at any time and the unused subscription price is refunded.
Worldwide revenues from circulation accounted for $571.7 million, or 78% of the total revenues of Reader's Digest magazine, in the fiscal year ended June 30, 1995.
Advertising
In fiscal 1995, Reader's Digest carried 1,033 advertising pages in its United States--English language edition and 13,082 advertising pages in its other editions. The estimated gross advertising revenues for the United States--English edition were $169.3 million and for the other editions were $126.3 million in fiscal 1995. (Figures for the United States--English language edition are as reported by Publishers Information Bureau, Inc. ("PIB") and for the other editions are based on data contained in the LNA/Rome Report of Expenditures in International Media. Gross advertising revenues are computed from basic one-time rates and the number of advertising pages carried and, therefore, exceed actual advertising revenues as included in the Company's financial statements. Actual advertising revenues reflect lower rates for multiple insertion, volume discounts and cash discounts.)
The United States and the larger international editions of Reader's Digest offer advertisers different regional editions, major market editions and demographic editions. These editions, containing the same editorial material, permit advertisers to concentrate their advertising in specific markets or to target specific audiences. Reader's Digest sells advertising in both the United States and international editions principally through an internal advertising sales force. The Company sells advertisements in multiple editions worldwide, and offers advertisers discounts for placing advertisements in more than one edition.
Worldwide revenues from advertising accounted for $161.3 million, or 22% of the total revenues of Reader's Digest magazine, in the fiscal year ended June 30, 1995.
Editorial
Reader's Digest is a reader-driven, family magazine. Editorial content is, therefore, crucial to the loyal subscriber base that constitutes the cornerstone of the Company's operations. The editorial goal of Reader's Digest is to inform, enrich, entertain and inspire. The articles, book section and features included in Reader's Digest cover a broad range of contemporary issues and reflect an awareness of traditional values.
A substantial portion of the selections in Reader's Digest are original articles written by staff writers or free-lance writers. The balance is selected from existing published sources. All material is condensed by Reader's Digest editors. The Company employs a professional staff to research and fact- check all published pieces.
Each international edition has a local editorial staff responsible for the editorial content of the edition. The mix of locally generated editorial material, material taken from the United States edition and material taken from other international editions varies greatly among editions. In general, the Company's larger international editions, for example, those in Canada, France, Germany and the United Kingdom, carry more original or locally adapted material than do smaller editions.
Production and Fulfillment
All editions of Reader's Digest are printed by independent third parties. The United States edition is currently printed by one printer at its location in New York State. In September 1994, the Company signed a new 10-year printing agreement with another printer, commencing in late 1996, to produce the United States edition at its Pennsylvania location. The Company believes that generally there is an adequate supply of alternative printing services available to the Company at competitive prices, should the need arise. The Company has developed plans to minimize recovery time in the event of a disaster at an existing printing facility.
The principal raw materials used in the publication of Reader's Digest are coated and uncoated paper. The Company has supply contracts with a number of global suppliers of paper and believes that those supply contracts provide an adequate supply of paper for its needs and that, in any event, alternative sources are available at competitive prices. Paper prices are affected by a variety of factors, including demand, capacity, pulp supply, and by general economic conditions.
Subscription copies of the United States edition of Reader's Digest are delivered through the United States Postal Service as second class mail. Subscription copies of international editions are also delivered through the postal service in each country. For additional information about postal rates and service, see "Direct Marketing Operations and Sweepstakes."
Newsstand and other retail distribution is accomplished through a distribution network. The Company has contracted in each country with a magazine distributor for the distribution of Reader's Digest.
Licensed Editions
Three international editions--the Korean and the two Indian editions--are not produced by subsidiaries of the Company, but rather are published by third parties to whom the Company has licensed the right to publish Reader's Digest and use the Company's trademarks (subject to Company approval of editorial content). The Reader's Digest Fund for the Blind, Inc., a New York not-for-profit corporation, publishes a large-type edition of Reader's Digest, pursuant to a royalty-free license. The Company also licenses, royalty-free, the right to publish a braille edition and a recorded edition of Reader's Digest. Revenues from licensed editions are not material. Books and Home Entertainment Products
The Company publishes and markets, principally by direct mail, Reader's Digest Condensed Books, series books, general books, recorded music collections and series and home video products. See "Direct Marketing Operations and Sweepstakes."
Condensed Books
Reader's Digest Condensed Books is a continuing series of condensed versions of current popular fiction and, to a limited extent, nonfiction. Condensation reduces the length of an existing text, while retaining the author's style, integrity and purpose. Today, 15 editions of Condensed Books, published in 12 languages, are marketed in 23 countries. In fiscal 1995, Condensed Books generated worldwide revenues of $392.1 million, as compared with $363.9 million in fiscal 1994 and $352.3 million in fiscal 1993.
International editions of Condensed Books generally include some material from the United States edition or from other international editions, translated and edited as appropriate, and some condensations of locally published works. Each local editorial staff determines whether existing Condensed Books selections are appropriate for their local market.
The Company publishes six volumes of Condensed Books a year in the United States. Some of the Company's international subsidiaries also publish six volumes a year, while others publish five. Condensed Books are marketed as an open-ended series.
Series Books
The Company markets two types of series books: reading series and illustrated series. These book series may be open- ended continuing series, or may consist of a limited number of volumes. Series books are published in nine languages and marketed in 18 countries. In fiscal 1995, series books generated worldwide revenues of $236.6 million, as compared with $214.9 million in fiscal 1994 and $228.8 million in fiscal 1993.
Series marketed in the United States include Today's Best Nonfiction(r), which consists of five volumes per year each generally containing condensed versions of four contemporary works of nonfiction and World's Best Reading, consisting of full- length editions of classic works of literature, of which six volumes are published each year. Today's Best Nonfiction is published in 12 countries in three languages and World's Best Reading is published in 12 countries in four languages. The Company recently introduced in selected European markets the Enhanced Reading Series, featuring condensations of existing books enhanced with additional information and photographs.
Illustrated series, which are marketed in the United States and several other countries, include The Reader's Digest American Medical Association Home Medical Library, People and Places of the World, and Successful Gardening. In addition, the Vie Sauvage illustrated series is marketed in 10 countries outside of the United States. Illustrated series are generally closed ended.
General Books
The Company's general books consist primarily of reference books, cookbooks, "how-to" and "do-it-yourself" books, songbooks, and books on subjects such as history, travel, religion, health, nature and the home. General books are published in 12 languages and are marketed in 31 countries. In fiscal 1995, general books generated worldwide revenues of $816.5 million, as compared with $755.2 million in fiscal 1994 and $826.4 million in fiscal 1993.
New general books are generally original Reader's Digest books, but may also be books acquired from other publishers. During the development period for an original Reader's Digest book, the Company conducts extensive research and prepares an appropriate marketing strategy for the book.
Although most sales of a general book will result from the initial bulk promotional mailing, substantial additional sales occur through subsequent promotions, catalog sales and the use of sales inserts in mailings for other Reader's Digest products. The Company also distributes a small portion of its books for retail sale in stores, through third-party distributors.
The Company is pursuing the use of electronic media and new technologies, such as CD-ROM and computer on-line services. In September 1994, the Company announced an agreement with Microsoft Corporation to produce original multimedia software for home computer users based on editorial content of the Company's best- selling books. The CD-ROM will be marketed by both companies and will carry both the Reader's Digestr and the Microsoftr Home brand names. Under the agreement, the Company has global direct mail rights and Microsoft Corporation has worldwide retail rights to the product.
In March 1995, the Company entered into a worldwide agreement with Dove Audio, Inc. ("Dove Audio") for direct marketing rights to Dove Audio's library of audio books, which currently numbers more than 800 titles. The agreement also provides that the Company may authorize Dove Audio to create new titles under the Reader's Digest brand using the content of the Company's books.
In July 1995, the Company and Meredith Corporation ("Meredith) entered into an agreement forming a strategic alliance that grants the Company certain exclusive direct marketing rights with respect to books and other products, such as music tapes and CDs, CD-ROMs and videotapes, published under Meredith's Better Homes and Gardens(r) and Ladies' Home Journal(r) trademarks. The agreement covers all such products bearing Meredith's brands and any other products created by Meredith or by the Company. The agreement also gives the Company direct access to Meredith's 60-million-name consumer database. The term of the strategic alliance will be approximately 16-1/2 years, with a five-year renewal option. The Company will pay Meredith royalties based on product sales and the use of Meredith's database.
Music
The Company publishes recorded music packages, which it sells by direct mail on cassettes and compact discs. The music packages are generally collections of previously recorded material by a variety of artists, although they may include selections from the Company's 16,000-selection library. The collections span a broad range of musical styles. In certain markets, the Company also sells music series, which are marketed in the same manner as Condensed Books and series books. The marketing strategy for music packages is similar to that for general books. The Company markets music products in 21 countries, offering different music products in the various international markets because of diverse tastes. In fiscal 1995, music products generated worldwide revenues of $435.9 million, as compared with $392.4 million in fiscal 1994 and $399.9 million in fiscal 1993.
Video
The Company's home video products are in genres similar to its general books. Several original video products have won awards of excellence, including three Emmy awards, and have appeared on the Disney Channel and the Discovery Channel. The Company continues to expand its video operations in the United States and in international markets and is presently marketing video products in the United States and 17 other countries. Most of the Company's original video programs have been licensed to cable television networks. The Company has also begun to sell its home video products through retail establishments. In fiscal 1995, home video products generated worldwide revenues of $218.7 million, as compared with $173.9 million in fiscal 1994 and $150.6 million in fiscal 1993.
Reader's Digest Young Families, Inc.
Reader's Digest Young Families, Inc., a wholly owned subsidiary of the Company, creates and markets children's books and home entertainment products. The subsidiary brings together in one stand-alone operation the business of Joshua Morris Publishing, Inc., a book publisher and packager acquired in 1991, and the publishing imprint of Reader's Digest Kids(r). Reader's Digest Young Families publishes books in 29 languages and is introducing more than 45 titles for the fall 1995 season. Beginning in fiscal 1996, Reader's Digest Young Families will be operated as part of the Special Markets Group and its financial results will be reported as part of the Special Markets Group.
In October 1994, Reader's Digest Young Families obtained direct marketing rights from Children's Television Workshop to create new books featuring Sesame Street licensed characters from the popular children's television program. In addition, Reader's Digest Young Families acquired from Western Publishing Company, Inc. the direct marketing rights for four children's book series, including the Sesame Street Book Club and Berenstain Bears Book Club.
Production and Fulfillment
The various editions of Condensed Books are printed and bound by third-party contractors. In September 1994, the Company entered into a seven-year exclusive agreement for printing Condensed Books distributed in the United States and Canada. The Company solicits bids for the printing and binding of each general book or book series. Production and manufacture of music and video products is typically accomplished through third parties.
The principal raw material necessary for the publication of Condensed Books, series books and general books is paper. The Company has a number of paper supply arrangements relating to paper for Condensed Books. Paper for series books and general books is purchased for each printing. The Company believes that existing contractual and other available sources of paper provide an adequate supply at competitive prices. Third parties arrange for the acquisition of some of the necessary raw materials for the manufacture of music and video products.
Fulfillment, warehousing, customer service and payment processing are conducted principally by independent contractors. Most of the Company's products are packaged and delivered to the Postal Service directly by the printer or supplier. For information about postal rates and service, see "Direct Marketing Operations and Sweepstakes."
In all of the Company's direct marketing sales, a customer may return any book or home entertainment product to the Company either prior to payment or after payment for a refund. The Company believes that its returned goods policy is essential to its reputation and also elicits a greater number of orders, many of which are not returned because of the generally high satisfaction rate of consumers with the Company's products. Nonetheless, this policy and a "first book free" policy for Condensed Books and series books result in a significant amount of returned goods.
Sales of the Company's books and home entertainment products are seasonal to some extent. In the direct marketing industry as a whole, the winter months have traditionally had higher consumer response than other times of the year. Sales are also higher during the pre-Christmas season than in spring and summer.
Direct Marketing Operations and Sweepstakes
The sale of magazine subscriptions, Condensed Books, series books, general books, music and video products, as well as certain other products, is accomplished principally through direct marketing solicitations to households on the Company's customer lists, usually accompanied by sweepstakes entries and, in some cases, premium merchandise offers. For many years the Company has been acknowledged as a pioneer and innovator in the direct mail industry. As part of its growth strategy, the Company has begun to pursue increased distribution of its products through direct response channels other than direct mail, such as catalogs, clubs and direct response television.
To promote the sale of its products in the United States, the Company offers in its promotional mailings participation in an annual sweepstakes, whose prizes totaled $13.4 million for the 1995 edition and will total about $13.7 million for 1996. Generally, each of the Company's international subsidiaries sponsors its own sweepstakes, the mechanics of which vary from jurisdiction to jurisdiction, depending upon local law.
From time to time, the Company is involved in proceedings concerning its direct marketing promotions. Also from time to time, more restrictive laws or regulations governing sweepstakes or direct marketing are considered in some jurisdictions, principally in Europe. The Company does not believe that such proceedings and proposed laws and regulations will have a material adverse effect on the Company's direct marketing business.
The Company is subject to postal rate increases, which affect its product deliveries, promotional mailings and billings. Postage is one of the Company's largest expenses in its promotional and billing activities. In the past, the Company has had sufficient advance notice of most increases in postal rates so that the higher rates could be factored into the Company's pricing strategies and operating plans. Because increased prices (or increased delivery charges paid by customers) may have a negative effect on sales, the Company may strategically determine from time to time the extent, if any, to which these cost increases are passed on to its customers.
The Company relies on postal delivery service in the jurisdictions in which it operates for timely delivery of its products and promotional mailings. In the United States, delivery service is generally satisfactory. Some international jurisdictions, however, experience periodic work stoppages in postal delivery service or less than adequate postal efficiency, although these problems have not had a significant impact on the Company.
In some states in the United States and in some foreign jurisdictions, some or all of the Company's products are subject to sales tax or value added tax. Tax, like delivery, is generally stated separately on bills where permitted by applicable law. Nonetheless, tax increases or imposition of new taxes increases the total cost to the customer and thus may have a negative effect on sales. Moreover, in jurisdictions where applicable tax must be included in the purchase price, the Company may be unable to fully recover from customers the amount of any tax increase or new tax.
Management Information Systems and List Enhancement
The size and quality of the Company's computerized customer list in each country in which it operates contribute significantly to its business and the Company is constantly striving to improve its lists. The Company believes that its United States list of about 50 million households, over half the total number of households in the country, is one of the largest direct response lists in the United States. The Company's international lists include a comparable number of households, in the aggregate. Unlike many publishers, the Company does not rent or sell its lists to third parties, although the Company's special interest magazines do rent their subscription lists. As part of the Company's marketing strategy to expand and enhance its customer lists, the Company may from time to time engage in limited exchanges of information from its customer lists.
The Company is making and will continue to make significant investments in management information systems in order to improve its operating efficiencies, increase the level of service provided to its customer base and facilitate globalization of the Company.
List management activity is limited in some international subsidiaries because local jurisdictions, particularly in Europe, have data protection laws or regulations prohibiting or limiting the exchange of such information. Certain jurisdictions also prohibit the retention of information, other than certain basic facts, about noncurrent customers. Although data protection laws may hinder the Company's list enhancement capacity, the Company believes that current laws and regulations do not prevent the Company from engaging in activities necessary to its business.
Special Interest Magazines
The Company publishes several special interest magazines that it deems consistent with its image, editorial philosophy and market expertise. Travel Holiday(r) magazine is a practical travel magazine aimed at middle income travelers. The Family Handyman(r) magazine provides instructions and guidance for "do-it-yourself" home improvement projects. New Choices for Retirement Living(r) magazine is aimed at active, mature readers and provides information on entertainment, travel, health and leisure time activities. American Health(r) magazine provides helpful information on medicine, nutrition, psychology and fitness. These magazines are sold by subscription. The Family Handyman and American Health are also sold on newsstands. In addition, Travel Holiday is distributed to members of a travel club, which also provides its members with various other benefits, such as travel insurance. Like most magazines, the Company's special interest magazines are highly dependent on advertising revenue. Each of these magazines publishes 10 issues per year. The Company also publishes Moneywise magazine, a magazine devoted to helping families manage their finances, in the United Kingdom.
The following table sets forth the circulation rate base of each of the Company's United States special interest magazines at June 30, 1995, as well as the number of advertising pages carried and the advertising revenues (before deducting discounts and commissions) for the fiscal years then ended. Circulation rate base data is as reported to ABC and advertising data is as reported by PIB.
Number of Gross Circulation Advertising Advertising Rate Base Pages Carried Revenues
The Family Handyman 1,000,000 500 $17,234,390 American Health 800,000 465 $13,611,041 Travel Holiday 600,000 531 $15,025,664 New Choices for Retirement Living 600,000 448 $14,100,365
____________ Gross advertising revenues are computed from basic one- time rates and the number of advertising pages carried and, therefore, exceed actual advertising revenues as included in the Company's financial statements. Actual advertising revenues reflect lower rates for multiple insertion, volume discounts and cash discounts.
Moneywise had a circulation rate base of 132,500 as of the end of fiscal 1995.
Of total revenues of $95.6 million for the Company's special interest magazines in fiscal 1995, 61% was generated by circulation revenues and 39% by advertising revenues.
The U.S. magazines are promoted to the Company's U.S. customer list and the Company's other products are promoted to each magazine's customer list, as appropriate. This strategy helps to expand the Company's customer base for all of its products.
The Company is working with software developers and computer on-line services to adapt its special interest magazines to new technologies. For example, The Family Handyman is available through The CompuServe Information Service and Travel Holiday is available through America Online and the Electronic Newsstand on the Internet. The Company plans to launch a site on the World Wide Web in fiscal 1996.
Other Businesses; Special Markets
The Company's wholly owned subsidiary, QSP, Inc. ("QSP") and a Canadian affiliate, are in the business of assisting schools and youth groups in the United States and Canada in their fundraising efforts. QSP's staff helps schools and youth groups prepare fundraising campaigns in which participants sell magazine subscriptions, music and video products, books, food and gifts. QSP derives its revenue from a portion of the proceeds of each sale. Several hundred publishers (including the Company) make magazine subscriptions available to QSP at a substantial discount. QSP also obtains discounted music products from a large music publisher. Processing of magazine subscription orders and payments is performed for QSP by an independent contractor. In August 1995, a Canadian subsidiary of the Company acquired the remaining 50% of the Company's Canadian affiliate from another large Canadian publisher.
In some markets, the Company also sells other products by direct response marketing, principally language courses (consisting of written materials and cassettes) and globes. Revenues from these activities are not material to the Company's business.
The foregoing other businesses are operated as part of the Company's Special Markets Group. Beginning in fiscal 1996, Reader's Digest Young Families will also be operated as part of that group and its financial results, which in fiscal 1995 are reported in the United States geographic and Books and Home Entertainment Products business segments, will be reported with the Special Markets Group in the United States geographic and Other Businesses business segments.
Competition and Trademarks
Although Reader's Digest magazine is a unique and well- established institution in the magazine publishing industry, it competes with other magazines for subscribers and with magazines and all other media, including radio and television, for advertising. The Company believes that the extensive and longstanding international operations of Reader's Digest provide the Company with a significant advantage over competitors seeking to establish a global publication.
The Company owns numerous trademarks that it uses in its business worldwide. Its two most important trademarks are "Reader's Digest" and the "Pegasus" logo. The Company believes that the name recognition, reputation and image that it has developed in each of its markets significantly enhance customer response to the Company's direct marketing sales promotions. Accordingly, trademarks are important to the Company's business and the Company aggressively defends its trademarks.
The Company believes that its name, image and reputation, as well as the quality of its customer lists, provide a significant competitive advantage over many other direct marketers. However, the Company's books and home entertainment products business is in competition with companies selling similar products at retail as well as by direct marketing. Because tests show that consumers' responses to direct marketing promotions can be adversely affected by the overall volume of direct marketing promotions, the Company is also in competition with all other direct marketers, regardless of whether the products being offered are similar to the Company's products.
Each of the Company's special interest magazines is in competition with other magazines of the same genre for readers and advertising. Nearly all of the Company's products compete with other products and services that utilize leisure activity time or disposable income.
Employees
As of June 30, 1995, the Company employed approximately 6,200 persons worldwide. Approximately 2,000 were employed in the United States and 4,200 were employed by the Company's international subsidiaries. The Company's relationship with its employees is generally satisfactory.
Executive Officers of the Company
The following paragraphs set forth the name, age and offices with the Company of each present executive officer of the Company, the period during which each executive officer has served as such and each executive officer's business experience during the past five years:
Name and Age Positions and Offices With the Company
James P. Schadt (57) Mr. Schadt is Chairman and Chief Executive Officer of the Company. He became Chairman on August 1, 1995 and became Chief Executive Officer on August 1, 1994. He joined the Company as President and Chief Operating Officer and was elected to the Board of Directors of the Company in September 1991. He served as President of the Company until September 8, 1995. He was a member of the board of directors of Cadbury Schweppes plc of London and Chief Executive Officer of its worldwide beverage business, Cadbury Beverages, Inc., from 1986 through July 1991.
Kenneth A. Gordon (58) Mr. Gordon was elected President and Chief Operating Officer of the Company and a member of the Board of Directors on September 8, 1995. He has been President, Reader's Digest U.S.A. since July 1993. Mr. Gordon was an Executive Vice President of the Company from April 1995 to September 1995, a Senior Vice President from January 1994 to April 1995 and a Vice President prior thereto. In addition, Mr. Gordon was President, International Group from October 1989 to June 1993. He joined the Company in 1960.
Joseph M. Grecky (56) Mr. Grecky has been Senior Vice President, Human Resources since January 1994. He had been Vice President, Human Resources since he joined the Company in 1987.
Heikki K. Helenius (53) Mr. Helenius has been President, Reader's Digest Europe and Vice President of the Company since July 1993. He was Vice President, International Group from January 1992 to June 1993 and was Managing Director of the Company's Finnish subsidiary prior thereto. Mr. Helenius joined the Company in 1972.
Melvin R. Laird (73) Mr. Laird has been a member of the Board of Directors of the Company since 1990. He has served as Senior Counsellor since 1974 and was elected to the additional position of Vice President in 1989. Mr. Laird joined the Company in 1974.
Barbara J. Morgan (50) Mrs. Morgan has been Senior Vice President and Editor-in-Chief, Books and Home Entertainment since April 1995. She was Vice President and Editor-in-Chief, Condensed Books from August 1987 to April 1995. She joined the Company in 1973.
Name and Age Positions and Offices With the Company
Martin J. Pearson (48) Mr. Pearson, who joined the Company in August 1973, has been President, Reader's Digest Pacific and Vice President of the Company since July 1993. He was Managing Director of Reader's Digest Australia from January 1990 to June 1993 and was its Marketing Director prior thereto.
Jack A. Smith (47) Mr. Smith has been Vice President, Corporate Planning, Research and Development since April 1995. He joined the Company as Vice President, Corporate Planning and Development in June 1991 and was a partner in the Consulting Services Division at Marketing Corporation of America prior thereto.
Paul A. Soden (51) Mr. Soden has been Senior Vice President and General Counsel since he joined the Company in February 1995. He became Secretary of the Company in September 1995. Prior thereto, he was Vice President, General Counsel and Secretary for Sterling Winthrop, Inc. (pharmaceutical and consumer products).
Kenneth Y. Tomlinson (51) Mr. Tomlinson, who joined the Company in 1968, has been Editor-in- Chief, Reader's Digest magazine since December 1990. In addition, he has been a Senior Vice President of the Company since April 1995 and was a Vice President prior thereto.
William H. Willis (44) Mr. Willis has been President, Special Markets Group and Vice President of the Company since he joined the Company in January 1994. He was previously Executive Vice President, Marketing and Sales of Ogden Services Corporation (facility management services).
Stephen R. Wilson (48) Mr. Wilson joined the Company as Executive Vice President and Chief Financial Officer in April 1995. He was Executive Vice President and Chief Financial Officer of RJR Nabisco Holdings Corp. (tobacco and food products) and its wholly owned subsidiary, RJR Nabisco, Inc. from May 1993 to April 1995, and was Senior Vice President, Corporate Development prior thereto.
Additional Corporate Officers
Connie K. Beck Vice President and Associate General Counsel Gregory G. Coleman Vice President and Publisher, U.S. Reader's Digest and Special Interest Magazines Peter J.C. Davenport Senior Vice President, Global Direct Marketing Thomas M. Kenney Vice President and President, U.S. Magazine Publishing Bruce G. Koe Vice President, Global Operations Milan Kofol Vice President and Treasurer Marcia M. Lefkowitz Vice President, Marketing, Reader's Digest U.S.A. Kenneth A. Nelson Vice President, Global Management Information Systems George S. Scimone Vice President and Controller
Pursuant to the By-Laws of the Company, officers serve at the pleasure of the Board of Directors. Officers of the Company are elected annually to serve until their respective successors are elected and qualified.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters and principal operating facilities are situated on approximately 120 acres in Westchester County, New York, much of which the Company acquired in 1940. The site includes five principal buildings aggregating approximately 697,000 square feet that house executive, administrative, editorial and operational offices, and data processing and other facilities. In New York City, the Company leases approximately 181,000 square feet of office space in a total of four buildings, portions of which are used as editorial offices for its books and home entertainment products business, as advertising sales offices for Reader's Digest magazine and as offices for the Company's special interest magazines. The Company leases space for an editorial bureau, advertising sales offices and other purposes in various cities in the United States.
The Company leases approximately 10,000 square feet of warehouse space in Brewster, New York. QSP leases approximately 163,000 square feet in Conyers, Georgia, 4,000 square feet in Danbury, CT, 20,000 square feet in Stone Mountain, Georgia and 21,000 square feet in Ridgefield, Connecticut. Reader's Digest Young Families leases approximately 36,000 square feet of office space in Westport, Connecticut.
The Company owns approximately 1,613,900 square feet and leases approximately 756,000 square feet of space outside the United States that is utilized by the Company's international operating subsidiaries principally as headquarters, administrative and editorial offices and warehouse space. The foregoing properties owned by the Company include 263,000 square feet of space in Swindon, United Kingdom, in a building owned by the Company on land leased by the Company through 2076.
The Company believes that its current facilities, together with expansions and upgrading of facilities presently underway or planned, are adequate to meet its present and reasonably foreseeable needs. The Company also believes that adequate space will be available to replace any leased facilities for which the leases expire in the near future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in several lawsuits and claims arising in the regular course of business. Based on the opinions of management and counsel for such matters, recoveries, if any, by plaintiffs and claimants would not materially affect the financial position of the Company or its results of operations.
On December 21, 1993, the Roman Catholic Bishop of San Diego and the Chino Unified School District commenced a lawsuit in the U.S. District Court for the Southern District of California against a subsidiary of the Company, QSP, Inc., and the Company, alleging violation of the federal antitrust laws and seeking treble damages in an unspecified amount and certain injunctive relief. The complaint alleges that QSP, Inc. is unlawfully monopolizing a claimed school and youth group magazine fund raising market. The suit was certified as a class action on July 1, 1994. Extensive depositions and discovery have taken place and are expected to conclude before the end of 1995. While the final outcome of this lawsuit cannot be determined with certainty, management believes that the final outcome will not have a material adverse effect on the Company's results of operations or financial position and the Company intends to defend this action vigorously.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended June 30, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Selected Quarterly Financial Data and Dividend and Market Information" in the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected Quarterly Financial Data and Dividend and Market Information" and "Selected Financial Data" in the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The information contained under the caption "Management's Discussion and Analysis" in the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appearing on pages 26 through 35 of the Company's 1995 Annual Report to Stockholders, together with the report thereon of KPMG Peat Marwick LLP appearing on page 37, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company under the caption "Election of Directors" in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on November 10, 1995 is incorporated herein by reference. Information with respect to executive officers of the Company appears under the caption "Executive Officers of the Company" in Item 1 of Part I hereof and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation under the captions "Executive Compensation," "Report of the Compensation & Nominating Committee" and "Performance Graph" in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on November 10, 1995 is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management under the caption "Equity Security Ownership" in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on November 10, 1995 is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions under the caption "Executive Compensation-- Miscellaneous" in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on November 10, 1995 is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements See the Index to Consolidated Financial Statements on page 20 of this Report.
(2) Financial Statement Schedules All schedules have been omitted since the information required to be submitted has been included in the Consolidated Financial Statements or Notes thereto or has been omitted as not applicable or not required.
(3) Exhibits
3.1.1 Restated Certificate of Incorporation of The Reader's Digest Association, Inc. filed with the State of Delaware on February 7, 1990 filed as Exhibit 3.1.1 to the registrant's Form 10-K for the year ended June 30, 1993, is incorporated herein by reference.
3.1.2 Certificate of Amendment of the Certificate of Incorporation of The Reader's Digest Association, Inc. filed with the State of Delaware on February 22, 1991 filed as Exhibit 3.1.2 to the registrant's Form 10-K for the year ended June 30, 1993, is incorporated herein by reference.
3.2 Amended and Restated By-Laws of The Reader's Digest Association, Inc., effective February 22, 1991 filed as Exhibit 3.2 to the registrant's Form 10-K for the year ended June 30, 1993, is incorporated herein by reference.
10.1 The Reader's Digest Association, Inc. Management Incentive Compensation Plan (Amendment and Restatement as of July 1, 1994) filed as Exhibit 10.1 to the registrant's Form 10-K for the year ended June 30, 1994, is incorporated herein by reference.*
10.2 The Reader's Digest Association, Inc. 1989 Key Employee Long Term Incentive Plan filed as Exhibit 10.2 to the Registration Statement on Form S-1 (Registration No. 33- 32566) filed by registrant on December 19, 1989, is incorporated herein by reference.*
10.3 The Reader's Digest Association, Inc. 1994 Key Employee Long Term Incentive Plan filed as Exhibit 10.17 to the registrant's Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference.*
10.4 The Reader's Digest Association, Inc. Deferred Compensation Plan (Amendment and Restatement as of July 8, 1994) filed as Exhibit 10.4 to the registrant's Form 10-K for the year ended June 30, 1994, is incorporated herein by reference.*
10.5 The Reader's Digest Association, Inc. Severance Plan for Senior Management (Amendment and Restatement as of July 8, 1994) filed as Exhibit 10.5 to the registrant's Form 10-K for the year ended June 30, 1994, is incorporated herein by reference.*
10.6 The Reader's Digest Association, Inc. Income Continuation Plan for Senior Management (amended and restated) filed as Exhibit 10.5 to the registrant's Form 10-K for the year ended June 30, 1993, is incorporated herein by reference.*
10.7 Excess Benefit Retirement Plan of The Reader's Digest Association, Inc. (Amendment and Restatement as of July 1, 1994) filed as Exhibit 10.7 to the registrant's Form 10-K for the year ended June 30, 1994, is incorporated herein by reference.*
10.8 Supplemental Retirement Agreement dated as of May 15, 1985 between the registrant and George V. Grune filed as Exhibit 10.12 to the Registration Statement on Form S-1 (Registration No. 33-32566) filed by registrant on December 19, 1989, is incorporated herein by reference.*
*Denotes a management contract or compensatory plan.
10.9 Supplemental Retirement Benefit Agreement dated as of August 22, 1988 between the registrant and George V. Grune filed as Exhibit 10.7 to the Registration Statement on Form S-1 (Registration No. 33-32566) filed by registrant on December 19, 1989, is incorporated herein by reference.*
10.10 Supplemental Retirement Benefit Agreement dated as of August 25, 1988 between the registrant and Kenneth A. Gordon filed as Exhibit 10.10 to the Registration Statement on Form S-1 (Registration No. 33-32566) filed by registrant on December 19, 1989, is incorporated herein by reference.*
10.11 Supplemental Retirement Benefit Agreement dated as of December 12, 1989 between the registrant and Thomas M. Kenney filed as Exhibit 10.21 to the registrant's Form 10-K for the year ended June 30, 1991, is incorporated herein by reference.*
10.12 Supplemental Retirement Benefit Agreement dated as of August 16, 1990 between the registrant and Anthony W. Ruggiero filed as Exhibit 10.22 to the registrant's Form 10- K for the year ended June 30, 1991, is incorporated herein by reference.*
10.13 Supplemental Retirement Benefit Agreement dated as of September 13, 1991 between the registrant and James P. Schadt filed as Exhibit 10.16 to the registrant's Form 10-K for the year ended June 30, 1993, is incorporated herein by reference.*
10.14 Supplemental Retirement Benefit Agreement dated as of August 25, 1988 between the registrant and Joseph M. Grecky.*
10.15 Supplemental Retirement Benefit Agreement dated as of June 8, 1994 between the registrant and Martin J. Pearson.*
10.16 Supplemental Retirement Benefit Agreement dated as of August 23, 1988 between the registrant and Kenneth Y. Tomlinson.*
10.17 The Reader's Digest 1992 Executive Retirement Plan (Amendment and Restatement as of September 8, 1995).*
10.18 The Reader's Digest Association, Inc. Deferred Compensation Plan for Non--Employee Directors filed as Exhibit 10.20 to the registrant's Form 10-K for the year ended June 30, 1990, is incorporated herein by reference.*
10.19 Resolution of the Board of Directors of the registrant adopted January 10, 1986 relating to compensation for former members of the Board of Directors.*
10.20 Agreement dated July 10, 1992 between the registrant and George V. Grune filed as Exhibit 10.15 to the registrant's Form 10-K for the year ended June 30, 1992, is incorporated herein by reference.*
10.21 Agreement dated as of February 17, 1995 between the registrant and an executive officer filed as Exhibit 10.17 to the registrant's Form 10-Q for the quarter ended March 31, 1995, is incorporated by reference.*
*Denotes a management contract or compensatory plan.
13 Financial Review appearing at pages 20 through 36 of the registrant's 1995 Annual Report to Stockholders, together with the report thereon of KPMG Peat Marwick LLP appearing on page 37 (furnished for the information of the Securities and Exchange Commission only and not to be deemed filed as part of this Annual Report on Form 10-K, except for the portions thereof that are specifically incorporated herein by reference).
21 Subsidiaries of the registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three months ended June 30, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
By: James P. Schadt (James P. Schadt) Chairman and Chief Executive Officer Date: September 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
James P. Schadt Chairman and Chief September 26, 1995 (James P. Schadt) Executive Officer and a Director
Kenneth A. Gordon President and Chief September 26, 1995 (Kenneth A. Gordon) Operating Officer and a Director
Melvin R. Laird Vice President and September 26, 1995 (Melvin R. Laird) Senior Counsellor and a Director
Stephen R. Wilson Executive Vice September 26, 1995 (Stephen R. Wilson) President and Chief Financial Officer
George S. Scimone Vice President and September 26, 1995 (George S. Scimone) Controller
William G. Bowen Director September 26, 1995 (William G. Bowen)
Lynne V. Cheney Director September 26, 1995 (Lynne V. Cheney)
M. Christine DeVita Director September 26, 1995 (M. Christine DeVita)
James E. Preston Director September 26, 1995 (James E. Preston)
Robert G. Schwartz Director September 26, 1995 (Robert G. Schwartz)
Walter V. Shipley Director September 26, 1995 (Walter V. Shipley)
C.J. Silas Director September 26, 1995 (C.J. Silas)
THE READER'S DIGEST ASSOCIATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of KPMG Peat Marwick LLP, Independent Auditors *
Financial Statements:
Consolidated Statements of Income--For the Years Ended June 30, 1995, 1994 and 1993 *
Consolidated Balance Sheets--June 30, 1995 and 1994 *
Consolidated Statements of Cash Flows--For the Years Ended June 30, 1995, 1994 and 1993 *
Consolidated Statements of Changes in Stockholders' Equity-- For the Years Ended June 30, 1995, 1994 and 1993 *
Notes to Consolidated Financial Statements *
____________ *Incorporated by reference to the Company's 1995 Annual Report to Stockholders. See Item 8 of the Annual Report on Form 10-K.