Reader's Digest Association Announces 1Q Fiscal 2005 Results; Includes Previously Announced Change in Expensing of Promotions; RD North America and International Profits Improve

Oct 28, 2004, 01:00 ET from The Reader's Digest Association, Inc.

    PLEASANTVILLE, N.Y., Oct. 28 /PRNewswire-FirstCall/ -- The Reader's Digest
 Association, Inc. (NYSE:   RDA) today reported a loss of $(0.31) per share for
 the first quarter of Fiscal 2005 ended September 30, 2004.  Results included a
 non-cash charge of $(0.17) per share for amortization of previously deferred
 magazine promotion expenses and an estimated $(0.05) per share related to the
 timing of expensing first quarter promotion costs as incurred versus deferring
 such costs, the company's practice last year.  In Fiscal 2004, the first-
 quarter loss was $(0.14) per share.  The Fiscal 2005 variance was attributable
 to the two promotion-expense items, partly offset by stronger operating
 results in both the RD North America and RD International business segments.
     Revenues were $490 million versus $495 million in the Fiscal 2004 quarter.
 The company reported an operating loss of $(36) million, which included $(25)
 million of amortization of previously deferred magazine promotion expenses and
 an estimated $(7) million in promotion expense timing impact.  Last year, the
 company reported a first-quarter operating loss of $(13) million.
     "Overall, operating results were better than our expectations and
 significantly better than last year's when adjusted for the change to
 expensing previously deferred promotion costs as incurred," said Thomas O.
 Ryder, Chairman and Chief Executive Officer.  "Our core businesses in RD North
 America and RD International continue to show increasing strength.  QSP and
 Books Are Fun are operating in competitive environments and addressing their
 respective challenges."
     The company's first quarter is historically not the most significant and
 typically has a loss as RDA gears up for its fall and winter selling seasons.
 Factors contributing to the year-over-year variance in reported results for
 the first quarter include:
 
      *  A $3 million increase in operating profits at RD North America, which
         improved by 27 percent despite an estimated incremental $(5) million
         of timing-related magazine promotion expense.
 
      *  A $2 million increase in operating profits at RD International, which
         improved from a loss of $(1) million despite an estimated incremental
         $(2) million of timing-related magazine promotion expense.
 
      *  A $(3) million increase in losses at CBS.
 
      *  A $1 million improvement in corporate unallocated expense.
 
      *  A $(25) million non-cash charge related to amortization of a portion
         of the deferred magazine promotion expenses on the books as of June
         30, 2004.
 
      *  A $(3) million increase in expenses in other income/(expense), net,
         reflecting $4 million in proceeds from asset sales in prior year
         results.
 
     Free cash flow (change in cash before the change in total borrowings,
 dividends, share repurchases, divestitures and acquisitions) was a use of
 $(87) million, versus a use of $(71) million in the year-ago quarter.  The
 company historically uses significant cash in the first quarter in preparation
 for the fall and winter selling seasons at Books Are Fun (BAF) and QSP.  The
 increase in use was attributable to timing of working capital and to
 incremental cash flow in the Fiscal 2004 quarter from the sale of Schoolpop,
 Inc., and LookSmart, Ltd. shares.
     As previously announced, effective July 1, 2004 the company changed its
 accounting for magazine direct-response promotion costs and began expensing
 costs as incurred, versus the previous practice of deferring and amortizing
 much of those costs.  This change was precipitated by changes in the company's
 magazine business and by new initiatives the company is undertaking.  In
 connection with this change, a non-cash charge of $(27) million was taken to
 reflect amortization of a portion of the total existing deferred promotion
 expense balance at June 30 of $(104) million.  The remaining balance of $(77)
 million, or $(0.49) per share, will be amortized over Fiscal 2005, with the
 first-quarter impact being $(25) million, or $(0.17) per share.  All of these
 amounts are non-cash.  Excluding this amortization, the change is expected to
 have a minimal impact on the full fiscal year but will result in timing
 differences in year-to-year quarter comparisons.  These timing differences
 will result in unfavorable comparisons in the first half and favorable
 comparisons in the second.
 
     Other Income and Expense, Net
     Other income and expense, net was $(11) million this quarter, unfavorable
 by $(3) million compared with last year.  Net interest expense was $(11)
 million in this quarter and in the year-ago quarter.  The average cost of
 borrowings this quarter was 4.8 percent versus 4.0 percent in the year-ago
 quarter.  In addition, last year's results included a gain of $3 million from
 the sale of Schoolpop, Inc. and a gain of $1 million on the sale of the
 company's remaining shares in LookSmart, Ltd.
 
     Outlook
     The company continues to expect full-year Fiscal 2005 earnings per share
 to be in line with the Previously Announced Fiscal 2005 Guidance of  $0.77 to
 $0.87, not including amortization for deferred magazine promotions costs
 ($(0.49) per share) and special items (including restructuring charges).
 
 
     Reconciliation of Previously Announced
      Fiscal 2005 Guidance                                  EPS
     Previously Announced Fiscal 2005 Guidance         $0.77 - $0.87
     Add:
       Amortization of existing magazine deferred
        promotion asset as of June 30, 2004                   $(0.49)
          Earnings per share                           $0.28 - $0.38
 
 
                              Segment Information
 
     In millions                     Fiscal 2005     Fiscal 2004        Better/
                                    Quarter 1 (a)   Quarter 1 (a)       (Worse)
     Revenues:
      Reader's Digest North America     $210            $210           $ --
      Reader's Digest International      215             216             (1)
      Consumer Business Services          71              75             (4)
      Intercompany eliminations           (6)             (6)            --
       Total revenues                   $490            $495           $ (5)
 
     Operating Profit (Loss):
      Reader's Digest North America      $13             $10             $3
      Reader's Digest International        1              (1)             2
      Consumer Business Services         (16)            (13)            (3)
      Corporate Unallocated               (9)            (10)             1
      Deferred Promotion Amortization    (25)             --            (25)
       Total operating profit/(loss)    $(36)           $(13)          $(23)
 
      (a) Certain amounts do not recalculate due to rounding.
 
     Reader's Digest North America (RDNA)
     In the first quarter, revenues for RDNA were $210 million, flat to last
 year.  Results largely reflect increases at Reiman, financial services and
 Canada offset by lower revenues at U.S. BHE related to a reduction in
 unprofitable marketing activities including telemarketing at Reader's Digest
 Young Families and planned lower circulation sales at Reader's Digest
 magazine.  This segment now includes results from the financial services and
 Young Families businesses (see "Segment Composition").
     Operating profits improved by 27 percent in the quarter to $13 million
 despite an estimated incremental $(5) million in promotion expense timing in
 the current year's quarter.  The improvement marks the 10th consecutive
 quarter of year-over-year gains in profits at RDNA.  Profits improved across
 nearly all units within the segment.  The strongest drivers were improved
 profits at Reiman's book business, increased subscriber profitability at
 Reader's Digest magazine, a one-time fee in financial services related to the
 termination of a partnership agreement, improved profitability at Young
 Families, higher advertising sales at Selecciones, The Family Handyman and
 Reader's Digest Large Print, and continued profit improvement at U.S. BHE.
 
     Reader's Digest International (RDI)
     In the first quarter, RDI revenues were $215 million, versus $216 million
 in the year-ago period.  Operating profits improved to $1 million, despite an
 estimated $(2) million in incremental promotion expense timing, versus a loss
 of $(1) million in last year's quarter.  Excluding the effects of foreign
 currency translation, revenues declined by 8 percent.  Profits improved in
 most international markets, led by gains in the larger markets-Germany,
 Australia, the United Kingdom, France and Poland.  Most markets benefited from
 lower operating costs and improved marketing execution.  These improvements
 were partially offset by further investment in new initiatives launched last
 year including new market launches in Romania, Croatia, Slovenia and Ukraine,
 which are all performing ahead of internal expectations.  The company also
 invested in tests of a Reiman-style magazine in Brazil and a new "English as a
 Second Language" product in several markets.
 
     Consumer Business Services (CBS)
     Revenues at Consumer Business Services were $71 million in the quarter, a
 decline of 5 percent, and the operating loss was $(16) million versus a loss
 of $(13) million last year.  The first quarter is typically the smallest for
 CBS as BAF and QSP invest in preparation for the fall and winter selling
 seasons.  Revenues at QSP grew slightly on higher magazine subscription sales,
 while operating losses increased, driven by higher campaign investment and
 sales force expansion.  BAF revenues and profits were off compared to last
 year, principally because of fewer events in schools.  The decline in school
 events reflects higher sales force turnover, delayed school openings (Labor
 Day fell one week later than last year), and school closures because of
 hurricanes in the southeastern United States.
 
     Corporate Unallocated
     Corporate unallocated expenses were $(9) million in the quarter versus
 $(10) million in the year-ago quarter.  Corporate unallocated expenses include
 the cost of governance and other centrally managed expenses, as well as the
 accounting for U.S. pension plans, post-retirement healthcare costs, and
 executive compensation programs.  The favorable variance for the quarter was
 attributable to higher pension income from the company's U.S. pension plans,
 partially offset by higher employee related costs.
 
     Non-GAAP Financial Measures
     The company publicly reports its financial information in accordance with
 accounting principles generally accepted in the United States (GAAP).  To
 facilitate external analysis of the company's operating performance, the
 company also presents financial information that may be considered "non-GAAP
 financial measures" under Regulation G and related reporting requirements
 promulgated by the Securities and Exchange Commission.  Non-GAAP financial
 measures should be evaluated in conjunction with, and are not a substitute
 for, GAAP financial measures.  The following non-GAAP financial measures
 included in this release are used by the company in its internal analysis of
 the business.
 
      *  Free Cash Flow (change in cash before the change in total borrowings,
         dividends, share repurchases, divestitures and acquisitions) -- Free
         cash flow is presented to provide period-to-period cash flow trends
         generated by the business before any discretionary, finance-related
         uses/sources of cash. It is used by management to reconcile the change
         in net debt from period to period.  Certain amounts do not recalculate
         due to rounding.
 
 
     Reconciliation of Free Cash Flow,
     in millions                                      Q1 Fiscal      Q1 Fiscal
                                                         2005           2004
     Reported change in cash per cash flow               $(15)           $11
      statement (see Table 4)
     Less:
     Change in total borrowings                            78             87
       Dividends                                           (5)            (5)
       Debt financing fees                                 (1)            --
         Free Cash Flow (Use) Source                     $(87)          $(71)
 
      *  Net Debt (total borrowings less cash and cash equivalents) -- Net debt
         is one of management's measures of leverage and is an approximate
         measure of the company's debt less amounts the company has the
         capacity to repay.  The company typically manages its cash and debt by
         using any "excess" cash (i.e., cash in excess of a desired on-hand
         amount) to make principal payments on its outstanding debt.
 
      *  Previously Announced Fiscal 2005 Guidance (earnings per share before
         the effects of the change in accounting for magazine deferred
         promotion costs and special items, including restructuring charges) --
         The Previously Announced Fiscal 2005 Guidance represented the
         company's full-year earnings per share guidance, excluding final
         resolution of the treatment of its existing magazine deferred
         promotion asset (which was not determinable at that time), and special
         items (including restructuring charges).  Subsequent to this date, the
         company finalized the accounting for magazine deferred promotion
         costs.  Previously Announced Fiscal 2005 Guidance is presented to
         facilitate an understanding of the impact of the company's change in
         magazine deferred promotion accounting on its guidance.  Management
         uses Fiscal 2005 Guidance to assess the company's actual performance
         relative to its full-year expectations on a per-share basis.  A
         reconciliation of this amount is included in the "Outlook" section,
         above.
 
     The company will host a conference call with financial analysts to discuss
 the company's first quarter results on Thursday, October 28, 2004 at 8:30 a.m.
 EST.  The company invites investors to listen to the webcast of the conference
 call at the company's Investor Relations Web site,
 http://www.rd.com/investors.  This will also include a reconciliation of non-
 GAAP financial measures that may be disclosed on the conference call or from
 time to time in other oral, webcast or broadcast public announcements by the
 company.  A transcript of the conference call will be posted on
 http://www.rd.com/investors.
 
     Segment Composition
     Effective with the first quarter of Fiscal 2005, the company moved two
 small businesses, Reader's Digest Young Families and financial services, from
 Consumer Business Services to the Reader's Digest North America segment to
 reflect a change in management responsibility.  Prior-year results for these
 segments have been restated for comparability.
 
     The company reports business results in three segments:
 
      *  Reader's Digest North America -- Reader's Digest magazine in the
         United States and Canada; Reiman Media Group, including magazines
         Taste of Home, Light & Tasty, Quick Cooking, Backyard Living, Cooking
         for 2, Birds & Blooms, Country, Country Woman, Country Discoveries,
         Reminisce, and Farm & Ranch, as well as books, cooking schools,
         country tours and other enterprises; The Family Handyman, American
         Woodworker, Reader's Digest Large Print Edition and U.S. Selecciones
         magazines; Reader's Digest Young Families; financial services
         marketing alliances; and Select Editions, series and general books,
         health and home books, and music and video products in the United
         States and Canada.
 
      *  Consumer Business Services -- Books Are Fun, a display marketer in
         North America selling books, gifts and other items; QSP, Inc. and QSP
         Canada, schools and youth fundraising companies; and Trade
         Publishing, comprising adult and children's trade books.
 
      *  Reader's Digest International - Products sold in more than 60
         countries outside the United States and Canada, including: Select
         Editions, series and general books, music, video and Young Families
         products; Reader's Digest magazine in 48 editions and 19 languages,
         Special Interest magazines in the Czech Republic; The Family Handyman
         in Australia; Books Are Fun operations in France, Mexico and Spain;
         and financial services marketing partnerships and other initiatives in
         more than 30 countries.
 
     The Reader's Digest Association, Inc. is a global publisher and direct
 marketer of products that inform, enrich, entertain and inspire people of all
 ages and cultures around the world.  Global headquarters are located at
 Pleasantville, New York.  The company's main Web site is http://www.rd.com .
 
     This release may include "forward-looking statements" within the meaning
 of the Private Securities Litigation Reform Act of 1995.  Forward-looking
 statements inherently involve risks and uncertainties that could cause actual
 future results and occurrences to differ materially from the forward-looking
 statements.  The Reader's Digest Association, Inc.'s filings with the
 Securities and Exchange Commission, including its reports on Forms 10-K, 10-Q
 and 8-K, contain a discussion of additional factors that could affect future
 results and occurrences.  Reader's Digest does not undertake to update any
 forward-looking statements.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                       Consolidated Statements of Income
                      (In millions, except per share data)
                                  (unaudited)
 
                                               Three-month period ended
                                             September 30, 2004 and 2003 (A)
 
                                            Fiscal Year              Better/
                                            2005    2004             (Worse)
 
     Revenues                              $490.0  $494.7               (1%)
 
     Product, distribution and editorial
      expenses                             (203.0) (208.3)               3%
     Promotion, marketing and
      administrative expenses              (322.9) (299.9)              (8%)
     Other operating items, net                --      --                --
 
     Operating loss                         (35.9)  (13.5)               N/M
 
     Other income and (expense), net (B)    (11.0)   (7.6)             (45%)
 
     Loss before income tax benefit         (46.9)  (21.1)               N/M
 
     Income tax benefit (provision)          16.6     7.6                N/M
 
     Net loss                              ($30.3) ($13.5)               N/M
 
     Basic and diluted loss per share:
        Weighted average common shares
         outstanding                         97.3    97.0
 
        Basic and diluted loss per share   ($0.31) ($0.14)               N/M
 
     Dividends per common share             $0.05   $0.05                 --
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year.
 
      (B) Other (expense) income, net for the three-month period ended
          September 30, 2003, included a $2.7 million gain from the company's
          share of the proceeds from the merger of Schoolpop, Inc. and a $0.8
          million gain on the sale of its remaining shares in LookSmart, Ltd.
 
      N/M - Not meaningful.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
              Revenues and Operating Profit by Operating Segments
                                 (In millions)
                                  (unaudited)
 
                                                 Three-month period ended
                                              September 30, 2004 and 2003 (A)
 
                                                 Fiscal Year
                                                     Restated (B)   Better/
                                               2005       2004      (Worse)
 
     Revenues
 
     Reader's Digest North America            $209.7     $210.0        --
 
     Reader's Digest International             214.8      215.8        --
 
     Consumer Business Services                 71.4       75.3       (5%)
 
     Intercompany eliminations (C)              (5.9)      (6.4)       8%
 
 
     Total Revenues                           $490.0     $494.7       (1%)
 
     Operating profit (loss)
 
     Reader's Digest North America             $13.2      $10.4       27%
 
     Reader's Digest International               0.7       (1.2)     158%
 
     Consumer Business Services                (15.9)     (12.7)     (25%)
 
     Corporate unallocated (D)                  (8.5)     (10.0)      15%
 
                                              ($10.5)    ($13.5)      22%
 
     Deferred promotion amortization (E)       (25.4)        --       N/M
 
     Total operating loss                     ($35.9)    ($13.5)      N/M
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year.
 
      (B) The results for fiscal 2004 have been restated for the movement of
          the Young Families and Financial Services businesses from the
          Consumer Business Services segment to the Reader's Digest North
          America segment.
 
      (C) In the normal course of business, the company's segments enter into
          transactions with one another. These intercompany transactions are
          recorded by each segment at amounts as if the transactions were with
          third parties and, therefore, affect segment performance. Operating
          segment revenues, above, are presented gross before intercompany
          eliminations.  However, intercompany revenues and associated expenses
          are eliminated in consolidation and are not reflected in the
          company's consolidated results.
 
      (D) Corporate unallocated expenses include the cost of governance and
          other centrally managed expenses, as well as the accounting for U.S.
          pension plans, post-retirement healthcare costs, and executive
          compensation programs which are not allocated to the operating
          segments. Governance and centrally managed expenses include costs
          such as corporate finance and general management, investor and public
          relations, legal, treasury, and any related information technology
          and facility costs utilized by these departments.
 
      (E) The deferred promotion amortization of $(25.4) million reflects the
          expensing of the deferred magazine promotion asset as of June 30,
          2004.
 
      N/M - Not meaningful.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                          Consolidated Balance Sheets
                   As of September 30, 2004 and June 30, 2004
                                 (In millions)
                                  (unaudited)
 
                                                  September 30,        June 30,
                                                       2004              2004
     Assets
         Cash and cash equivalents                    $35.6             $50.3
         Accounts receivable, net                     269.6             229.0
         Inventories                                  205.8             152.0
         Prepaid and deferred promotion costs         108.0             106.9
         Prepaid expenses and other current assets    188.0             152.1
 
     Total current assets                             807.0             690.3
 
         Property, plant and equipment, net           155.0             155.8
         Goodwill                                   1,009.8           1,009.5
         Other intangible assets, net                 164.5             173.9
         Other noncurrent assets                      393.5             413.2
 
     Total assets                                  $2,529.8          $2,442.7
 
     Liabilities and Stockholders' Equity
         Loans and notes payable                     $177.2             $83.9
         Accounts payable                             119.0             110.6
         Accrued expenses                             264.6             268.7
         Income taxes payable                          16.4              15.5
         Unearned revenue                             426.3             403.4
         Other current liabilities                     10.9              10.2
 
     Total current liabilities                      1,014.4             892.3
 
         Postretirement and postemployment
          benefits other than pensions                116.8             119.5
         Unearned revenues                            138.6             129.3
         Long-term debt                               622.2             637.7
         Other noncurrent liabilities                 203.0             200.8
 
     Total liabilities                              2,095.0           1,979.6
 
         Capital stock                                 12.6              17.8
         Paid-in capital                              206.9             210.1
         Retained earnings                          1,295.0           1,330.4
         Accumulated other comprehensive
          (loss) income                               (84.7)            (89.4)
         Treasury stock, at cost                     (995.0)         (1,005.8)
 
     Total stockholder's equity                       434.8             463.1
 
     Total liabilities and stockholder's equity    $2,529.8          $2,442.7
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                Consolidated Condensed Statements of Cash Flows
             Three-month periods ended September 30, 2004 and 2003
                                 (In millions)
                                  (unaudited)
 
                                                     Three-month period ended
                                                         September 30, (A)
                                                      2004             2003
     Cash flows from operating activities
     Net loss                                       ($30.3)          ($13.5)
     Depreciation and amortization                    15.1             16.1
     Magazine deferred promotion charge               25.4               --
     Amortization of debt issuance costs               1.0              1.3
     Stock-based compensation                          3.1              2.9
     Net gain on marketable securities and
      sales of certain assets                           --             (3.5)
     Changes in current assets and liabilities
          Accounts receivable, net                   (36.6)           (25.6)
          Inventories                                (52.4)           (45.6)
          Unearned revenues                           19.2             29.1
          Accounts payable and accrued expenses        1.3              2.4
          Other, net                                 (38.3)           (63.7)
     Changes in noncurrent assets and liabilities      8.0             31.0
     Net change in cash due to operating activities  (84.5)           (69.1)
 
     Cash flows from investing activities
     Proceeds from maturities and sales of
      marketable securities                             --              0.8
     Purchases of marketable securities and
      investments                                       --             (1.3)
     Proceeds from other long-term
      investments                                       --              2.7
     Proceeds from sales of property,
      plant and equipment                              0.1              0.1
     Capital expenditures                             (3.2)            (4.0)
     Net change in cash due to investing
      activities                                      (3.1)            (1.7)
 
     Cash flows from financing activities
     Proceeds / (repayments) of revolving
      credit and short-term debt, net                 85.8            105.0
     Repayments of term loan                          (8.0)           (18.1)
     Dividends paid                                   (5.2)            (5.2)
     Payments of debt financing costs                 (0.5)              --
     Proceeds from employee stock purchase
      plan and exercise of stock options               0.1               --
     Other, net                                         --               --
     Net change in cash due to financing
      activities                                      72.2             81.7
 
     Effect of exchange rate changes on cash           0.7              0.5
 
     Net change in cash and cash equivalents         (14.7)            11.4
 
     Cash and cash equivalents at beginning of
      period                                          50.3             51.3
 
     Cash and cash equivalents at end of period      $35.6            $62.7
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year. In some instances,
          prior year amounts have been reclassified to conform to the current
          year presentation.
 
 

SOURCE The Reader's Digest Association, Inc.
    PLEASANTVILLE, N.Y., Oct. 28 /PRNewswire-FirstCall/ -- The Reader's Digest
 Association, Inc. (NYSE:   RDA) today reported a loss of $(0.31) per share for
 the first quarter of Fiscal 2005 ended September 30, 2004.  Results included a
 non-cash charge of $(0.17) per share for amortization of previously deferred
 magazine promotion expenses and an estimated $(0.05) per share related to the
 timing of expensing first quarter promotion costs as incurred versus deferring
 such costs, the company's practice last year.  In Fiscal 2004, the first-
 quarter loss was $(0.14) per share.  The Fiscal 2005 variance was attributable
 to the two promotion-expense items, partly offset by stronger operating
 results in both the RD North America and RD International business segments.
     Revenues were $490 million versus $495 million in the Fiscal 2004 quarter.
 The company reported an operating loss of $(36) million, which included $(25)
 million of amortization of previously deferred magazine promotion expenses and
 an estimated $(7) million in promotion expense timing impact.  Last year, the
 company reported a first-quarter operating loss of $(13) million.
     "Overall, operating results were better than our expectations and
 significantly better than last year's when adjusted for the change to
 expensing previously deferred promotion costs as incurred," said Thomas O.
 Ryder, Chairman and Chief Executive Officer.  "Our core businesses in RD North
 America and RD International continue to show increasing strength.  QSP and
 Books Are Fun are operating in competitive environments and addressing their
 respective challenges."
     The company's first quarter is historically not the most significant and
 typically has a loss as RDA gears up for its fall and winter selling seasons.
 Factors contributing to the year-over-year variance in reported results for
 the first quarter include:
 
      *  A $3 million increase in operating profits at RD North America, which
         improved by 27 percent despite an estimated incremental $(5) million
         of timing-related magazine promotion expense.
 
      *  A $2 million increase in operating profits at RD International, which
         improved from a loss of $(1) million despite an estimated incremental
         $(2) million of timing-related magazine promotion expense.
 
      *  A $(3) million increase in losses at CBS.
 
      *  A $1 million improvement in corporate unallocated expense.
 
      *  A $(25) million non-cash charge related to amortization of a portion
         of the deferred magazine promotion expenses on the books as of June
         30, 2004.
 
      *  A $(3) million increase in expenses in other income/(expense), net,
         reflecting $4 million in proceeds from asset sales in prior year
         results.
 
     Free cash flow (change in cash before the change in total borrowings,
 dividends, share repurchases, divestitures and acquisitions) was a use of
 $(87) million, versus a use of $(71) million in the year-ago quarter.  The
 company historically uses significant cash in the first quarter in preparation
 for the fall and winter selling seasons at Books Are Fun (BAF) and QSP.  The
 increase in use was attributable to timing of working capital and to
 incremental cash flow in the Fiscal 2004 quarter from the sale of Schoolpop,
 Inc., and LookSmart, Ltd. shares.
     As previously announced, effective July 1, 2004 the company changed its
 accounting for magazine direct-response promotion costs and began expensing
 costs as incurred, versus the previous practice of deferring and amortizing
 much of those costs.  This change was precipitated by changes in the company's
 magazine business and by new initiatives the company is undertaking.  In
 connection with this change, a non-cash charge of $(27) million was taken to
 reflect amortization of a portion of the total existing deferred promotion
 expense balance at June 30 of $(104) million.  The remaining balance of $(77)
 million, or $(0.49) per share, will be amortized over Fiscal 2005, with the
 first-quarter impact being $(25) million, or $(0.17) per share.  All of these
 amounts are non-cash.  Excluding this amortization, the change is expected to
 have a minimal impact on the full fiscal year but will result in timing
 differences in year-to-year quarter comparisons.  These timing differences
 will result in unfavorable comparisons in the first half and favorable
 comparisons in the second.
 
     Other Income and Expense, Net
     Other income and expense, net was $(11) million this quarter, unfavorable
 by $(3) million compared with last year.  Net interest expense was $(11)
 million in this quarter and in the year-ago quarter.  The average cost of
 borrowings this quarter was 4.8 percent versus 4.0 percent in the year-ago
 quarter.  In addition, last year's results included a gain of $3 million from
 the sale of Schoolpop, Inc. and a gain of $1 million on the sale of the
 company's remaining shares in LookSmart, Ltd.
 
     Outlook
     The company continues to expect full-year Fiscal 2005 earnings per share
 to be in line with the Previously Announced Fiscal 2005 Guidance of  $0.77 to
 $0.87, not including amortization for deferred magazine promotions costs
 ($(0.49) per share) and special items (including restructuring charges).
 
 
     Reconciliation of Previously Announced
      Fiscal 2005 Guidance                                  EPS
     Previously Announced Fiscal 2005 Guidance         $0.77 - $0.87
     Add:
       Amortization of existing magazine deferred
        promotion asset as of June 30, 2004                   $(0.49)
          Earnings per share                           $0.28 - $0.38
 
 
                              Segment Information
 
     In millions                     Fiscal 2005     Fiscal 2004        Better/
                                    Quarter 1 (a)   Quarter 1 (a)       (Worse)
     Revenues:
      Reader's Digest North America     $210            $210           $ --
      Reader's Digest International      215             216             (1)
      Consumer Business Services          71              75             (4)
      Intercompany eliminations           (6)             (6)            --
       Total revenues                   $490            $495           $ (5)
 
     Operating Profit (Loss):
      Reader's Digest North America      $13             $10             $3
      Reader's Digest International        1              (1)             2
      Consumer Business Services         (16)            (13)            (3)
      Corporate Unallocated               (9)            (10)             1
      Deferred Promotion Amortization    (25)             --            (25)
       Total operating profit/(loss)    $(36)           $(13)          $(23)
 
      (a) Certain amounts do not recalculate due to rounding.
 
     Reader's Digest North America (RDNA)
     In the first quarter, revenues for RDNA were $210 million, flat to last
 year.  Results largely reflect increases at Reiman, financial services and
 Canada offset by lower revenues at U.S. BHE related to a reduction in
 unprofitable marketing activities including telemarketing at Reader's Digest
 Young Families and planned lower circulation sales at Reader's Digest
 magazine.  This segment now includes results from the financial services and
 Young Families businesses (see "Segment Composition").
     Operating profits improved by 27 percent in the quarter to $13 million
 despite an estimated incremental $(5) million in promotion expense timing in
 the current year's quarter.  The improvement marks the 10th consecutive
 quarter of year-over-year gains in profits at RDNA.  Profits improved across
 nearly all units within the segment.  The strongest drivers were improved
 profits at Reiman's book business, increased subscriber profitability at
 Reader's Digest magazine, a one-time fee in financial services related to the
 termination of a partnership agreement, improved profitability at Young
 Families, higher advertising sales at Selecciones, The Family Handyman and
 Reader's Digest Large Print, and continued profit improvement at U.S. BHE.
 
     Reader's Digest International (RDI)
     In the first quarter, RDI revenues were $215 million, versus $216 million
 in the year-ago period.  Operating profits improved to $1 million, despite an
 estimated $(2) million in incremental promotion expense timing, versus a loss
 of $(1) million in last year's quarter.  Excluding the effects of foreign
 currency translation, revenues declined by 8 percent.  Profits improved in
 most international markets, led by gains in the larger markets-Germany,
 Australia, the United Kingdom, France and Poland.  Most markets benefited from
 lower operating costs and improved marketing execution.  These improvements
 were partially offset by further investment in new initiatives launched last
 year including new market launches in Romania, Croatia, Slovenia and Ukraine,
 which are all performing ahead of internal expectations.  The company also
 invested in tests of a Reiman-style magazine in Brazil and a new "English as a
 Second Language" product in several markets.
 
     Consumer Business Services (CBS)
     Revenues at Consumer Business Services were $71 million in the quarter, a
 decline of 5 percent, and the operating loss was $(16) million versus a loss
 of $(13) million last year.  The first quarter is typically the smallest for
 CBS as BAF and QSP invest in preparation for the fall and winter selling
 seasons.  Revenues at QSP grew slightly on higher magazine subscription sales,
 while operating losses increased, driven by higher campaign investment and
 sales force expansion.  BAF revenues and profits were off compared to last
 year, principally because of fewer events in schools.  The decline in school
 events reflects higher sales force turnover, delayed school openings (Labor
 Day fell one week later than last year), and school closures because of
 hurricanes in the southeastern United States.
 
     Corporate Unallocated
     Corporate unallocated expenses were $(9) million in the quarter versus
 $(10) million in the year-ago quarter.  Corporate unallocated expenses include
 the cost of governance and other centrally managed expenses, as well as the
 accounting for U.S. pension plans, post-retirement healthcare costs, and
 executive compensation programs.  The favorable variance for the quarter was
 attributable to higher pension income from the company's U.S. pension plans,
 partially offset by higher employee related costs.
 
     Non-GAAP Financial Measures
     The company publicly reports its financial information in accordance with
 accounting principles generally accepted in the United States (GAAP).  To
 facilitate external analysis of the company's operating performance, the
 company also presents financial information that may be considered "non-GAAP
 financial measures" under Regulation G and related reporting requirements
 promulgated by the Securities and Exchange Commission.  Non-GAAP financial
 measures should be evaluated in conjunction with, and are not a substitute
 for, GAAP financial measures.  The following non-GAAP financial measures
 included in this release are used by the company in its internal analysis of
 the business.
 
      *  Free Cash Flow (change in cash before the change in total borrowings,
         dividends, share repurchases, divestitures and acquisitions) -- Free
         cash flow is presented to provide period-to-period cash flow trends
         generated by the business before any discretionary, finance-related
         uses/sources of cash. It is used by management to reconcile the change
         in net debt from period to period.  Certain amounts do not recalculate
         due to rounding.
 
 
     Reconciliation of Free Cash Flow,
     in millions                                      Q1 Fiscal      Q1 Fiscal
                                                         2005           2004
     Reported change in cash per cash flow               $(15)           $11
      statement (see Table 4)
     Less:
     Change in total borrowings                            78             87
       Dividends                                           (5)            (5)
       Debt financing fees                                 (1)            --
         Free Cash Flow (Use) Source                     $(87)          $(71)
 
      *  Net Debt (total borrowings less cash and cash equivalents) -- Net debt
         is one of management's measures of leverage and is an approximate
         measure of the company's debt less amounts the company has the
         capacity to repay.  The company typically manages its cash and debt by
         using any "excess" cash (i.e., cash in excess of a desired on-hand
         amount) to make principal payments on its outstanding debt.
 
      *  Previously Announced Fiscal 2005 Guidance (earnings per share before
         the effects of the change in accounting for magazine deferred
         promotion costs and special items, including restructuring charges) --
         The Previously Announced Fiscal 2005 Guidance represented the
         company's full-year earnings per share guidance, excluding final
         resolution of the treatment of its existing magazine deferred
         promotion asset (which was not determinable at that time), and special
         items (including restructuring charges).  Subsequent to this date, the
         company finalized the accounting for magazine deferred promotion
         costs.  Previously Announced Fiscal 2005 Guidance is presented to
         facilitate an understanding of the impact of the company's change in
         magazine deferred promotion accounting on its guidance.  Management
         uses Fiscal 2005 Guidance to assess the company's actual performance
         relative to its full-year expectations on a per-share basis.  A
         reconciliation of this amount is included in the "Outlook" section,
         above.
 
     The company will host a conference call with financial analysts to discuss
 the company's first quarter results on Thursday, October 28, 2004 at 8:30 a.m.
 EST.  The company invites investors to listen to the webcast of the conference
 call at the company's Investor Relations Web site,
 http://www.rd.com/investors.  This will also include a reconciliation of non-
 GAAP financial measures that may be disclosed on the conference call or from
 time to time in other oral, webcast or broadcast public announcements by the
 company.  A transcript of the conference call will be posted on
 http://www.rd.com/investors.
 
     Segment Composition
     Effective with the first quarter of Fiscal 2005, the company moved two
 small businesses, Reader's Digest Young Families and financial services, from
 Consumer Business Services to the Reader's Digest North America segment to
 reflect a change in management responsibility.  Prior-year results for these
 segments have been restated for comparability.
 
     The company reports business results in three segments:
 
      *  Reader's Digest North America -- Reader's Digest magazine in the
         United States and Canada; Reiman Media Group, including magazines
         Taste of Home, Light & Tasty, Quick Cooking, Backyard Living, Cooking
         for 2, Birds & Blooms, Country, Country Woman, Country Discoveries,
         Reminisce, and Farm & Ranch, as well as books, cooking schools,
         country tours and other enterprises; The Family Handyman, American
         Woodworker, Reader's Digest Large Print Edition and U.S. Selecciones
         magazines; Reader's Digest Young Families; financial services
         marketing alliances; and Select Editions, series and general books,
         health and home books, and music and video products in the United
         States and Canada.
 
      *  Consumer Business Services -- Books Are Fun, a display marketer in
         North America selling books, gifts and other items; QSP, Inc. and QSP
         Canada, schools and youth fundraising companies; and Trade
         Publishing, comprising adult and children's trade books.
 
      *  Reader's Digest International - Products sold in more than 60
         countries outside the United States and Canada, including: Select
         Editions, series and general books, music, video and Young Families
         products; Reader's Digest magazine in 48 editions and 19 languages,
         Special Interest magazines in the Czech Republic; The Family Handyman
         in Australia; Books Are Fun operations in France, Mexico and Spain;
         and financial services marketing partnerships and other initiatives in
         more than 30 countries.
 
     The Reader's Digest Association, Inc. is a global publisher and direct
 marketer of products that inform, enrich, entertain and inspire people of all
 ages and cultures around the world.  Global headquarters are located at
 Pleasantville, New York.  The company's main Web site is http://www.rd.com .
 
     This release may include "forward-looking statements" within the meaning
 of the Private Securities Litigation Reform Act of 1995.  Forward-looking
 statements inherently involve risks and uncertainties that could cause actual
 future results and occurrences to differ materially from the forward-looking
 statements.  The Reader's Digest Association, Inc.'s filings with the
 Securities and Exchange Commission, including its reports on Forms 10-K, 10-Q
 and 8-K, contain a discussion of additional factors that could affect future
 results and occurrences.  Reader's Digest does not undertake to update any
 forward-looking statements.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                       Consolidated Statements of Income
                      (In millions, except per share data)
                                  (unaudited)
 
                                               Three-month period ended
                                             September 30, 2004 and 2003 (A)
 
                                            Fiscal Year              Better/
                                            2005    2004             (Worse)
 
     Revenues                              $490.0  $494.7               (1%)
 
     Product, distribution and editorial
      expenses                             (203.0) (208.3)               3%
     Promotion, marketing and
      administrative expenses              (322.9) (299.9)              (8%)
     Other operating items, net                --      --                --
 
     Operating loss                         (35.9)  (13.5)               N/M
 
     Other income and (expense), net (B)    (11.0)   (7.6)             (45%)
 
     Loss before income tax benefit         (46.9)  (21.1)               N/M
 
     Income tax benefit (provision)          16.6     7.6                N/M
 
     Net loss                              ($30.3) ($13.5)               N/M
 
     Basic and diluted loss per share:
        Weighted average common shares
         outstanding                         97.3    97.0
 
        Basic and diluted loss per share   ($0.31) ($0.14)               N/M
 
     Dividends per common share             $0.05   $0.05                 --
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year.
 
      (B) Other (expense) income, net for the three-month period ended
          September 30, 2003, included a $2.7 million gain from the company's
          share of the proceeds from the merger of Schoolpop, Inc. and a $0.8
          million gain on the sale of its remaining shares in LookSmart, Ltd.
 
      N/M - Not meaningful.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
              Revenues and Operating Profit by Operating Segments
                                 (In millions)
                                  (unaudited)
 
                                                 Three-month period ended
                                              September 30, 2004 and 2003 (A)
 
                                                 Fiscal Year
                                                     Restated (B)   Better/
                                               2005       2004      (Worse)
 
     Revenues
 
     Reader's Digest North America            $209.7     $210.0        --
 
     Reader's Digest International             214.8      215.8        --
 
     Consumer Business Services                 71.4       75.3       (5%)
 
     Intercompany eliminations (C)              (5.9)      (6.4)       8%
 
 
     Total Revenues                           $490.0     $494.7       (1%)
 
     Operating profit (loss)
 
     Reader's Digest North America             $13.2      $10.4       27%
 
     Reader's Digest International               0.7       (1.2)     158%
 
     Consumer Business Services                (15.9)     (12.7)     (25%)
 
     Corporate unallocated (D)                  (8.5)     (10.0)      15%
 
                                              ($10.5)    ($13.5)      22%
 
     Deferred promotion amortization (E)       (25.4)        --       N/M
 
     Total operating loss                     ($35.9)    ($13.5)      N/M
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year.
 
      (B) The results for fiscal 2004 have been restated for the movement of
          the Young Families and Financial Services businesses from the
          Consumer Business Services segment to the Reader's Digest North
          America segment.
 
      (C) In the normal course of business, the company's segments enter into
          transactions with one another. These intercompany transactions are
          recorded by each segment at amounts as if the transactions were with
          third parties and, therefore, affect segment performance. Operating
          segment revenues, above, are presented gross before intercompany
          eliminations.  However, intercompany revenues and associated expenses
          are eliminated in consolidation and are not reflected in the
          company's consolidated results.
 
      (D) Corporate unallocated expenses include the cost of governance and
          other centrally managed expenses, as well as the accounting for U.S.
          pension plans, post-retirement healthcare costs, and executive
          compensation programs which are not allocated to the operating
          segments. Governance and centrally managed expenses include costs
          such as corporate finance and general management, investor and public
          relations, legal, treasury, and any related information technology
          and facility costs utilized by these departments.
 
      (E) The deferred promotion amortization of $(25.4) million reflects the
          expensing of the deferred magazine promotion asset as of June 30,
          2004.
 
      N/M - Not meaningful.
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                          Consolidated Balance Sheets
                   As of September 30, 2004 and June 30, 2004
                                 (In millions)
                                  (unaudited)
 
                                                  September 30,        June 30,
                                                       2004              2004
     Assets
         Cash and cash equivalents                    $35.6             $50.3
         Accounts receivable, net                     269.6             229.0
         Inventories                                  205.8             152.0
         Prepaid and deferred promotion costs         108.0             106.9
         Prepaid expenses and other current assets    188.0             152.1
 
     Total current assets                             807.0             690.3
 
         Property, plant and equipment, net           155.0             155.8
         Goodwill                                   1,009.8           1,009.5
         Other intangible assets, net                 164.5             173.9
         Other noncurrent assets                      393.5             413.2
 
     Total assets                                  $2,529.8          $2,442.7
 
     Liabilities and Stockholders' Equity
         Loans and notes payable                     $177.2             $83.9
         Accounts payable                             119.0             110.6
         Accrued expenses                             264.6             268.7
         Income taxes payable                          16.4              15.5
         Unearned revenue                             426.3             403.4
         Other current liabilities                     10.9              10.2
 
     Total current liabilities                      1,014.4             892.3
 
         Postretirement and postemployment
          benefits other than pensions                116.8             119.5
         Unearned revenues                            138.6             129.3
         Long-term debt                               622.2             637.7
         Other noncurrent liabilities                 203.0             200.8
 
     Total liabilities                              2,095.0           1,979.6
 
         Capital stock                                 12.6              17.8
         Paid-in capital                              206.9             210.1
         Retained earnings                          1,295.0           1,330.4
         Accumulated other comprehensive
          (loss) income                               (84.7)            (89.4)
         Treasury stock, at cost                     (995.0)         (1,005.8)
 
     Total stockholder's equity                       434.8             463.1
 
     Total liabilities and stockholder's equity    $2,529.8          $2,442.7
 
 
             The Reader's Digest Association, Inc. and Subsidiaries
                Consolidated Condensed Statements of Cash Flows
             Three-month periods ended September 30, 2004 and 2003
                                 (In millions)
                                  (unaudited)
 
                                                     Three-month period ended
                                                         September 30, (A)
                                                      2004             2003
     Cash flows from operating activities
     Net loss                                       ($30.3)          ($13.5)
     Depreciation and amortization                    15.1             16.1
     Magazine deferred promotion charge               25.4               --
     Amortization of debt issuance costs               1.0              1.3
     Stock-based compensation                          3.1              2.9
     Net gain on marketable securities and
      sales of certain assets                           --             (3.5)
     Changes in current assets and liabilities
          Accounts receivable, net                   (36.6)           (25.6)
          Inventories                                (52.4)           (45.6)
          Unearned revenues                           19.2             29.1
          Accounts payable and accrued expenses        1.3              2.4
          Other, net                                 (38.3)           (63.7)
     Changes in noncurrent assets and liabilities      8.0             31.0
     Net change in cash due to operating activities  (84.5)           (69.1)
 
     Cash flows from investing activities
     Proceeds from maturities and sales of
      marketable securities                             --              0.8
     Purchases of marketable securities and
      investments                                       --             (1.3)
     Proceeds from other long-term
      investments                                       --              2.7
     Proceeds from sales of property,
      plant and equipment                              0.1              0.1
     Capital expenditures                             (3.2)            (4.0)
     Net change in cash due to investing
      activities                                      (3.1)            (1.7)
 
     Cash flows from financing activities
     Proceeds / (repayments) of revolving
      credit and short-term debt, net                 85.8            105.0
     Repayments of term loan                          (8.0)           (18.1)
     Dividends paid                                   (5.2)            (5.2)
     Payments of debt financing costs                 (0.5)              --
     Proceeds from employee stock purchase
      plan and exercise of stock options               0.1               --
     Other, net                                         --               --
     Net change in cash due to financing
      activities                                      72.2             81.7
 
     Effect of exchange rate changes on cash           0.7              0.5
 
     Net change in cash and cash equivalents         (14.7)            11.4
 
     Cash and cash equivalents at beginning of
      period                                          50.3             51.3
 
     Cash and cash equivalents at end of period      $35.6            $62.7
 
      (A) RDA reports on a fiscal year beginning July 1.  The three-month
          periods ended September 30, 2004 and 2003 are the first fiscal
          quarters of fiscal year 2005 and fiscal year 2004, respectively.
          Operating results for any interim period are not necessarily
          indicative of the results for an entire year. In some instances,
          prior year amounts have been reclassified to conform to the current
          year presentation.
 
 SOURCE  The Reader's Digest Association, Inc.