FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of October 31, 1996, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 85,566,616 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
Page 1 of 14 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
September 30, 1996
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month periods ended September 30, 1996 and 1995 3
Consolidated Condensed Balance Sheets
as of September 30, 1996 and June 30, 1996 4
Consolidated Condensed Statements of Cash Flows
for the three-month periods ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 11
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three-Month periods ended September 30, 1996 and 1995
(In millions, except per share data)
(unaudited)
Three-Month period ended
September 30,
1996 1995
Revenues $ 644.0 $ 730.5
Product, distribution and editorial expense 221.7 250.9
Promotion, marketing and administrative 375.7 397.8
expense
Operating profit 46.6 81.8
Other income, net 8.0 3.1
Income before provision for income taxes 54.6 84.9
Provision for income taxes 20.0 31.0
Net income $ 34.6 $ 53.9
Earnings per share $ 0.32 $ 0.50
Average common shares outstanding 107.4 108.0
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 1996 and June 30, 1996
(In millions)
(unaudited)
September 30, June 30,
1996 1996
Assets
Cash and cash equivalents $ 127.1 $ 258.1
Short-term investments 23.3 18.9
Receivables, net 494.8 412.4
Inventories 228.7 204.4
Prepaid expenses and other current assets 302.6 310.3
Total current assets 1,176.5 1,204.1
Marketable securities 85.2 97.2
Property, plant and equipment, net 256.3 261.5
Other noncurrent assets 361.0 341.3
Total assets $1,879.0 $ 1,904.1
Liabilities and stockholders' equity
Accounts payable $ 203.8 $ 216.0
Accrued expenses 441.7 457.3
Income taxes payable 68.6 67.3
Unearned revenue 366.9 354.9
Other current liabilities 20.6 17.5
Total current liabilities 1,101.6 1,113.0
Other noncurrent liabilities 338.2 312.2
Total liabilities 1,439.8 1,425.2
Capital stock 28.6 28.4
Paid-in capital 138.9 138.3
Retained earnings 969.9 984.0
Foreign currency translation adjustment (14.0) (14.2)
Net unrealized losses on certain investments (1.1) (1.3)
Treasury stock, at cost (683.1) (656.3)
Total stockholders' equity 439.2 478.9
Total liabilities and stockholders' equity $1,879.0 $ 1,904.1
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three-Month periods ended September 30, 1996 and 1995
(In millions)
(unaudited)
Three-Month period ended
September 30,
1996 1995
Cash flows from operating activities
Net income $ 34.6 $ 53.9
Depreciation and amortization 11.9 11.7
Other, net (112.8) (97.7)
Net change in cash due to operating activities (66.3) (32.1)
Cash flows from investing activities
Proceeds from maturities and sales of
short-term investments and marketable securities 22.9 181.2
Purchases of short-term investments and (6.4) (76.6)
marketable securities
Other, net (3.5) (25.4)
Net change in cash due to investing activities 13.0 79.2
Cash flows from financing activities
Dividends paid (48.7) (43.6)
Common stock repurchased (27.7) (26.0)
Other, net (1.4) (6.7)
Net change in cash due to financing activities (77.8) (76.3)
Effect of exchange rate changes on cash 0.1 (0.6)
Net change in cash and cash equivalents (131.0) (29.8)
Cash and cash equivalents at beginning of period 258.1 214.6
Cash and cash equivalents at end of period $ 127.1 $ 184.8
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended September 30, 1996, and 1995 are the first
fiscal quarters of fiscal year 1997 and fiscal year 1996,
respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting principles
applying certain judgments and estimates which include all
adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information. Operating
results for any interim period are not necessarily indicative of the
results for an entire year due to the seasonality of the company's
business.
(2) Earnings Per Share
Earnings per share is computed by dividing net income, less
preferred stock dividend requirements, of $0.3 in each of the three-
month periods ended September 30, 1996 and 1995 by the weighted
average number of common shares outstanding during the period.
(3) Inventories
September 30, June 30,
1996 1996
Raw materials $ 24.7 $ 33.0
Work-in progress 24.0 19.9
Finished goods 180.0 151.5
$ 228.7 $ 204.4
(4) Revenues by Business Segments and Geographic Areas
Three-Month period ended
September 30,
1996 1995
BUSINESS SEGMENTS
Reader's Digest Magazine $ 174.9 $ 177.4
Books and Home Entertainment Products 439.2 515.5
Special Interest Magazines 15.7 20.0
Other Businesses 14.2 17.6
Total revenues $ 644.0 $ 730.5
GEOGRAPHIC AREAS
United States $ 269.5 $ 289.7
Europe 275.6 337.7
Pacific and Other Markets 98.9 103.1
Total revenues $ 644.0 $ 730.5
(5) Other Operating Items
As described in Note 2 to the company's consolidated financial
statements included in its 1996 Annual Report to Stockholders, the
company recorded a charge relating primarily to streamlining of the
company's organizational structure and the strategic repositioning of
certain businesses in the third quarter of 1996. The components of
this charge, as well as reserve balances remaining at September 30,
1996 , were:
Total
Charged Utilized Remaining
Employee retirement & severance benefits $104.4 $ 52.6 $ 51.8
Other items 51.5 18.0 33.5
Business repositioning 48.1 21.6 26.5
Total $204.0 $ 92.2 $111.8
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Results of Operations
Three-Month Period Ended September 30, 1996 Compared With Three-
Month Period Ended September 30, 1995
Worldwide revenues for the three-month period ended September 30,
1996 decreased to $644.0, or by 12%, compared with $730.5 in the
three-month period ended September 30, 1995. Revenues declined in
all geographic areas, particularly in the company's European
operations. The decrease in revenues was predominantly due to lower
unit sales in the Books and Home Entertainment Products segment.
Worldwide operating profit decreased to $46.6, or by 43%, in the
first quarter of 1997, compared with $81.8 in the first quarter of
1996. These results reflect the adverse impact of reduced mail
quantities in the company's European operations, execution problems
in certain United States promotional mailings in the first quarter
of 1997, as well as lower customer response rates. While lower
revenues and operating profit were expected to result from the
company's strategic actions, revenues declined more than expected.
The company believes that the deliberate shift to less aggressive
sweepstakes promotional copy and more product-focused offers
contributed to lower customer response rates, which in turn
contributed to the revenue decline. Also adversely affecting
operating profit in the first quarter of 1997 was investment
spending on initiatives to increase customer counts; these
initiatives have historically been spread more evenly throughout the
year.
The company reported net income of $34.6, or $0.32 per share in the
first quarter of 1997, compared with $53.9, or $0.50 per share in
the first quarter of 1996.
Other Income, Net
Other income, net increased in the first quarter of 1997 to $8.0,
compared with $3.1 a year ago. This increase was primarily because
of higher gains on the sales of certain investments in 1997
partially offset by lower interest income.
Income Taxes
The overall effective tax rate is 36.5% for the first quarter of
1997 and the first quarter of 1996. The company anticipates that the
effective tax rate will remain at 36.5% for the remainder of the
year.
Geographic Areas
United States
Revenues in the United States decreased from $289.7 in 1996 to
$269.5, or by 7%, in 1997. Approximately 5% of this decrease was
attributable to lower unit sales in Books and Home Entertainment
Products. Revenues were also adversely affected by the sale of
Travel Holiday magazine in the third quarter of 1996. Within Books
and Home Entertainment Products, the lower unit sales were
attributable to Condensed Books, music products and video products.
During the first quarter of 1997 the company's United States
operations experienced execution problems for certain music, video
and general book offers related to the 1996 downsizing and the
transition to new lettershop and fulfillment vendors. The decline
in Condensed Books was caused by lower customer response to
promotional offers and lower membership retention rates. The
company believes that the use of repetitive promotion copy
contributed to this decline. Operating profit decreased
significantly in 1997 compared with 1996 due to lower revenues,
timing of promotional expenses and increased investment in new
initiatives, partially offset by the benefit of cost-containment
initiatives.
Europe
Revenues in Europe decreased from $337.7 in 1996 to $275.6, or by
18%, in 1997, primarily due to lower unit sales of Books and Home
Entertainment Products. Operating profit decreased significantly in
1997 compared with 1996. These results reflect the company's
ongoing restaging of its European operations, and the continuing
general weakness in European economies. The company has been taking
actions that are affecting short-term revenues and profits in order
to restore long-term customer and revenue growth. These actions
include the intentional reduction of the number of mailings and mail
quantity in a given mailing, with the subsequent short-term decrease
in orders; modification and variation of promotional formats,
resulting in initial lower customer response rates but expected to
lead to long-term improvements in rejects and bad debts; and
moderation of product prices and investment in new distribution
channels.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $103.1 in 1996
to $98.9, or by 4%, in 1997. This decrease was caused by lower
Books and Home Entertainment Products revenues; however increased
Reader's Digest magazine circulation revenues offset approximately
one-half of this decline. The decline in revenues was largely due
to the impact of lower mail quantities and customer response rates,
including the effect of variations to promotional formats, in South
Africa. Operating profit decreased significantly in 1997 compared
with 1996, primarily because of lower revenues, timing of reduced
price mailings and continuing investments in new country expansion.
Corporate Expense
Corporate expense in the first quarter of 1997 decreased to $10.7
compared with $11.7 in the first quarter of 1996 due to the benefit
of cost containment initiatives.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $177.4 in 1996
to $174.9, or by 1%, in 1997. This decrease was due to decreases in
circulation revenues. Lower circulation levels and to a lesser
extent the unfavorable effect of changes in foreign currency
exchange rates were partially offset by higher average subscription
prices in certain new and high inflation markets. Operating profit
for Reader's Digest Magazine decreased significantly in the first
quarter of 1997 compared with the same period a year ago. The
decrease reflects lower revenues, investments in new countries, as
well as increased promotional spending to retain high-quality
subscribers who purchase the company's other products.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$515.5 in 1996 to $439.2, or by 15%, in 1997, of which approximately
11% was attributable to the company's European operations. Most
product lines reported significantly lower revenues, predominantly
due to lower unit sales. Operating profit for Books and Home
Entertainment Products decreased significantly in 1997 compared with
1996. These results reflect lower unit sales in Europe from the
strategic reduction in mail quantities, lower customer response
rates to modified and varied promotional formats and moderated
pricing; as well as lower customer response to Condensed Books
promotional mailings and execution problems in the United States, as
discussed above.
Special Interest Magazines
Revenues for Special Interest Magazines decreased from $20.0 in 1996
to $15.7, or by 21%, in 1997. This decrease was primarily
attributable to the sale of Travel Holiday in the third quarter of
1996. Operating performance improved in 1997 compared with 1996
primarily reflecting the divestiture of Travel Holiday.
Forward-Looking Information
The company expects that in the second quarter revenues will
stabilize and operating profit should be down only moderately
compared with prior year as European operations continue to recover.
The company's strategic actions, discussed above, are expected to
provide initial benefits in the form of improving customer response
rates, declining product returns and bad debts and rebuilding and
augmenting the customer base, particularly in the second half of
1997, with improved financial results to follow. The benefits of
the company's actions, including the cost savings from the 1996
downsizing, should be an upward turn in the company's results in the
second half of this fiscal year.
Given the company's expectations of improved European performance in
the second half of 1997 and assuming planned results in the rest of
the business, the company expects solid full-year operating profit
growth in 1997; however the company also expects substantially
lower interest income, lower capital gains and a one percentage
point higher effective tax rate. Due to these non-operating items,
earnings per share will not track with operating profit growth in
1997.
The statements contained in this report, if not historical, are
forward-looking statements, which involve risks and uncertainties
that could cause actual results to differ materially from the
financial results described in the forward-looking statements.
These risks and uncertainties include the level and rate of progress
in the company's program to stabilize and restore growth in its
operations, the effect of worldwide paper and postage costs, and the
ability of the company to achieve earnings per share growth through
internal investment, strategic alliances, joint ventures and other
methods. The success of the company's program is in turn dependent
on factors such as the effectiveness of the company's marketing
strategies to grow its customer base and improve customer response
rates, especially the impact of modified and varied promotional
formats on customer responses, the appeal of the company's mix of
products, the company's success at entering into and collaborating
with others to conduct effective strategic alliances and joint
ventures, and general economic conditions.
Liquidity and Capital Resources
September 30, 1996 Compared With June 30, 1996
Cash and cash equivalents, short-term investments and marketable
securities decreased $138.6 to $235.6 at September 30, 1996. The
decrease was primarily due to dividend payments of $48.7, the
repurchase of Class A nonvoting common stock, at a cost of $27.7,
and cash used by operations of $66.3.
In the first quarter of 1997, the company paid a $0.45 per share
dividend on its common stock, representing a 13% increase, compared
with $0.40 per share a year ago. At the current rate, the company
will pay a total dividend of $1.80 per share in 1997 compared with
$1.75 in 1996.
In October 1996 the company's Board of Directors approved a program
to purchase up to 5.0 million shares of the company's Class A
nonvoting common stock. The company repurchased 0.7 million shares
of Class A nonvoting common stock in the first quarter of 1997. From
the announcement of its first repurchase program in February 1992
through September 30, 1996, the company has repurchased
approximately 15.7 million shares of Class A nonvoting common stock.
The company believes that its liquidity, capital resources, cash
flow and borrowing capacity are sufficient to fund normal capital
expenditures, working capital requirements, the payment of dividends
and the company's share repurchase program. The company also
believes its liquidity, capital resources, cash flow and borrowing
capacity are sufficient to finance present plans to expand existing
product lines in existing markets, to identify and develop new
products and markets and to enter into strategic alliances and make
small acquisitions.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule. [1 page]
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
(Registrant)
Date: November 7, 1996 By: Stephen R. Wilson
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
(and authorized signatory)
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Consolidated Statement of Income and Consolidated Balance Sheet
for the three month period ended September 30, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 127100
<SECURITIES> 23300
<RECEIVABLES> 671700
<ALLOWANCES> 176900
<INVENTORY> 228700
<CURRENT-ASSETS> 1176500
<PP&E> 608900
<DEPRECIATION> 352600
<TOTAL-ASSETS> 1879000
<CURRENT-LIABILITIES> 1101600
<BONDS> 0
<COMMON> (200)
0
28800
<OTHER-SE> 410600
<TOTAL-LIABILITY-AND-EQUITY> 1879000
<SALES> 644000
<TOTAL-REVENUES> 644000
<CGS> 597400
<TOTAL-COSTS> 597400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1400
<INCOME-PRETAX> 54600
<INCOME-TAX> 20000
<INCOME-CONTINUING> 34600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34600
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
