SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996 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.
incorporation or organization) Employer
Identification No.)
Pleasantville, New York 10570
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (914) 238-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange
Class A Nonvoting Common Stock on which
par value $.01 per share registered
New York Stock
Exchange
Class B Voting Common Stock New York Stock
par value $.01 per share Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
______________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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 [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of registrant, at September 11, 1996, was
approximately $229,217,102, based on the closing price of
registrant's Class B Voting Stock on the New York Stock Exchange-
- -Composite Transactions on such date.
As of September 11, 1996, 85,605,971 shares of the registrant's
Class A Nonvoting Common Stock and 21,716,057 shares of the
registrant's Class B Voting Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders of registrant for the fiscal year
ended June 30, 1996. Certain information therein is incorporated
by reference into Part I and Part II hereof.
Proxy Statement for the Annual Meeting of Stockholders of
registrant to be held on November 8, 1996. Certain information
therein is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
Reader's Digest Magazine 1
Circulation 1
Advertising 2
Editorial 2
Production and Fulfillment 3
Licensed Editions 3
Books and Home Entertainment Products 3
Condensed Books 3
Series Books 4
General Books 4
Music 5
Television and Video 5
Production and Fulfillment 5
Direct Marketing Operations and Sweepstakes 6
Management Information Systems and Customer List 7
Enhancement
Special Interest Magazines 8
QSP, Inc. 8
Competition and Trademarks 9
Employees 9
Executive Officers of the Company 10
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 12
HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL 13
CONDITION AND RESULTS OF OPERATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 13
DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 13
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 14
TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 14
SIGNATURES 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 18
"Reader's Digest" is a registered trademark of The Reader's
Digest Association, Inc.
PART I
ITEM 1. BUSINESS
The Reader's Digest Association, Inc. (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.
The Company 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 1996 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 operates the Company's
school and youth group fundraising business and focuses on
developing new products and entering new marketing channels. For
financial information by geographic area, see Note 15 to the
Company's consolidated financial statements appearing in the
Company's 1996 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 (registered mark),"
"Life In These United States (registered mark)," "Humor In
Uniform (registered mark)," "Campus Comedy (registered mark)" and
"All In A Day's Work (registered mark)," and other regular
features, including "Heroes For Today (registered mark)," "It
Pays To Enrich Your Word Power (registered mark)," "News From The
World Of Medicine (registered mark)" and "The Verbal Edge
(trademark)." DeWitt and Lila Wallace founded Reader's Digest
magazine in 1922. Today, Reader's Digest has a worldwide
circulation of approximately 27 million and approximately 100
million readers each month, generating revenues of $739.8 million
in fiscal 1996, as compared with $732.9 million in fiscal 1995
and $689.1 million in fiscal 1994. Reader's Digest is published
in 48 editions and 19 languages. The Company began publication of
a Thai edition in April 1996 and over the next few years plans to
launch several new editions of Reader's Digest, with principal
emphasis on Asia and Latin America.
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 English
language edition of Reader's Digest has the largest paid
circulation of any United States magazine, other than those
automatically distributed to all members of the American
Association of Retired Persons. Approximately 94% of the United
States paid circulation of Reader's Digest consists of
subscriptions. The balance consists of single copy sales at
newsstands and in supermarkets and similar establishments.
[END PAGE 1]
Reader's Digest is truly a global magazine. Many of its
international editions have the largest paid circulation for
general interest magazines 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 27.4 million
includes a circulation rate base of 15 million 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 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 $569.3
million, or 77% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1996.
Advertising
In fiscal 1996, Reader's Digest carried 1,098 advertising
pages in its United States--English language edition and 12,803
advertising pages in its other editions. 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, usually 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 $170.5
million, or 23% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1996.
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 mission 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.
[END PAGE 2]
Production and Fulfillment
All editions of Reader's Digest are printed by independent
third parties. The United States edition, which was printed by
one printer at its location in New York State during fiscal 1996,
will be printed exclusively by another printer in Pennsylvania
under a 10-year contract, commencing in fiscal 1997. 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
"periodicals" 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 to 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 1996,
Condensed Books generated worldwide revenues of $370.4 million,
as compared with $392.1 million in fiscal 1995 and $363.9 million
in fiscal 1994.
[END PAGE 3]
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 1996, series books generated
worldwide revenues of $264.3 million, as compared with $236.6
million in fiscal 1995 and $214.9 million in fiscal 1994.
Reading series marketed in the United States include Today's
Best Nonfiction (registered mark), which consists of five volumes
per year each generally containing condensed versions of four
contemporary works of nonfiction and The 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 nine countries in three
languages and The World's Best Reading is published in seven
countries in three languages.
The Company markets illustrated series, which are generally
closed ended, in the United States and several other countries.
General Books
The Company's general books consist primarily of reference
books, cookbooks, "how-to" and "do-it-yourself" books, songbooks,
children's books and books on subjects such as history, travel,
religion, health, nature and the home. General books are
published in 14 languages and are marketed in 33 countries. In
fiscal 1996, general books generated worldwide revenues of $753.5
million, as compared with $808.7 million in fiscal 1995 and
$751.3 million in fiscal 1994.
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.
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 and content from other sources.
In July 1995, the Company and Meredith Corporation
("Meredith") entered into an agreement forming a strategic
alliance that grants the Company certain exclusive direct
[END PAGE 4]
marketing rights with respect to books and other products, such
as music cassettes and compact discs, CD-ROMs and videotapes,
published under Meredith's Better Homes and Gardens (registered
mark) and Ladies' Home Journal (registered mark) 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.
The Company is pursuing the use of electronic media and new
technologies, such as CD-ROM and computer on-line services.
Pursuant to an agreement with Microsoft Corporation to produce
original multimedia software for home computer users, a CD-ROM,
based on the Company's popular New Complete Do-it-Yourself
Manual, was completed in 1996 and is marketed by both companies
carrying both the Reader's Digest (registered mark) and the
Microsoft (registered mark) Home brand names. Under the
agreement, the Company has global direct mail rights and
Microsoft Corporation has worldwide retail rights to the product.
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 and
newly commissioned material by a variety of artists, although
they may include selections from the Company's 17,000-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 28
countries, offering different music products in the various
international markets because of diverse tastes. In fiscal 1996,
music products generated worldwide revenues of $460.1 million, as
compared with $435.9 million in fiscal 1995 and $392.4 million in
fiscal 1994.
Television and Video
The Company's television and home video products are in
genres similar to its general books. Several original programs
have won awards of excellence, including four Emmy awards, and
have appeared on the Disney Channel and the Discovery Channel.
The Company continues to expand its video operations and to
develop its television business in the United States and in
international markets and is presently marketing video products
in the United States and 23 other countries. Most of the
Company's original programs have been licensed to cable
television networks. The Company has also begun to sell its home
video products through retail establishments. In fiscal 1996,
home video products generated worldwide revenues of $241.3
million, as compared with $218.7 million in fiscal 1995 and
$173.9 million in fiscal 1994.
In November 1995, the Company formed a five-year strategic
alliance with the Public Broadcasting Service ("PBS") to develop,
acquire, create and distribute television series, miniseries and
specials for initial broadcast on PBS. The programs will be
based on original editorial content from the Company, including
its existing product lines, as well as ideas and concepts
proposed by PBS, its affiliates and independent producers. PBS
has domestic television distribution and U.S. retail distribution
rights and the Company has worldwide direct marketing rights for
home videos, books and certain other home entertainment products
based on the television programs.
Production and Fulfillment
The various editions of Condensed Books are printed and
bound by third-party contractors. The Company is a party to an
[END PAGE 5]
exclusive agreement through 2002 for printing English language
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 mail 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, direct response television and telemarketing. Under a
September 1995 agreement, the Company and Avon Products, Inc.
("Avon") are testing door-to-door sales of Reader's Digest
magazine subscriptions and books to be offered by Avon
representatives in five countries outside of the United States.
Also, in August 1996, the Company entered into an agreement with
Spiegel Inc. to conduct a two-year test that will involve
development of jointly branded catalogs and the taking and
fulfillment by Spiegel Inc. of orders from a new Company catalog.
The Company is also working with software developers and
computer on-line services to adapt the editorial content and the
marketing methods of its magazines and books and home
entertainment products to new technologies. The Company plans to
launch a site on the World Wide Web in fiscal 1997.
To promote the sale of its products in the United States,
the Company usually offers a sweepstakes in its promotional
mailings. Prizes total about $14 million for the 1996 and 1997
[END PAGE 6]
editions of the sweepstakes. 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 Customer List Enhancement
The size and quality of the Company's computerized customer
list of current and prospective customers 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
corporate strategy and its marketing strategy to expand and
enhance its customer lists, the Company engages in limited
exchanges or transfers 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
in effect from time to time 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.
[END PAGE 7]
Special Interest Magazines
The Company publishes several special interest magazines
that it deems consistent with its image, editorial philosophy and
market expertise. The Family Handyman (registered mark) magazine
provides instructions and guidance for "do-it-yourself" home
improvement projects. New Choices: Living Even Better After 50
(registered mark) magazine is aimed at active, mature readers and
provides information on entertainment, travel, health and leisure
time activities. American Health (registered mark) magazine
provides helpful information on medicine, nutrition, psychology
and fitness and, beginning in fiscal 1997, focuses on these
issues as they relate to women. These magazines are sold by
subscription. The Family Handyman and American Health are also
sold on newsstands. 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 Company also published Travel Holiday (registered mark)
magazine in the United States until its sale in March 1996.
The following table sets forth the circulation rate base of
each of the Company's United States special interest magazines at
June 30, 1996, as well as the number of advertising pages carried
for the fiscal year ended June 30, 1996. Circulation rate base
data is as reported to ABC.
Number of
Circulation Advertising
Rate Base Pages
Carried
The Family Handyman 1,000,000 582
American Health 800,000 460
New Choices: Living Even Better After 50 600,000 400
Moneywise had a circulation rate base of 126,250 as of the end of
fiscal 1996.
Of total revenues of $91.9 million for the Company's special
interest magazines in fiscal 1996, 62% was generated by
circulation revenues and 38% 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.
QSP, Inc.
The Company's wholly owned subsidiaries, QSP, Inc. and
Quality Service Plan, Inc. ("QSP"), 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.
[END PAGE 8]
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, 1996 and 1995, respectively, the Company
employed approximately 6,300 and 6,900 persons worldwide;
approximately 2,200 and 2,600 were employed in the United States
and 4,100 and 4,300 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 (58) 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.
[END PAGE 9]
Melvin R. Laird (74) Mr. Laird has been a member of the
Board of Directors of the Company
since 1990. He has served as Senior
Counsellor for national and
international affairs since 1974 and
was elected to the additional
position of Vice President in 1989.
Mr. Laird joined the Company in
1974.
Robert J. Aubin (47) Mr. Aubin has been President,
Reader's Digest U.S.A. since
November 1995. He joined the
Company in September 1994 as
Managing Director of Reader's Digest
Canada. From May 1987 to August
1994, Mr. Aubin was Chief Executive
Officer of Delisle Foods, Ltd.
Glenda K. Burkhart (45) Ms. Burkhart has been Senior Vice
President, Strategic Planning and
Human Resources since joining the
Company in April 1996. Prior to
joining the Company, she was
Corporate Vice President-Human
Resources, Strategic Planning and
Corporate Marketing for Millipore
Corp. (purification systems for
pharmaceutical and semiconductor
markets), from November 1993 to
April 1996 and Partner/Consultant of
Mass-Burkhart (strategy and change
management consulting) from August
1991 to October 1993.
Richard A. Garvey (48) Mr. Garvey has been a Vice President
and Group President of the Company
since September 1996. He was
previously Vice President, Marketing
of LEGO Systems, Inc. (children's
educational and entertainment
products).
Betty J. Hudson (47) Ms. Hudson has been Senior Vice
President, Corporate Communications
since joining the Company in May
1996. Prior to joining the Company,
Ms. Hudson served as Executive
Producer of NBC Productions from May
1993 to May 1996, and Senior Vice
President, Corporate Communications
of NBC, Inc., from January 1989 to
April 1993.
Barbara J. Morgan (51) 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.
Martin J. Pearson (49) Mr. Pearson, who joined the Company
in August 1973, has been President,
Reader's Digest Europe since
November 1995. He served as
President, Reader's Digest Pacific
from July 1993 to November 1995 and
has been a 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.
[END PAGE 10]
Paul A. Soden (52) 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 of
Sterling Winthrop, Inc.
(pharmaceutical and consumer
products).
Christopher P. Willcox (49) Mr. Willcox has been Senior Vice
President and Editor in Chief of
Reader's Digest magazine since March
1996. He served as World-wide
Executive Editor from June 1994 to
March 1996, Executive Editor,
International from October 1991 to
June 1994 and Assistant Managing
Editor from 1990 to 1991. He joined
the Company in 1988.
William H. Willis (45) Mr. Willis has been President,
Reader's Digest Pacific since
November 1995. He was President,
Special Markets Group from January
1994 to November 1995. He has been
a Vice President of the Company
since he joined the Company in 1994.
Prior to joining the Company, Mr.
Willis was Executive Vice President
of Ogden Services Corporation
(facility management services).
Stephen R. Wilson (49) 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.
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.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 three 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. A subsidiary of the Company also leases 36,000 square
feet of office space in Westport, Connecticut.
QSP leases approximately 163,000 square feet in Conyers,
Georgia, 4,000 square feet in Danbury, Connecticut, 21,000 square
feet in Ridgefield, Connecticut.
[END PAGE 11]
The Company owns approximately 1,612,700 square feet and
leases approximately 691,100 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, England, 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.LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various
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.
During the third quarter of fiscal 1996, the Company's QSP,
Inc. subsidiary and the Company reached an agreement with the
plaintiffs to settle an antitrust class action lawsuit commenced
in December 1993 by the Roman Catholic Bishop of San Diego and
the Chino Unified School District. The agreement, which is
subject to final approval by the U.S. District Court for the
Southern District of California, provides for QSP, Inc. and the
Company to deliver up to $40 million in retail value of Company
products, coupons for discounts on QSP, Inc. programs, and cash.
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, 1996.
PART II
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 1996 Annual Report to Stockholders is incorporated
herein by reference.
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 1996 Annual Report to
Stockholders is incorporated herein by reference.
[END PAGE 12]
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 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appearing on
pages 19 through 28 of the Company's 1996 Annual Report to
Stockholders, together with the report thereon of KPMG Peat
Marwick LLP appearing on page 29, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company under
the caption "Proposal 1: Election of Directors" in the Proxy
Statement for the Annual Meeting of Stockholders of the Company
to be held on November 8, 1996 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. 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 8, 1996 is incorporated herein by
reference.
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 8, 1996 is
incorporated herein by reference.
[END PAGE 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 8, 1996 is
incorporated herein by reference.
PART IV
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 18 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.*
[END PAGE 14]
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 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.*
10.9 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.*
10.10 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.*
10.11 Supplemental Retirement Benefit Agreement dated as of
June 8, 1994 between the registrant and Martin J. Pearson
filed as Exhibit 10.15 to the registrant's Form 10-K for the
year ended June 30, 1995 is incorporated herein by
reference.*
10.12 The Reader's Digest 1992 Executive Retirement Plan
(Amendment and Restatement as of September 8, 1995) filed as
Exhibit 10.17 to the registrant's Form 10-K for the year
ended June 30, 1995 is incorporated herein by reference.*
10.13 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.*
10.14 Resolution of the Board of Directors of the registrant
adopted January 10, 1986 relating to compensation for former
members of the Board of Directors filed as Exhibit 10.19 to
the registrant's Form 10-K for the year ended June 30, 1995
is incorporated herein by reference.*
10.15 Agreement dated as of August 22,1996 between the registrant
and Thomas M. Kenney.*
10.16 Agreement dated as of June 10, 1996 between the registrant
and Kenneth A. Gordon.*
10.17 The Reader's Digest Association, Inc. Executive Financial
Counseling Plan.*
10.18 Amendment No. 1 to The Reader's Digest Association, Inc.
Management Incentive Compensation Plan (effective as of
April 11, 1996) filed as Exhibit 10.1.1 to the registrant's
Form 10-Q for the quarter ended March 31, 1996, is incorporated
herein by reference.*
[END PAGE 15]
10.19 Amendment No. 1 to The Reader's Digest Association, Inc.
1994 Key Employee Long Term Incentive Plan
(effective as of April 11, 1996) filed as Exhibit 10.3.1
to the registrant's Form 10-Q for the quarter ended March 31,
1996, is incorporated herein by reference.*
10.20 Termination Agreement dated as of April 1, 1996 between
the registrant and James P. Schadt, filed as Exhibit 10.23
to the registrant's Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by reference.*
10.21 Termination Agreement dated as of April 1, 1996
between the registrant and Paul A. Soden,
filed as Exhibit 10.25 to the registrant's Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by
reference.*
10.22 Termination Agreement dated as of April 1, 1996 between
the registrant and Stephen R. Wilson, filed as Exhibit 10.26
to the registrant's Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by reference.
13 Financial information appearing at pages 14 through 30 of
the registrant's 1996 Annual Report to Stockholders,
together with the report thereon of KPMG Peat Marwick LLP
appearing on page 29 (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, 1996.
*Denotes a management contract or compensatory plan.
[END PAGE 16]
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, 1996
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, 1996
(James P. Schadt) Executive Officer and
a Director
MELVIN R. LAIRD Vice President and September 26, 1996
(Melvin R. Laird) Senior Counsellor and
a Director
STEPHEN R. WILSON Executive Vice President September 26, 1996
(Stephen R. Wilson) and Chief Financial
Officer
GEORGE S. SCIMONE Vice President and September 26, 1996
(George S. Scimone) Controller
WILLIAM G. BOWEN Director September 26, 1996
(William G. Bowen)
LYNNE V. CHENEY Director September 26, 1996
(Lynne V. Cheney)
M. CHRISTINE DEVITA Director September 26, 1996
(M. Christine DeVita)
JAMES E. PRESTON Director September 26, 1996
(James E. Preston)
ROBERT G. SCHWARTZ Director September 26, 1996
(Robert G. Schwartz)
WALTER V. SHIPLEY Director September 26, 1996
(Walter V. Shipley)
C.J. SILAS Director September 26, 1996
(C.J. Silas)
WILLIAM J. WHITE Director September 26, 1996
(William J. White)
[END PAGE 17]
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,
1996, 1995 and 1994 *
Consolidated Balance Sheets--June 30, 1996 and 1995 *
Consolidated Statements of Cash Flows--For the Years Ended June 30, *
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity--For the *
Years Ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements *
____________
*Incorporated by reference to the Company's 1996 Annual
Report to Stockholders. See Item 8 of the Annual Report on Form
10-K.
[END PAGE 18]
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
Financial Overview
In millions, except per share data 1996(1) 1995
<S> <C> <C>
Revenue $3,098.1 $3,068.5
Operating profit $109.3 $391.9
Net income $80.6 $264.0
Earnings per share $0.73 $2.35
Dividends per common share $1.75 $1.55
Cash and cash equivalents,
Short-term investments and
marketable securities $374.2 $532.1
Total assets $1,904.1 $1,958.7
Stockholders' equity $478.9 $640.8
(1) Results for 1996 include the effects of third quarter charges (aggregate pre-
tax charges of $245.0, or $1.57 per share) and fourth quarter savings on the
finalization of the company's lease termination program in the United Kingdom
($10.0, or $0.09 per share).
</TABLE>
<TABLE>
The Reader's Digest Association, Inc. and
Subsidiaries
BUSINESS SEGMENT FINANCIAL INFORMATION
Years ended June 30,
In millions 1996 1995 1994
<S> <C> <C> <C>
Revenues
Reader's Digest Magazine $739.8 $732.9 $689.1
Books and Home Entertainment Products $2,099.4 $2,099.8 $1,900.3
Special Interest Magazines $91.9 $95.6 $90.6
Other Businesses $170.6 $143.9 $129.6
Intersegment (1) $(3.6) $(3.7) $(3.2)
$3,098.1 $3,068.5 $2,806.4
Operating profit
Reader's Digest Magazine $48.8 $78.3 $78.6
Books and Home Entertainment Products $322.1 $339.3 $310.8
Special Interest Magazines $0.3 $(0.8) $(3.2)
Other Businesses $32.2 $31.1 $26.6
Effect of promotion accounting
changes, net --- --- $113.9
Other operating items $(235.0) --- $(76.0)
Corporate Expense $(59.1) $(56.0) $(57.0)
$109.3 $391.9 $393.7
Identifiable assets
Reader's Digest Magazine $358.3 $365.0 $348.4
Books and Home Entertainment Products $981.1 $973.7 $928.9
Special Interest Magazines $66.4 $88.6 $80.1
Other Businesses $76.9 $51.0 $39.2
Corporate (2) $421.4 $480.4 $652.8
$1,904.1 $1,958.7 $2,049.4
Depreciation and amortization
Reader's Digest Magazine $11.8 $11.6 $11.2
Books and Home Entertainment Products $30.4 $27.8 $23.7
Special Interest Magazines $1.6 $2.4 $4.1
All other $5.0 $2.9 $3.2
$48.8 $44.7 $42.2
Capital expenditures
Reader's Digest Magazine $14.7 $13.6 $12.1
Books and Home Entertainment Products $36.8 $32.9 $26.7
All other $8.1 $3.8 $3.4
$59.6 $50.3 $42.2
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC FINANCIAL INFORMATION Years ended June 30,
In millions 1996 1995 1994
<S> <C> <C> <C>
Revenues
United States $1,278.9 $1,196.9 $1,117.8
Europe 1,379.7 1,455.8 1,301.0
Pacific and Other Markets 445.6 424.9 396.8
Interarea (6.1) (9.1) (9.2)
$3,098.1 $3,068.5 $2,806.4
Revenues interarea
United States $3.2 $4.3 $4.6
Europe 2.4 3.2 3.5
Pacific and Other Markets 0.5 1.6 1.1
$6.1 $9.1 $9.2
Operating profit
United States $167.6 $151.7 $135.1
Europe 173.5 225.5 231.3
Pacific and Other Markets 62.3 70.7 46.4
Effect of promotion accounting
changes, net --- --- 113.9
Other operating items (235.0) --- (76.0)
Corporate Expense (59.1) (56.0) (57.0)
$109.3 $391.9 $393.7
Identifiable assets
United States $664.9 $587.6 $525.3
Europe 563.4 669.4 660.7
Pacific and Other Markets 254.4 221.3 210.6
Corporate (2) 421.4 480.4 652.8
$1,904.1 $1,958.7 $2,049.4
(1) Intersegment sales are included in the company's Other Businesses segment.
(2) Corporate assets consist primarily of cash and cash equivalents,
short-term investments, marketable securities and other long-term
investments.
</TABLE>
The Reader's Digest Association, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS
Dollars in millions, except per share data
Change in Presentation
In 1996, the company reclassified certain costs and
expenses in the consolidated statements of income to more
closely reflect its business and internal reporting
practices. There was no impact on operating profit or net
income. Additionally, certain prior year amounts in the company's
consolidated balance sheet and consolidated statements
of cash flows have been reclassified to conform with the
current year's presentation.
Results of Operations
In the third quarter of 1996, the company recorded total
charges of $245.0 ($169.8 after tax, or $1.57 per share),
comprised of $204.0 relating primarily to the
streamlining of the company's organizational structure
and the strategic repositioning of certain businesses and
$41.0 for various claims against the company. These
charges are recorded in other operating items in the
consolidated statement of income. The streamlining of the
company's organizational structure covers the separation of
approximately 1,300 employee positions from the worldwide workforce by the
end of 1997 through a combination of voluntary early
retirement incentives and involuntary severance programs.
Nearly onehalf of these positions have been identified
from European operations, with the remainder divided
between the United States and Pacific and Other Markets.
Also associated with the streamlining are asset write-
downs and contract terminations relating to the
redirection of distributor and supplier relationships,
the outsourcing of certain functions where it is cost-
beneficial to the company, lease terminations, and the
discontinuation of individual products in specific
geographic markets.
The strategic repositioning of certain businesses relates
in part to the special interest magazines in the United
States, which were re-assessed for their fit with the
overall corporate strategy, including their ability to
attract new customers. As a result, Travel Holiday
magazine was sold effective March 21, 1996, and certain
other magazines will re-focus their editorial content and
their target audiences. Other businesses affected were a
publishing and book club business in the United Kingdom,
and a children's book club business in the United States.
The primary components of the $204.0 charge are $104.4 of
severance costs associated with the reduction of the
worldwide workforce; $51.5 of other items such as asset
write-downs and contract termination costs; and $48.1
relating to the strategic repositioning of certain
businesses. As a result of these initiatives, the company
expects to realize approximately $50.0 of annual pre-tax
savings in 1997. Additionally, these initiatives will
require pre-tax cash outlays of approximately $144.0, the
majority of which are expected to occur in 1997. The
savings from these actions are not necessarily indicative
of incremental earnings in 1997 as they will help fuel the
company's investment in long-term growth initiatives.
1996 v. 1995 Worldwide revenues in 1996 were about even
at $3,098.1, compared with the prior year. Slightly higher
prices and sales of a higher priced product mix were
offset by slight declines in volume. Higher revenues in
the United States and Pacific and Other Markets were
offset by lower revenues in Europe.
Worldwide operating profit decreased from $391.9 in 1995
to $109.3, or by 72%, in 1996. Excluding the effect of
the third quarter charges, worldwide operating profit
decreased to $354.3, or by 10%, which includes $10.0 of
savings recognized as a result of the finalization of the
company's lease termination program in the United Kingdom.
Operating profit also decreased due to higher paper and
postage costs and performance in the company's European
operations.
Earnings per share declined 69% to $0.73 in 1996 compared
with $2.35 in 1995. Excluding the effect of the third
quarter charges, earnings per share decreased to $2.30, or
by 2%, in 1996, which includes the benefit of $0.09 per
share due to the savings recognized as a result of the
finalization of the company's lease termination program in
the United Kingdom. Earnings per share declined less than
operating profit due to a lower effective tax rate,
excluding the effect of other operating items, and the
reduction in outstanding shares due to the company's share
repurchase program.
1995 v. 1994 Worldwide revenues in 1995 increased 9%, to
$3,068.5, compared with the prior year, of which
approximately 4% was attributable to the favorable effect
of changes in foreign currency exchange rates, 3% to
higher prices and sales of a higher priced product mix and
2% to an increase in volume. The segments that were the
primary contributors to this 9% increase were Books and
Home Entertainment Products and Reader's Digest Magazine,
representing approximately 7% and 2%, respectively.
Worldwide operating profit was $391.9 in 1995 and $393.7
in 1994. However, as a result of the changes in
accounting practices in 1994, worldwide operating profit
in 1995 is not comparable to that of 1994. Adjusting 1994
results to reflect the accounting practices of 1995 and to
exclude the other operating items of $76.0 (comparable
basis), worldwide operating profit in 1995 increased 10%
compared with 1994. This 10% increase was primarily due to
higher revenues as operating profit margins in 1995 were
consistent with those in 1994. Results were favorably
influenced by the effect of changes in foreign currency
exchange rates and unfavorably affected by lower response
rates to promotional mailings in Europe and higher paper
and postage costs.
Earnings per share was $2.35 in 1995. On a comparable
basis, earnings per share increased 4% over 1994. This
increase is attributable to the reduction in outstanding
shares due to the company's share repurchase program and a
lower effective tax rate.
Other Income, Net
1996 v. 1995 Other income, net decreased in 1996 to
$28.4, compared with $30.6 in 1995. The primary
contributor to this decrease was lower interest income
($21.5 in 1996, compared with $40.1 in 1995), partially
offset by higher gains on the sales of certain investments
($15.8 in 1996, compared with $8.9 in 1995) and lower
expense related to losses on foreign exchange transactions
and hedging activity ($6.1 in 1996, compared with $10.3 in
1995).
1995 v. 1994 Other income, net decreased in 1995 to
$30.6, compared with $69.5 in 1994. This decrease was
caused by lower gains on the sales of certain investments
($8.9 in 1995, compared with $42.6 in 1994).
Income Taxes
The company reduced its overall effective tax rate,
excluding the effect of other operating items, to 35.5% in
1996 from 37.5% in 1995. This decrease was primarily
attributable to favorable settlements relating to prior
years, as well as effective tax planning.
Geographic Areas
[Graph - Operating Profit by Geographic Area]
United States
1996 v. 1995 Revenues in the United States increased in
1996 to $1,278.9, or by 7%, compared with 1995. Books
and Home Entertainment Products accounted for 6% of this
increase. Within Books and Home Entertainment Products,
the increase was attributable to higher revenues in books,
due to a higher priced product mix, the launch of a new
illustrated book series and higher music product revenues
which was partially attributable to increased membership
in music series. Revenues also increased in Other
Businesses due to higher sales at QSP. Operating profit
increased 11% to $167.6 in 1996 compared with 1995 due to
higher revenues and the benefit of cost containment
initiatives, partially offset by higher paper and postage
costs.
1995 v. 1994 Revenues in the United States increased in
1995 to $1,196.9, or by 7%, compared with 1994. Operating
profit increased 12% to $151.7. On a comparable basis,
operating profit increased 13%. The increases in revenues
and operating profit were principally due to higher and
more profitable unit sales of Books and Home
Entertainment Products as a result of a variety of
factors, including the appeal of products offered and the
number and timing of promotional mailings. Notably,
Condensed Books shipments increased 10% over the prior
year and video unit sales rose 30%. For Reader's Digest
Magazine, advertising revenues increased as a result of an
increase in advertising pages of more than 20% compared
with the prior year. However, the impact on profits of
these higher advertising revenues was more than offset by
increased promotion costs.
Europe
1996 v. 1995 Revenues in Europe decreased from $1,455.8
in 1995 to $1,379.7, or by 5%, in 1996. Excluding the
favorable effects of foreign currency exchange rates,
revenues declined 8%. This decline was attributable
primarily to lower volume in Books and Home Entertainment
Products, including Condensed Books, general books and
series books. Operating profit decreased from $225.5 in
1995 to $173.5, or by 23%, in 1996. These results reflect
the company's investment in restaging its European
operations, lower customer response rates to some of the
company's promotional mailings in a number of markets and
general weakness in European economies. The restaging
comprises a program to restore long-term customer and
revenue growth by decreasing the number of mailings and
mail quantity in a given mailing, varying its promotional
offers, adding distribution channels, such as direct
response television, and moderating the rate of product
price increases. While the company believes its strategy
to improve European performance is on track, the pace of
implementation of the restaging has been slower than
originally anticipated due to the changes in local and
regional management and the ongoing changes throughout the
company, and the continued general weakness in European
economies. These factors and circumstances resulted in
lower performance particularly in Books and Home
Entertainment Products. Higher paper costs also
contributed to the operating profit decline.
1995 v. 1994 Revenues in Europe in 1995 increased 12%,
to $1,455.8, compared with 1994, due to the favorable
effect of changes in foreign currency exchange rates.
Excluding this effect, revenues increased only slightly as
the impact of higher prices and a higher priced product
mix were offset by lower unit sales of Books and Home
Entertainment Products. These lower unit sales were
primarily due to a decline in customer response rates to
mailing programs in certain markets, including the three
largest markets: Germany, the United Kingdom and France. The company
attributes this weakness principally to increases in the
number of product offerings over the past few years, which
led to customer list fatigue and reduced order rates.
Operating profit decreased 2% in 1995 to $225.5. On a
comparable basis, operating profit decreased 3% as a
result of higher promotion costs and would have declined
14% if not for the favorable effect of changes in foreign
currency exchange rates.
Pacific and Other Markets
1996 v. 1995 Revenues in Pacific and Other Markets
increased from $424.9 in 1995 to $445.6, or by 5%, in
1996. Excluding the unfavorable effects of foreign
exchange, revenues increased 10%. This increase was
attributable to Books and Home Entertainment Products,
Reader's Digest Magazine and Other Businesses. Within
Books and Home Entertainment Products, excluding the
unfavorable effects of foreign currency exchange rates,
all product lines reported revenue increases due primarily
to higher prices and a higher priced product mix. For
Reader's Digest Magazine the increase was primarily
attributable to increased circulation revenues. Revenues
for Other Businesses increased due to the acquisition of
QSP Canada. Operating profit decreased 12% in 1996 to
$62.3. The decrease in operating profit was primarily
attributable to higher paper costs, lower response rates
to promotional mailings and formats in South Africa and
investments in new countries.
1995 v. 1994 Revenues for Pacific and Other Markets
increased in 1995 to $424.9, or by 7%, compared with the
prior year, principally due to higher sales of Books and
Home Entertainment Products. Operating profit increased
52% in 1995 to $70.7. On a comparable basis, operating
profit increased 57%. This increase was primarily
attributable to improved results in Mexico, which absorbed
costs in 1994 associated with a change in marketing
approach, and increased sales of Books and Home
Entertainment Products in other locations.
Business Segments
[GRAPH - Operating Profit by Business Segment]
Reader's Digest Magazine
1996 v. 1995 Revenues for Reader's Digest Magazine
remained about even at $739.8 in 1996. The slight
increase was primarily due to higher advertising revenues.
The increase in advertising revenues was attributable to
higher rates and to a lesser extent higher advertising
pages. Advertising pages increased in the United States
and Pacific and Other Markets but declined in Europe.
Circulation revenues remained even. Lower circulation
levels were offset by higher subscription pricing.
Increased circulation levels in Pacific and Other Markets
were more than offset by decreased circulation levels in
Europe. Subscription price increases in Europe and Pacific
and Other Markets were partially offset by lower average
subscription prices in the United States consistent with
the company's long-term growth strategy. Operating profit
for Reader's Digest Magazine decreased in 1996 to $48.8
compared with $78.3 in 1995 due primarily to higher paper
and postage costs and increased promotional spending to
retain high-quality subscribers who purchase the company's other
products.
1995 v. 1994 Revenues for Reader's Digest Magazine
increased in 1995 to $732.9, or by 6%, due equally to
higher advertising revenue and the favorable effect of
changes in foreign currency exchange rates. The increase
in advertising revenue of $26.0 was attributable to an
increase in advertising pages as the worldwide advertising
environment improved. About 25% of this effect was offset
by a decline in effective advertising rates caused by a
change in the mix of advertising pages sold. Circulation
revenues were about even in 1995 compared with the prior
year as the effects of higher pricing were almost entirely
offset by fewer paid subscriptions. Average circulation
levels, on a global basis, declined slightly in 1995
principally as a result of the reduction in the U.S.
circulation rate base to 15 million from 16.25 million
effective January 1, 1994. Operating profit in 1995 of
$78.3 decreased slightly compared with 1994. On a
comparable basis, operating profit decreased 5%. In
addition to higher paper and postage costs in the second
half of 1995, operating profit was affected principally by
higher promotion costs.
Books and Home Entertainment Products
1996 v. 1995 Revenues for Books and Home Entertainment
Products were even at $2,099.4 in 1996, compared with
1995. Higher prices and sales of a higher priced product
mix, and to a lesser extent, the favorable effect of
changes in foreign currency exchange rates, were offset by
a decrease in unit sales. Higher unit sales in the United
States and Pacific and Other Markets were more than offset
by lower unit sales in Europe. Globally, revenues for
series books, music and video products reported healthy
gains, offset by substantially lower revenues for general
books and Condensed Books. Operating profit for Books and
Home Entertainment Products decreased in 1996 to $322.1
compared with $339.3 in 1995 principally due to lower
levels of customer response in Europe offset by strong
performance in the United States. Higher paper and postage
costs also reduced profitability.
1995 v. 1994 Revenues for Books and Home Entertainment
Products increased in 1995 to $2,099.8, or by 10%,
compared with the prior year, of which 5% was attributable
to the favorable effect of changes in foreign currency
exchange rates, 4% to higher prices and sales of a higher
priced product mix and 1% to an increase in unit sales.
Higher unit sales in the United States and Pacific and
Other Markets were offset by lower sales in Europe.
Revenues increased for all product lines. Notably, video
revenues increased 26% compared with the prior year as
unit sales increased in each of the company's three
geographic areas. Sales of Books and Home Entertainment
Products were influenced by a variety of factors,
including the appeal of products offered and the number
and timing of promotional mailings. Operating profit
increased in 1995 to $339.3, or by 9%, over 1994. On a
comparable basis, operating profit increased 11%. This
increase is almost equally attributable to increased
revenues and the favorable effect of changes in foreign
currency exchange rates.
Special Interest Magazines
1996 v. 1995 Revenues for Special Interest Magazines
decreased in 1996 to $91.9, or by 4%, compared with the
prior year. This decrease was primarily attributable to
the sale of Travel Holiday magazine in the third quarter
of 1996. Excluding results for Travel Holiday,
circulation revenues increased slightly due primarily to
higher subscription pricing while advertising revenues
remained about even compared with the prior year.
Operating performance improved in 1996 compared with 1995
primarily due to lower advertising sales expenses.
1995 v. 1994 Revenues for Special Interest Magazines
increased in 1995 to $95.6, or by 5%, compared with the
prior year, of which 3% is attributable to an increase in
advertising revenue and 2% to an increase in circulation
revenue. The increase in advertising revenue was
primarily due to higher effective advertising rates. The
increase in circulation revenue was caused equally by
higher subscription pricing and an increase in the number
of paid subscriptions. Special Interest Magazines
operating loss decreased in 1995 to $0.8 compared with
$3.2 in the prior year. This improvement was due to lower
amortization expense.
Other Businesses
1996 v. 1995 Revenues for Other Businesses, net of
intersegment sales, increased in 1996 to $167.0, or by
19%, compared with the prior year, primarily due to higher
sales at QSP in the United States and the acquisition of
QSP Canada. Operating profit increased because of
magazine subscription growth at QSP, offset by higher
paper costs.
1995 v. 1994 Revenues for Other Businesses, net of
intersegment sales, increased in 1995 to $140.2, or by
11%, compared with the prior year, primarily due to higher
sales at QSP. Operating profit increased 17% in 1995, to
$31.1, compared with 1994. On a comparable basis,
operating profit increased 14% primarily because of
increased revenues.
Corporate Expense
Corporate Expense in 1996 of $59.1 increased 6% compared
with $56.0 in the prior year primarily due to higher
recruiting and relocation expenses offset by the benefit
of cost containment initiatives. Corporate Expense in
1995 of $56.0 was slightly lower compared with $57.0 in
1994.
Forward-Looking Information
The company's strategic actions discussed above are
expected to provide initial benefits in the form of
improving customer response rates, reducing 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.
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
capital gains, lower interest income and a one percentage
point higher effective tax rate. Due to the these non-
operating items, earnings per share growth will not
correlate with operating profit growth in 1997.
The company seeks to maximize total long-term return to
shareholders and believes that through the expansion of
product lines, distribution channels and promotional
programs to attract new and younger customers, it will be
able to achieve sustainable growth over the long term.
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, 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
Cash and cash equivalents, short-term investments and
marketable securities decreased $157.9 to $374.2 at June
30, 1996 compared with $532.1 at June 30, 1995. This
decrease was primarily due to dividend payments ($190.1)
and the repurchase of 1.4 million shares of Class A
nonvoting common stock ($62.9) exceeding cash provided by
operations ($119.2).
The 1996 full-year dividend payment increased to $1.75 per
share, or 13%. The company increased its quarterly
dividend on common stock to $0.45 per share, or 13%,
during 1996 and is currently paying dividends at an
annualized rate of $1.80 per share.
Capital expenditures in 1996 amounted to $59.6 and were
primarily for management information systems equipment and
improvements to existing facilities.
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.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which
must be adopted by 1997. This statement establishes
accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be
disposed of. Adoption of SFAS No. 121 is not expected to
have a material impact on the company's results of
operations and financial position nor will it affect the
company's cash flow.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes an alternative
method of accounting for stock-based compensation awarded
to employees. SFAS No. 123 provides for the recognition
of compensation expense based on the fair value of the
award, but allows companies to continue to measure compensation
cost in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees. Companies electing this method must make pro
forma disclosures of net income and earnings per share as
if the fair value-based method had been applied. The
company plans to continue to use APB No. 25, which does
not require the company to record compensation expense for
stock options it awards to employees. In 1997 the company
will disclose the pro forma effect of the fair value-based
method on 1996 and 1997 net income and earnings per share.
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30,
In millions, except per share data 1996 1995 1994
<S> <C> <C> <C>
Revenues $3,098.1 $3,068.5 $2,806.4
Product, distribution and editorial 1,079.8 1,049.7 935.8
expense
Promotion, marketing and 1,674.0 1,626.9 1,514.8
administrative expense
Effect of promotion accounting --- --- (113.9)
changes, net
Other operating items 235.0 --- 76.0
Operating profit 109.3 391.9 393.7
Other income, net 28.4 30.6 69.5
Income before provision for income taxes
and mulative effect of change in 137.7 422.5 463.2
accounting principle
Provision for income taxes 57.1 158.5 191.1
Income before cumulative effect of
change in accounting principle 80.6 264.0 272.1
Cumulative effect of change in
accounting principle, net --- --- (25.8)
Net income $80.6 $264.0 $246.3
Earnings per share:
Before cumulative effect of change
in accounting principle $0.73 $2.35 $2.34
Cumulative effect of change in
accounting principle --- --- (0.23)
Earnings per share $0.73 $2.35 $2.11
Average common shares outstanding 107.9 112.0 115.7
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
In millions 1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $258.1 $214.6
Short-term investments 18.9 93.0
Receivables, net 412.4 396.4
Inventories 204.4 188.6
Prepaid expenses and other current assets 310.3 218.5
Total current assets 1,204.1 1,111.1
Marketable securities 97.2 224.5
Other long-term investments 39.8 43.1
Property, plant and equipment, net 261.5 256.6
Intangible assets, net 58.4 77.6
Other noncurrent assets 243.1 245.8
Total assets $1,904.1 $1,958.7
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 216.0 $224.8
Accrued expenses 457.3 340.2
Income taxes payable 67.3 97.5
Unearned revenue 354.9 360.4
Other current liabilities 17.5 17.9
Total current liabilities 1,113.0 1,040.8
Postretirement and postemployment benefits
other than pensions 147.5 133.5
Other noncurrent liabilities 164.7 143.6
Total liabilities 1,425.2 1,317.9
Stockholders' equity:
Capital stock 28.4 29.5
Paid-in capital 138.3 118.3
Retained earnings 984.0 1,093.5
Foreign currency translation adjustment (14.2) (0.3)
Net unrealized (losses) gains on (1.3) 5.1
certain investments
Treasury stock, at cost (656.3) (605.3)
Total stockholders' equity 478.9 640.8
Total liabilities and stockholders' equity $1,904.1 $1,958.7
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
In millions 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income $80.6 $264.0 $246.3
Depreciation and amortization 48.8 44.7 42.2
Gain on marketable securities and investments (15.8) (8.9) (42.6)
Cumulative effect of change in accounting --- --- 25.8
principle
Changes in assets and liabilities:
Accounts receivable, net (26.1) 6.8 (3.6)
Inventories (25.7) (15.7) 6.2
Unearned revenue 5.3 (5.4) 10.9
Accounts payable and accrued expenses 164.0 23.7 120.6
Other, net (111.9) (56.9) (89.6)
Net change in cash due to operating activities 119.2 252.3 316.2
Cash flows from investing activities
Proceeds from maturities and sales of
marketable securities and short- 393.1 405.8 275.4
investments
Purchases of marketable securities and
short-term investments (194.3) (144.2) (277.0)
Capital expenditures (59.6) (50.3) (42.2)
Proceeds from other long-term investments, 13.3 4.3 19.6
net
Other, net (9.1) (10.0) 2.0
Net change in cash due to investing activities 143.4 205.6 (22.2)
Cash flows from financing activities
Dividends paid (190.1) (175.5) (157.7)
Common stock repurchased (62.9) (280.2) (150.3)
Other, net 37.8 15.4 2.8
Net change in cash due to financing (215.2) (440.3) (305.2)
activities
Effect of exchange rate changes on cash (3.9) 13.8 10.9
Net change in cash and cash equivalents 43.5 31.4 (0.3)
Cash and cash equivalents at beginning of year 214.6 183.2 183.5
Cash and cash equivalents at end of year $258.1 $214.6 $183.2
Supplemental information
Cash paid for interest $2.0 $1.4 $2.3
Cash paid for income taxes $158.5 $168.8 $157.0
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Capital Stock
Unamort-
ized
Res- Paid
Preferred Common tricted in
In millions, except per share data Stock Stock Stock Capital
<S> <C> <C> <C> <C>
Balance at June 30, 1993 $28.8 $1.4 $(1.1) $77.3
Net income --- --- --- ---
Translation adjustment --- --- --- ---
Common stock repurchased --- --- --- ---
Common stock issued under various plans --- --- 0.5 13.0
Dividends on common stock ($1.35 per share) --- --- --- ---
Dividends on preferred stock --- --- --- ---
Net unrealized gains on certain
investments, net of tax --- --- --- ---
Balance at June 30, 1994 $28.8 $1.4 $(0.6) $90.3
Net income --- --- --- ---
Translation adjustment --- --- --- ---
Common stock repurchased --- --- --- ---
Common stock issued under various plans --- --- (0.1) 28.0
Dividends on common stock ($1.55) per share --- --- --- ---
Dividends on preferred stock --- --- --- ---
Net unrealized losses on certain
investments, net of tax --- --- --- ---
Balance at June 30, 1995 $28.8 $1.4 $(0.7) $118.3
Net income --- --- --- ---
Translation adjustment --- --- --- ---
Common stock repurchased --- --- --- ---
Common stock issued under various plans --- --- (1.1) 20.0
Dividends on common stock ($1.75 per share) --- --- --- ---
Dividends on preferred stock --- --- --- ---
Net unrealized losses on certain
investments, net of tax --- --- --- ---
Balance at June 30, 1996 $28.8 $1.4 $(1.8) $138.3
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Foreign Unrealized
Currency (Losses)
Retained Translation Gains on Treasury
In millions, except per share data Earnings Adjustment Investments Stock Total
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $916.4 $(35.9) $--- $(180.7) $806.2
Net income 246.3 --- --- --- 246.3
Translation adjustment --- 13.8 --- --- 13.8
Common stock repurchased --- --- --- (150.3) (150.3)
Common stock issued under --- --- --- 7.3 20.8
various plans
Dividends on common stock (156.4) --- --- --- (156.4)
($1.35 per share)
Dividends on preferred stock (1.3) --- --- --- (1.3)
Net unrealized gains on certain
investments, net of tax --- --- 11.9 --- 11.9
Balance at June 30, 1994 $1,005.0 $(22.1) $11.9 $(323.7) $791.0
Net income 264.0 --- --- --- 264.0
Translation adjustment --- 21.8 --- --- 21.8
Common stock repurchased --- --- --- (280.2) (280.2)
Common stock issued under --- --- --- (1.4) 26.5
various plans
Dividends on common stock (174.2) --- --- --- (174.2)
($1.55 per share)
Dividends on preferred stock (1.3) --- --- --- (1.3)
Net unrealized losses on certain
investments, net of tax --- --- (6.8) --- (6.8)
Balance at June 30, 1995 $1,093.5 $(0.3) $5.1 $(605.3) $640.8
Net income 80.6 --- --- --- 80.6
Translation adjustment --- (13.9) --- --- (13.9)
Common stock repurchased --- --- --- (62.9) (62.9)
Common stock issued under --- --- --- 11.9 30.8
various plans
Dividends on common stock (188.8) --- --- --- (188.8)
($1.75 per share)
Dividends on preferred stock (1.3) --- --- --- (1.3)
Net unrealized losses on certain
investments, net of tax --- --- (6.4) --- (6.4)
Balance at June 30, 1996 $984.0 $(14.2) $(1.3) $(656.3) $478.9
See accompanying notes to consolidated financial statements.
</TABLE>
The Reader's Digest Association, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except per share data
ONE Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include
the accounts of The Reader's Digest Association, Inc. and
its U.S. and international subsidiaries (the company). All
significant intercompany accounts and transactions have
been eliminated in consolidation.
Change in Presentation
In 1996, the company reclassified certain costs and
expenses in the consolidated statements of income to more
closely reflect its business and internal reporting
practices. There was no impact on operating profit or net
income. Additionally, certain prior year amounts in the
company's consolidated balance sheet and consolidated
statements of cash flows have been reclassified to conform
with the current year's presentation.
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts in these financial statements.
Actual results could differ from those estimates.
Changes in Accounting Principles
As of June 30, 1994, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
This adoption had no effect on the company's consolidated
statement of income for 1994.
In 1994, the company adopted Statement of Position (SOP)
No. 93-7, "Reporting on Advertising Costs," retroactive to
July 1, 1993. Concurrently, the company changed its
accounting for premiums and product development costs. The impact of
the product development and premium accounting changes on
prior years was not significant. As a result of the
promotion, premiums and product development accounting
changes, 1994 results reflect a one-time increase in
operating profit of $113.9.
In the first quarter of 1994, the company adopted SFAS No.
112, "Employers' Accounting for Postemployment Benefits."
The cumulative effect of the change resulted in a non-cash,
after-tax charge of $25.8, or $0.23 per share.
Cash and Cash Equivalents
The company considers all highly liquid debt instruments
with original maturities of three months or less to be cash
equivalents.
Accounts Receivable
Accounts receivable are reflected net of allowances for
returns and bad debts of $193.1, $227.8 and $209.5 at June
30, 1996, 1995 and 1994, respectively. Additions to the
allowances amounted to $428.6, $427.1 and $433.4 and
amounts written off amounted to $463.3, $408.8 and $422.3
during the years ended June 30, 1996, 1995 and 1994,
respectively.
Inventories
Inventories are stated at the lower of cost or market,
primarily determined on the first-in, first-out (FIFO)
basis. The majority of U.S. inventory is valued on the
lastin, first-out basis.
Short-Term Investments and Marketable Securities
Short-term investments and marketable securities are
composed primarily of government and corporate fixed
income securities. These securities are classified as
availablefor-sale and carried at fair value, based on
quoted market prices. The net unrealized gains or losses
on these investments are reported as a separate component
of stockholders' equity, net of tax. While it is the
company's intent to hold such securities until maturity,
management will occasionally sell particular securities
for cash flow purposes. The specific identification
method is used to compute the realized gains and losses on
debt and equity securities.
Derivative Financial Instruments
Premiums on option contracts which qualify for hedge
accounting are deferred and amortized into income
systematically over the life of the contract. Gains and
losses on other derivatives are recognized in income based
on current market values.
Depreciation and Amortization
The cost of buildings and equipment is depreciated using
the straight-line method over useful lives up to 50 years
for buildings, up to 15 years for printing and fulfillment
equipment and up to 5 years for other equipment.
Leasehold improvements are amortized using the straight-
line method over the term of the lease or the life of the
improvement, whichever is shorter.
Intangible Assets
Intangible assets are composed of distribution rights,
contracts, subscription lists and other intangible assets
as well as the excess of costs over the fair value of net
assets of several businesses acquired. The excess of costs
over fair value of businesses acquired is amortized, on a
straight-line basis, over varying periods, not in excess
of 40 years. Other acquired intangibles are amortized, on
a straight-line basis, over their estimated useful lives,
not in excess of 15 years. The company continually
evaluates the recoverability of its intangible assets to
determine whether current events or circumstances warrant
adjustments to the carrying value. Such evaluation may be
based on projected income and cash flows from operations
of related businesses on an undiscounted basis as well as
other economic and market variables.
Revenues
Sales of Books and Home Entertainment Products, less
provisions for returns, are recorded at the time of
shipment. Sales of magazine subscriptions are recorded as
unearned revenue at the gross subscription price at the
time the orders are received. Proportionate shares of the
gross subscription price are recognized as revenues when
the subscriptions are fulfilled.
Promotion Costs
Costs of direct response advertising are matched with the
expected revenue stream, generally one to 12 months.
Direct response advertising consists primarily of
promotion costs incurred in connection with the
procurement of magazine subscriptions and the sale of
books and other products. Promotion costs of $972.5,
$945.8 and $882.5 were incurred for the years ended June
30, 1996, 1995 and 1994, respectively. Prepaid promotion
costs, included in prepaid expenses and other current
assets, amounted to $54.2 and $40.8 at June 30, 1996 and
1995, respectively. Deferred promotion costs, included in
other noncurrent assets, amounted to $98.9 and $114.0 at
June 30, 1996 and 1995, respectively.
Income Taxes
Deferred income taxes, net of appropriate valuation
allowances, are recognized for the tax consequences of
temporary differences by applying enacted statutory tax
rates to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities.
Deferred federal income taxes have not been provided on
undistributed earnings of foreign subsidiaries as any
federal taxes payable would be substantially offset by
foreign tax credits.
Earnings Per Share
Earnings per share is computed by dividing net income,
less preferred stock dividend requirements, by the
weighted average number of common shares outstanding
during the year.
Foreign Currency Translation
Revenues and expenses denominated in foreign currencies
are translated at average monthly exchange rates
prevailing during the year. The assets and liabilities of
international subsidiaries are translated into U.S.
dollars at the rates of exchange in effect at the balance
sheet date. The resulting translation adjustment is
reflected as a separate component of stockholders' equity.
TWO Other Operating Items
In the fourth quarter of 1996, the company finalized
its lease termination program in the United Kingdom at a
savings of $10.0 below the provision that was originally
established as part of the 1994 other operating items, as
discussed below.
In the third quarter of 1996, the company recorded total
charges of $245.0 ($169.8 after tax, or $1.57 per share),
comprised of $204.0 relating primarily to the streamlining
of the company's organizational structure and the
strategic repositioning of certain businesses and $41.0
for various claims against the company.
The streamlining of the company's organizational structure
covers the separation of approximately 1,300 employee
positions from the worldwide workforce by the end of 1997
through a combination of voluntary early retirement
incentives and involuntary severance programs. Nearly one
half of these positions have been identified from European
operations, with the remainder divided between the United
States and Pacific and Other Markets.
Also associated with the streamlining, and included in
other items in the table below, are asset write-downs and
contract terminations relating to the redirection of
distributor and supplier relationships, the outsourcing of
certain functions where it is cost-beneficial to the
company, lease terminations, and the discontinuation of
individual products in specific geographic markets.
The strategic repositioning of certain businesses relates
in part to the special interest magazines in the United
States, which were re-assessed for their fit with the
overall corporate strategy, including their ability to
attract new customers. As a result, Travel Holiday
magazine was sold effective March 21, 1996, and certain
other magazines will re-focus their editorial content and
their target audiences. Other businesses affected were a
publishing and book club business in the United Kingdom,
and a children's book club business in the United States.
The components of the $204.0 charge, as well as reserve
balances remaining at June 30, 1996, are:
Total
Charged Utilized Remaining
Employee retirement and
severance benefits $104.4 $44.1 $60.3
Other items 51.5 16.2 35.3
Business repositioning 48.1 19.9 28.2
$204.0 $80.2 $123.8
In the fourth quarter of 1994, the company recorded
aggregate charges of $76.0 for certain other operating
items. These charges relate to losses on lease
terminations and provisions for certain claims against the
company.
THREE Other Income, Net
1996 1995 1994
Interest income $21.5 $40.1 $42.9
Interest expense (2.4) (3.3) (2.3)
Gains on the sales of certain 15.8 8.9 42.6
investments
Loss on foreign exchange (6.1) (10.3) (5.7)
Other, net (0.4) (4.8) (8.0)
$28.4 $30.6 $69.5
FOUR Inventories
1996 1995
Raw materials $33.0 $32.4
Work-in-progress 19.9 24.7
Finished goods 151.5 131.5
$204.4 $ 188.6
Inventories would have been $16.3 and $12.6 higher than the
amounts reported at June 30, 1996 and 1995,
respectively, had the FIFO method of inventory been
used for U.S. inventory.
FIVE Financial Instruments
Marketable Debt and Equity Securities
Unrealized Unrealized Fair
1996 Cost Gains Losses Value
Debt securities
maturing within:
1 year $18.9 $ --- $ --- $18.9
1 to 3 years 99.4 --- (2.2) 97.2
$118.3 $ --- $(2.2) $116.1
Unrealized Unrealized Fair
1995 Cost Gains Losses Value
Debt securities
maturing within:
1 year $92.7 $0.3 $ --- $93.0
1 to 10 years 213.8 0.5 (4.6) 209.7
Equity securities 2.9 11.9 --- 14.8
$309.4 $12.7 $(4.6) $317.5
Short-term investments for which quoted market prices were
not available are carried at cost, which approximates fair
market value due to the short maturities of these
investments. The fair value of all other investments is
based upon quoted market prices.
Proceeds from sales and maturities were $393.1, $405.8
and $275.4 for the years ended June 30, 1996, 1995 and
1994 including realized gains of $6.0, $8.7 and $27.4,
respectively.
Derivative Financial Instruments
The company is exposed to the effect of foreign exchange
rate fluctuations on the U.S. dollar value of its foreign
subsidiaries' income. The company purchases foreign
currency option contracts to minimize the effect of
fluctuating foreign currencies on its earnings, generally
over periods ranging up to 12 months. In addition, the
company enters into forward contracts to minimize the
effect of fluctuating foreign currency exchange rates on
certain foreign currency denominated assets and
liabilities.
The company, as a matter of policy, does not speculate in
financial markets and, therefore, does not hold financial
instruments for trading purposes. Premiums on option
contracts that qualify for hedge accounting are amortized
over the term of the contract and any gains at maturity
are included in other income. Option contracts that do
not qualify for hedge accounting are recorded at fair
value, and changes in market value on such instruments are
included in other income. The carrying value of option
contracts is included in other assets. Forward contracts
are reflected in the company's balance sheet at market
value in receivables, net and accounts payable, and
changes in market value on these instruments are included
in other income.
The company may be exposed to credit losses in the event
of nonperformance by the financial institutions that are
counterparties to these instruments; however the company
manages this exposure through specific minimum credit
standards and diversification of financial institutions
with which it enters into these derivative transactions.
The company's derivative financial instruments involve
elements of market risk as a result of potential changes
in foreign currency exchange rates. The market risk
associated with the option contracts is limited to the
carrying value of these contracts in the company's
consolidated balance sheet. Since forward contracts remain
outstanding as effective hedges of existing foreign
currency exposure, the impact of potential changes in
future foreign currency exchange rates on these
instruments would generally offset the related impact on
the assets and liabilities being hedged.
Notional/ Carrying Fair
1996 Principal Amounts Value Value Maturity
Forward Contracts
Assets $25.4 $25.4 $25.4 1996-1997
Liabilities $25.4 $25.4 $25.4 1996-1997
Option Contracts
Assets $300.6 $9.6 $10.5 1996-1997
Notional/ Carrying Fair
1995 Principal Amounts Value Value Maturity
Forward Contracts
Assets $10.8 $10.8 $10.8 1995-1996
Liabilities $10.9 $10.9 $10.9 1995-1996
Option Contracts
Assets $298.6 $ 7.1 $7.2 1995-1996
SIX Property, Plant and Equipment
1996 1995
Land $17.9 $18.8
Buildings and building improvements 240.4 226.7
Printing and fulfillment equipment 53.2 74.6
Furniture, fixtures and equipment 269.0 247.0
Leasehold improvements 23.9 25.2
$604.4 $592.3
Accumulated depreciation
and amortization $(342.9) $(335.7)
$261.5 $256.6
SEVEN Intangible Assets
1996 1995
Distribution rights, contracts,
subscription lists and other $67.8 $69.4
Excess of cost over fair value of
net assets of businesses acquired 78.6 83.7
$146.4 $153.1
Accumulated amortization (88.0) (75.5)
$58.4 $77.6
EIGHT Pension Plans
The company and certain of its U.S. and international
subsidiaries have pension plans covering substantially
all permanent employees. The plans' benefits are based
primarily on years of credited service and participants'
compensation. The plans' assets consist principally of
fixed income and equity securities.
The company's funding policy for its U.S. pension plans
is to meet the minimum requirements of the Employee
Retirement Income Security Act of 1974. Additional
amounts may be approved by the company's Board of
Directors from time to time. The company's funding
policy for its international pension plans is to meet
local statutory requirements. Assumptions used to
determine pension costs and projected benefit obligations
are as follows:
U.S. Plans
1996 1995 1994
Discount rate 7.75% 7.75% 8.00%
Compensation increase rate 5.25% 5.25% 5.50%
Long-term rate of return on plan 9.50% 9.50% 9.50%
assets
International Plans
1996 1995 1994
Discount rate 4-15% 5-15% 4-14%
Compensation increase rate 3-13% 4-13% 2-12%
Long-term rate of return on plan 5-16% 6-16% 5-16%
assets
Components of the company's consolidated net periodic
pension cost are as follows:
1996 1995 1994
Service cost $20.9 $18.8 $16.9
Interest cost 44.4 40.1 36.6
Actual return on plan assets (118.5) (103.3) (11.2)
Net amortization and deferral 65.6 54.9 (36.5)
Special items 2.5 --- ---
$14.9 $10.5 $5.8
Special items in the table above reflect the net increase
in 1996 pension expense due to the voluntary early
retirement and involuntary severance programs.
The actuarial present value of benefit obligations and the
funded status of the U.S. and international plans are as
follows:
1996 1995
Over- Under- Over- Under-
funded funded funded funded
Plan assets at fair value $716.2 $3.9 $627.0 $4.2
Projected benefit obligation (528.8) (78.8) (497.3) (72.4)
Plan assets in excess of (less than)
projected benefit obligation 187.4 (74.9) 129.7 (68.2)
Unrecognized net gain (131.5) (1.6) (72.0) (1.8)
Unrecognized net (asset) liability (27.5) 0.2 (33.2) 0.3
Unrecognized prior service cost 9.4 6.1 8.5 8.9
Additional minimum liability --- (3.4) --- (4.0)
Prepaid (accrued) pension cost $37.8 $(73.6) $33.0 $(64.8)
Accumulated benefit obligation $441.8 $69.7 $424.8 $62.5
Vested benefit obligation $ 429.5 $63.6 $414.8 $57.7
NINE Postretirement Benefits
The company provides medical and dental benefits to U.S.
retired employees and their dependents. Substantially
all of the company's U.S. employees become eligible for
these benefits when they meet minimum age and service
requirements. The company has the right to modify or
terminate these unfunded benefits.
Components of the company's costs for postretirement
benefits are as follows:
1996 1995 1994
Service cost $2.9 $3.0 $3.6
Interest cost 6.1 6.8 7.3
Amortization of net gain (1.1) (0.3) ---
Special items 3.4 --- ---
$11.3 $9.5 $10.9
Special items in the table above reflect the net increase
in 1996 postretirement benefits costs due to the
voluntary early retirement and involuntary severance
programs.
Components of the postretirement benefits liability
recognized in the company's consolidated balance sheets
are as follows:
1996 1995
Retirees (including covered dependents) $72.0 $52.9
Fully eligible active participants 3.3 12.0
Other active participants 22.4 31.5
Unrecognized net gain 17.3 10.3
$115.0 $106.7
The health care inflation assumption used to determine the
postretirement benefits liability was 12.0% for 1996 and 13.0%
for 1995, decreasing to 8.0% by the year 2001 with respect to
medical benefits and 10.5% for 1996 and 11.0% for 1995,
decreasing to 8.0% by the year 2001 with respect to dental
benefits. Increasing the assumed health care cost rates by one
percentage point in each year would increase the accumulated
postretirement benefits liability as of June 30, 1996 by
approximately $12.8 and increase the related interest and
service costs for 1996 by approximately $1.6. A discount rate
of 7.75%, 7.75% and 8.0% for 1996, 1995 and 1994, respectively,
was used in determining the accumulated postretirement benefits
liability.
TEN Employee Compensation Plans
The 1989 and 1994 Key Employee Long Term Incentive Plans
(Plans) provide that the Compensation & Nominating Committee of
the Board of Directors (the Committee) may grant stock options,
stock appreciation rights, restricted stock, performance units
and other awards to eligible employees. The Committee may grant
certain stock-based awards up to a maximum of 5,420,000 and
6,000,000 underlying Class A shares of nonvoting common stock
(Class A) under the Plans, respectively. No awards may be
granted with respect to Class B voting common stock (Class B).
Changes in outstanding options are as follows:
Shares Range of
Subject to Option Price
Options Per Share
Outstanding at June 30, 1993 3,304,350 $20.00 to $55.13
Granted 1,749,000 $41.06 to $41.50
Exercised (121,992) $20.00 to $29.44
Canceled (178,425) $20.00 to $48.00
Outstanding at June 30, 1994 4,752,933 $20.00 to $55.13
Granted 1,271,000 $42.50 to $48.13
Exercised (343,030) $20.00 to $48.00
Canceled (126,475) $20.00 to $48.00
Outstanding at June 30, 1995 5,554,428 $20.00 to $55.13
Granted 1,302,800 $41.25 to $50.94
Exercised (399,625) $20.00 to $48.00
Canceled (423,575) $29.44 to $48.00
Outstanding at June 30, 1996 6,034,028 $20.00 to $55.13
Options exercisable at June 30, 1996 2,831,003 $20.00 to $55.13
Options available for grant at
June 30, 1996 3,368,478
In 1996 the company granted 51,347 performance-based
restricted Class A shares with a value of $2.4 to an
executive officer at no cost. In 1995 the company granted
9,000 restricted Class A shares with a value of $0.4 to an
executive officer at no cost. No grants were made in
1994. The market value of shares awarded is recorded as
unamortized restricted stock which is included in capital
stock. Restricted stock is amortized over the term of the
restriction period. Amortization of restricted stock
amounted to $1.3, $0.3 and $0.5 for the years ended June
30, 1996, 1995 and 1994, respectively.
Additionally, in 1996 the company granted 12,200 stock
appreciation rights to an executive officer.
The company's 1996 financial statements reflect an accrual
for an anticipated contribution to its profit-sharing plan
related to 1996 and the issuance of 200,898 Class B shares
with a value of $8.7 in fulfillment of its 1995
contribution obligation. The company contributed 274,812
and 329,144 Class B shares with a value of $11.2 and $12.6
in 1995 and 1994, respectively, to its profit-sharing plan
in fulfillment of its 1994 and 1993 contribution
obligations.
ELEVEN Income Taxes
United States and International income before income taxes
and cumulative effect of change in accounting principle
are as follows:
1996 1995 1994
United States $59.7 $215.5 $231.9
International 78.0 207.0 231.3
$137.7 $422.5 $463.2
Components of the company's provision for income taxes are
as follows:
1996 1995 1994
Current
Federal $40.1 $57.8 $54.0
State and local 16.1 15.2 14.1
International 75.8 92.3 98.3
$132.0 $165.3 $166.4
Deferred
Federal $(44.8) $1.7 $8.6
State and local (8.7) 0.3 0.5
International (21.4) (8.8) 15.6
$(74.9) $(6.8) $24.7
$57.1 $158.5 $191.1
The differences between the effective income tax rate
and the statutory U.S. federal income tax rate are as
follows:
1996 1995 1994
U.S. statutory tax rate 35.0% 35.0% 35.0%
International operations (1.1) (0.6) 0.7
State taxes, net 2.1 2.4 2.0
Other operating items 6.0 --- 2.8
Other, net (0.5) 0.7 0.8
Effective tax rate 41.5% 37.5% 41.3%
The major components of deferred tax assets and
liabilities are as follows:
1996 1995
Assets:
Deferred compensation and other
employee benefits $91.2 $85.5
Accounts receivable and other 52.0 47.7
allowances
Other, net 124.2 27.6
$267.4 $160.8
Liabilities:
Deferred promotion costs $15.7 $14.0
Deferred compensation and other
employee benefits 6.6 5.8
Other, net 28.4 12.4
$50.7 $32.2
$216.7 $128.6
The balance sheet classification of the deferred tax
assets and liabilities is as follows:
1996 1995
Prepaid expenses and other current $114.0 $47.5
assets
Other noncurrent assets 117.9 97.4
Other current liabilities 2.0 3.5
Other noncurrent liabilities 13.2 12.8
$216.7 $128.6
TWELVE Accrued Expenses
1996 1995
Compensation and other employee $103.4 $98.9
benefits
Royalties and copyrights payable 42.1 46.5
Taxes, other than income taxes 16.9 21.0
Other, principally operating 294.9<F1> 173.8
expenses
$457.3 $340.2
<F1> Includes $123.8 relating primarily to the streamlining
of the company's organizational structure and the
strategic repositioning of certain businesses. Refer to
Other Operating Items footnote for further explanation.
THIRTEEN Capital Stock
1996 1995
First Preferred Stock, par value $1.00 per share;
authorized 40,000 shares; issued and $3.0 $3.0
outstanding 29,720 shares
Second Preferred Stock, par value $1.00 per share;
authorized 120,000 shares; issued and 10.3 10.3
outstanding103,720 shares
Third Subordinated Preferred Stock, par value $1.00
per share; authorized 230,000 shares; issued and
outstanding 155,022 shares 15.5 15.5
Preference stock, par value $0.01 per share;
authorized 25,000,000 shares; issued and --- ---
outstanding none
Class A nonvoting common stock, par value $0.01 per
share; authorized 200,000,000 shares; issued 1.2 1.2
119,428,472 shares
Class B voting common stock, par value $0.01 per
share; authorized 25,000,000 shares; issued and
outstanding 21,716,057 shares in 1996 and 0.2 0.2
21,515,159 shares in 1995
Unamortized restricted stock (1.8) (0.7)
$28.4 $29.5
Common stock in treasury, at cost; 33,494,062
and 32,739,849 Class A shares in 1996 and 1995, $(656.3) $(605.3)
respectively
All shares of preferred stock have a preference in
liquidation of $100.00 per share. The difference between
the aggregate par value and liquidation preference has
been appropriated from retained earnings. Further, all
preferred stock is redeemable at any time at the option of
the company at $105.00 per share plus accrued dividends.
The terms of the First Preferred Stock and the Second
Preferred Stock provide for annual cumulative dividends of
$4.00 per share. The terms of the Third Subordinated
Preferred Stock provide for annual cumulative dividends of
$5.00 per share.
In 1995, the company announced its fourth stock repurchase
program, to acquire up to 5,000,000 shares of Class A
nonvoting common stock in open market transactions. This
program began upon the completion of the prior programs,
which together provided for the repurchase of up to
11,000,000 shares of Class A nonvoting common stock. The
company has repurchased a total of 15,065,800 shares of
which 4,065,800 are related to the fourth program.
FOURTEEN Commitments and Contingencies
The company is a defendant in several lawsuits and
claims arising in the regular course of business.
Based on the opinions of management and counsel for the
company in such matters, recoveries, if any, by plaintiffs and
claimants would not materially affect the financial position of
the company or its results of operations.
During the third quarter of 1996, the company's QSP,
Inc. subsidiary and the company reached an agreement
with the plaintiffs to settle an antitrust class action
lawsuit commenced in December 1993 by the Roman Catholic Bishop of
San Diego and the Chino Unified School District.
The agreement, which is subject to final approval by
the U.S. District Court for the Southern District of
California, provides for QSP, Inc. and the company to
deliver up to $40.0 in retail value of company
products, coupons for discounts on QSP, Inc. programs, and cash.
The company and its subsidiaries occupy certain
facilities under lease arrangements and lease certain equipment.
Rentals amounted to $32.4, $31.7 and $33.0 in 1996, 1995
and 1994, respectively, and sublease income amounted to
$6.9, $7.1 and $7.0 in 1996, 1995 and 1994, respectively.
Future minimum rental commitments, net of sublease income,
for non-cancelable operating leases are as follows:
Minimum Rental Minimum Sublease
Payments Income Net
1997 $25.3 $5.9 $19.4
1998 16.3 5.4 10.9
1999 6.0 1.1 4.9
2000 3.4 1.2 2.2
2001 1.5 1.2 0.3
Later years 5.2 1.0 4.2
FIFTEEN Segments
Segment information is located on page 14 of this annual report.
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
In millions, except per share data 1996<F1> 1995<F2> 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues $3,098.1 $3,068.5 $2,806.4 $2,868.6 $2,614.0 $2,345.1
Operating profit $109.3 $391.9 $393.7 $352.7 $330.2 $292.0
Net income $80.6 $264.0 $246.3 $207.3 $234.4 $209.1
Earnings per share before
cumulative effect of accounting
changes/extraordinary items $0.73 $2.35 $2.34 $2.16 $1.95 $1.74
Cumulative effect of accounting -- -- (0.23) (0.42) ----
changes/extraordinary items
Earnings per share $0.73 $2.35 $2.11 $1.74 $1.95 $1.74
Dividends per common share $1.75 $1.55 $1.35 $1.15 $0.80 $0.57
Balance Sheet Data
Cash and cash equivalents,
short-term investments $374.2 $532.1 $766.9 $723.4 $804.0 $649.7
and marketable securities
Total assets $1,904.1 $1,958.7 $2,049.4 $1,872.4 $1,932.3 $1,605.3
Stockholders' equity $478.9 $640.8 $791.0 $806.3 $934.9 $759.6
Average common shares outstanding 107.9 112.0 115.7 118.7 119.8 119.4
Book value per common share $4.18 $5.66 $6.70 $6.65 $7.56 $6.12
<F1> Results for 1996 include the effects of third quarter charges (aggregate pre-tax charges
of $245.0, or $1.57 per share) and fourth quarter savings on the finalization of the company's
lease termination program in the United Kingdom ($10.0, or $0.09 per share).
<F2> Results for 1994 include the effects of promotion accounting changes, net (pre-tax benefit
of $113.9, or $0.60 per share) and other operating items (aggregate pre-tax charge of
$76.0, or $0.51 per share).
</TABLE>
<TABLE>
<CAPTION>
The Reader's Digest Association, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
In millions, except per share data 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues $2,009.7 $1,832.0 $1,712.0 $1,420.1 $1,254.8
Operating profit $240.1 $206.7 $213.3 $149.8 $97.7
Net income $176.0 $151.5 $142.3 $94.7 $73.1
Earnings per share before
cumulative effect of accounting
changes/extraordinary items $1.48 $1.28 $1.19 $0.72 $0.52
Cumulative effect of accounting -- -- -- 0.06 0.07
changes/extraordinary items
Earnings per share $1.48 $1.28 $1.19 $0.78 $0.59
Dividends per common share $0.38 $0.28 $0.22 $0.17 $0.10
Balance Sheet Data
Cash and cash equivalents,
short-term investments $588.4 $505.1 $411.7 $370.2 $258.1
and marketable securities
Total assets $1,434.3 $1,173.7 $1,054.2 $881.4 $706.5
Stockholders' equity $634.1 $449.2 $345.4 $238.4 $171.9
Average common shares 118.3 117.8 118.1 119.2 121.2
outstanding
Book value per common share $5.07 $3.57 $2.69 $1.77 $1.18
</TABLE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA and
DIVIDEND AND MARKET INFORMATION (Unaudited)
In millions, except per Operating
share data Profit Net Income (Loss)
Revenues (Loss) Amount Per Share
<S> <C> <C> <C> <C>
1996
First Quarter $730.5 $81.8 $53.9 $0.50
Second Quarter 918.6 144.4 94.8 0.88
Third Quarter 747.5 (170.5) (114.0) (1.06)
Fourth Quarter 701.5 53.6 45.9 0.42
$3,098.1 $109.3 $80.6 $0.73
1995
First Quarter $710.8 $101.6 $67.3 $0.59
Second Quarter 855.6 160.9 105.1 0.93
Third Quarter 793.0 98.7 66.0 0.59
Fourth Quarter 709.1 30.7 25.6 0.23
$3,068.5 $391.9 $264.0 $2.35
Cash dividends on common stock are declared and paid share and share alike, on Class A and Class
B stock. The company's Class A and Class B stock are listed on the New York Stock Exchange
under the symbols RDA and RDB, respectively. As of June 30, 1996, there were approximately
2,000 holders of record of the company's Class A stock, and 200 holders of record of the
company's Class B stock.
</TABLE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA and
DIVIDEND AND MARKET INFORMATION (Unaudited)
Stock Price Range
High - Low
In millions, except per Dividends
share data Per Share Class A Class B
<S> <C> <C> <C>
1996
First Quarter $0.40 $47 7/8- 43 7/8 $44 - 40 3/8
Second Quarter 0.45 $52 - 46 3/4 $47 7/8- 43 1/8
Third Quarter 0.45 $51 3/8 -45 1/4 $47 - 41 5/8
Fourth Quarter 0.45 $47 3/4- 40 1/2 $43 1/4 - 37
$1.75 $52 - 40 1/2 $47 7/8 - 37
1995
First Quarter $0.35 $44 3/8-39 7/8 $41 3/4-37 3/8
Second Quarter 0.40 $49 3/8-43 1/4 $46-40 1/4
Third Quarter 0.40 $49 1/4-45 $45 1/2-41 3/8
Fourth Quarter 0.40 $48 5/8-38 1/4 $45-36 3/4
$1.55 $49 3/8-38 1/4 $46-36 3/4
Cash dividends on common stock are declared and paid share and share alike, on Class A and Class
B stock. The company's Class A and Class B stock are listed on the New York Stock Exchange
under the symbols RDA and RDB, respectively. As of June 30, 1996, there were approximately
2,000 holders of record of the company's Class A stock, and 200 holders of record of the
company's Class B stock.
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Reader's Digest Association, Inc.
We have audited the accompanying consolidated balance
sheets of The Reader's Digest Association, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility
of the company's management. Our responsibility is to
express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of The Reader's Digest
Association, Inc. and subsidiaries at June 30, 1996 and
1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended
June 30, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARKWICK LLP
KPMG Peat Marwick LLP
New York, New York
August 13, 1996
REPORT OF MANAGEMENT
The company has prepared the accompanying financial
statements and other related financial information
contained in this annual report in conformity with
generally accepted accounting principles, applying certain
estimates and judgments as required.
The company maintains a system of internal accounting
controls designed to provide reasonable assurance, at
reasonable cost, that transactions and events are recorded
properly and that assets are safeguarded. The internal
control system is supported by written policies and
procedures and by the careful selection, training and
supervision of qualified personnel, and is monitored by an
internal audit function.
The company's financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors, as stated in
their report, which is presented herein.
The Audit Committee of the Board of Directors, composed
only of directors who are not employed by the company,
meets periodically with management, internal auditors and
the independent auditors to review accounting, auditing,
financial reporting and other related matters. The
internal auditors and independent auditors have full and
unrestricted access to the Audit Committee.
JAMES P. SCHADT
James P. Schadt
Chairman and Chief Executive Officer
STEPHEN R. WILSON
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF
THE READER'S DIGEST ASSOCIATION, INC.
Argentina
Reader's Digest Argentina S.A.
Australia
The Reader's Digest Association Pty. Limited
Reader's Digest (Australia) Pty. Ltd.
Austria
Verlag Das Beste GmbH
Belgium
N.V. Reader's Digest S.A.
Reader's Digest World Services, S.A.
Brazil
Reader's Digest Brasil Ltda.
Canada
The Reader's Digest Association (Canada) Ltd.
Quality Service Plan, Inc. Canada
Chile
Reader's Digest Chile Limitada
Colombia
Reader's Digest Colombia S.A.
Czech Republic
Reader's Digest Vyber s.r.o.
Denmark
Forlaget Det Beste A/S
England
The Reader's Digest Association Limited
Berkeley Magazine Ltd.
Money Magazine Limited
Reader's Digest (Family Insurance Services) Limited
The Reader's Digest Association (Ireland) Limited
David & Charles plc
Reader's Union Limited
Victoria House Publishing, Ltd.
Reader's Digest European Systems Ltd.
Reader's Digest New Country Development Europe Limited
Finland
Oy Valitut Palat - Reader's Digest Ab
France
Selection du Reader's Digest S.A.
Germany
Verlag Das Beste GmbH
Optimail/Direcktwerbeservice GmbH
Pegasus Buch-und Zeitschriften - Vertriebsgesellschaft.mbH
Hong Kong
Reader's Digest Association Far East Limited
Asian Qualiproducts Services, Limited
Reader's Digest Asia, Ltd.
Reader's Digest (East Asia) Limited
Reader's Digest Global Advertising Ltd.
Reader's Digest (Malaysia) Sdn. Bhd
R.D. Properties, Ltd.
Hungary
Reader's Digest Kiado KFT
Italy
Selezione Dal Reader's Digest S.p.A.
Japan
The Reader's Digest Ltd.
Mexico
Caribe Condor S.A. de C.V.
Reader's Digest Mexico, S.A. de C.V.
Netherlands
Uitgeversmaatschappij The Reader's Digest N.V.
Distrimedia Services B.V.
New Zealand
The Reader's Digest Association (New Zealand) Limited
Norway
Det Beste A/S
Peru
Reader's Digest Peru, S.A.
Philippines
Reader's Digest (Philippines) Inc.
Poland
Reader's Digest Przeglad Sp.z o.o.
Portugal
Seleccoes do Reader's Digest (Portugal) S.A.
Euroseleccoes - Publicacoes E Artigos Promocionais, Lda.
Russia
Joint Stock Company "Publishing House Reader's Digest
South Africa
The Reader's Digest Association South Africa Pty. Limited
Reader's Digest Investments (Pty.) Limited
AA The Motorists Publications (Pty.) Limited (50%
ownership)
Spain
Reader's Digest Selecciones S.A.
Sweden
Reader's Digest Aktiebolag
Switzerland
Das Beste aus Reader's Digest AG
Thailand
Reader's Digest (Thailand) Limited
United States*
Ardee Music Publishing, Inc.
Joshua Morris Publishing, Inc.
NetGet Ltd. (80% ownership)
Pegasus Investment, Inc.
Pegasus Sales, Inc.
Pleasantville Music Publishing, Inc.
QSP, Inc.
Gift USA, Inc.
VideOvation, Inc.
QSP Distribution Services, Inc.
Family Reading Program Corp.
R.D. Manufacturing Corporation
RD Publications, Inc.
Travel Publications, Inc.
RD Member Services Inc.
Home Service Publications, Inc.
Retirement Living Publishing Company, Inc.
Reader's Digest Entertainment, Inc.
Reader's Digest Latinoamerica, S.A.
Reader's Digest Sales and Services, Inc.
Reader's Digest Sub Six, Inc.
Reader's Digest Sub Seven, Inc.
Reader's Digest Young Families, Inc.
SMDDMS, Inc.
The Reader's Digest Association (Russia) Incorporated
W. A. Publications, Inc.
_____________________
* All are Delaware corporations except W.A. Publications,
Inc., a New York corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors of The Reader's Digest Association,
Inc.:
We consent to incorporation by reference in the registration
statements (Registration Nos. 33-37434 and 33-56883) on Form S-8
of The Reader's Digest Association, Inc. and subsidiaries of our
reports dated August 13, 1996, relating to the consolidated
balance sheets of The Reader's Digest Association, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, which reports appear in or are
incorporated by reference in the June 30, 1996 Annual Report on
Form 10-K of The Reader's Digest Association, Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
September 26, 1996
EXHIBIT 10.15
[LOGO]
THE READER'S DIGEST ASSOCIATION, INC.
August 22, 1996
Thomas M. Kenney
10 The Byway
Bronxville, New York 10708
Dear Tom:
This letter serves to confirm payments, benefits and
other terms thereof relating to your mutually agreed upon
separation from The Reader's Digest Association, Inc. (the
"Company") which will become effective on the earlier of
your employment by another employer or October 31, 1996
("Date of Separation").
1. You will continue to perform your responsibilities
as President, Global Magazine/Corporate Development, remain
on the payroll and receive your bi-weekly salary payment
until the Date of Separation. At the Company's direction,
you will execute any and all resignations of offices of the
Company and its affiliates.
2. Subject to the terms of The Reader's Digest
Association, Inc. Severance Plan for Senior Management
("Severance Plan"), you are eligible to receive one (1)
month's base salary for each full year of continuous service
completed prior to termination, subject to appropriate
deductions, up to a maximum of twenty-four (24) months of
base salary -- in your case, however, twenty-four (24)
months in accordance with paragraph 5 of the Company's
letter to you dated August 30, 1989; these severance
payments will be made as follows: $387,000 within thirty
(30) days of your Date of Separation and the remaining
$387,000 on a bi-weekly basis shall be paid in twenty-six
(26) equal installments, commencing immediately after the
Date of Separation ("Severance Period"). (For purposes of
this Agreement, your annual base salary is $387,000.)
As a condition to severance pay eligibility, you must sign
the attached General Waiver and Release of Claims Form
("Waiver") and repay any outstanding advances or loans due
the Company and return all Company property by the Date of
Separation. No payments will be made until at least seven
(7) days have elapsed following the Company's receipt of
your signed Waiver. Additional information regarding the
Waiver and other severance procedures is attached to this
letter.
3. Provided you execute the Waiver, you will also be
eligible to receive, on or around September 1996, an award
under the Company's Management Incentive Compensation Plan;
the amount of any such award, if any, will be solely in the
Company's discretion, is subject to approval by the
Company's Compensation & Nominating Committee and shall be
made in accordance with that plan. Provided you have
delivered the executed Waiver to the Company (and seven (7)
days have elapsed since such delivery) and you provide the
Company with at least ten (10) business days notice of your
anticipated Date of Separation if it is prior to October 21,
1996, any such award to you will be payable prior to your
Date of Separation, solely to preserve your eligibility
under that Plan.
4. Pursuant to the terms of The Reader's Digest
Association, Inc. Key Employee Long Term Incentive Plans
("Key Employee Plans"), you will be eligible to receive up
to one hundred percent (100%) of the value of the
Performance Units awarded for Fiscal Years 1994-96 (275,000
units), 24/36ths of the value of the Performance Units
awarded for Fiscal Years 1995-97 (195,000 units), and
12/36ths of the value of the Performance Units awarded for
Fiscal Years 1996-98 (245,000 units), provided RDA's
Compensation & Nominating Committee determines that the
performance goals referred to in the respective Award
Letters of Agreement between you and the Company regarding
each such award under the Key Employee Plans have been
achieved and provided further you execute the Waiver. The
amount of such awards, if any, will be in the sole
discretion of RDA. Payment, if any, will be made at the
time all awards are made under the Key Employee Plan.
5. Pursuant to the Severance Plan, provided you execute
the Waiver, the Company shall pay to you an amount equal to
the difference between your monthly retirement benefit
payable under The Reader's Digest Association, Inc.
Retirement Plan ("RDA Retirement Plan") and the Excess
Benefit Retirement Plan of The Reader's Digest Association,
Inc.. and the amount that would have been payable if your
age and aggregate periods of service under those plans
included the Severance Period set forth in paragraph 2 of
this letter. Such amount, if any, shall be paid by the
Company consistent with the terms of the Severance Plan.
6. Your medical and/or dental coverage will continue
through the last day of the month which the Date of
Separation occurs, regardless of whether you sign the
Waiver. Pursuant to the Severance Plan, effective the first
day of the month following the Date of Separation, provided
you execute the Waiver, you will be entitled to continued
participation in the Company's medical, dental and group
term insurance plans for a period of two (2) years, unless
those plans do not so permit. In such event, the Company
will arrange to provide you with benefits during that period
substantially similar to those you were entitled to receive
under such plans immediately prior to your date of
termination. For that period, your share of the cost will
be automatically deducted from your severance pay. If you
elect not to sign the Waiver, you will have the option to
continue your medical and dental coverage at your own
expense (see COBRA information attached) for a period of
eighteen (18) months following the Date of Separation. In
either event, you must make the election to continue
coverage under COBRA within sixty (60) days of when your
coverage ends.
7. Provided you execute the Waiver, pursuant to the
Severance Plan you are eligible for outplacement counseling
services for a period of up to one (1) year following the
Date of Separation. Please let me know if you are desirous
of such services.
8. Provided you execute the Waiver, pursuant to the
Executive Financial Counseling Plan, you shall receive
financial counseling services, if you desire, for one (1)
year following the Date of Separation.
9. Following your separation, you will receive a lump-
sum payment reflecting any earned and unused vacation and
floating personal days for the period ending as of the Date
of Separation.
10. You will be eligible for a contribution to The Reader's
Digest Association, Inc. Employee Profit-Sharing Plan ("Profit Sharing Plan")
for Plan Year 1996 (based upon your 1996 Plan Year earnings) to
the extent a contribution is made for that period. Your
account will be settled shortly following the Date of
Separation. All of the preceding is subject to the precise
terms of the Profit Sharing Plan, as are requirements
regarding repayment of outstanding loans to the Profit
Sharing Plan.
11. Your currently outstanding stock options will
continue to be exercisable and will continue to vest until
the Date of Separation in accordance with all the other terms
of the applicable stock option grants and the Key Employee Plans.
Your options may be exercised for three (3) months following the
Date of Separation.
12. You are also eligible to receive benefits under your
Supplemental Retirement Benefit Agreement executed on December 12, 1989
("SRBA"), subject to and in accordance with the SRBA's terms.
The benefits due you under the SRBA will be paid in fifteen (15) annual
installments commencing at the date selected by you in
accordance with the terms of the SRBA.
13. The Company will consult with you as to the terms of any
public announcement concerning your separation and termination of employment
prior to such announcement. The Company's senior management
will not disparage you or your work for the Company.
14. Deferred compensation due you under The Reader's Digest Association,
Inc. Deferred Compensation Plan shall include any award to you under the
Company's Management Incentive Compensation Plan discussed
under Paragraph 3 above, and be paid in ten (10) annual
installments in accordance with the Deferred Compensation
Plan, and such payment will not be accelerated through a
lump-sum payment.
Bill Coplin is available to provide you with additional
information regarding your benefits under the Profit-Sharing
Plan, RDA Retirement Plan, The Reader's Digest Association,
Inc. Medical and Dental Expense Plan for Retirees and
Disabled Individuals, The Reader's Digest Employee Stock
Purchase Plan, Group Universal Life Insurance and SRBA
The Company expects that you will continue to adhere to
all the Company policies, practices and procedures, up to,
during and following your separation including but not
limited to the Company's Proprietary Information Policy,
Code of Conduct and Policy on Insider Trading. Furthermore,
without limitation, you should be aware that the benefits
set forth in the Severance Plan are subject to all of the
terms of the Severance Plan, including but not limited to
Section 4.11, which provides as follows:
"If, without the prior written consent of the
Chief Executive Officer, a participant
receiving payments or benefits under this
Plan shall become a proprietor, director,
partner or employee of, or otherwise become
connected with any business that is in
competition with the Company (other than as a
stockholder with a non-substantial interest
in any such business), or if he shall commit
any criminal act against the Company, or any
act that would constitute Cause as defined
herein, or if he shall disclose any
information likely to be regarded as
confidential and relating to the Company's
business, or if he shall solicit clients
against the interest of the Company or
solicits the Company's employees to work for
a competitor of the Company, or if he
performs any other act which is substantially
detrimental to the Company or its employees,
including but not limited to disparaging the
Company, its senior management or its
products, all payments and benefits and all
rights of the participant under this Plan
shall cease as of the initial date of such
conduct. The determination of whether such
conduct has occurred shall be in the sole
discretion of the Chief Executive Officer
with the advice of the Senior Vice President,
Human Resources and the General Counsel."
Without in any manner limiting the above, you agree that you
will not prior to, during the Severance Period or for a
period of one (1) year following the Severance Period become
involved in a manner in any transactions or proposed
transactions where an objective of such transactions is to
obtain or sell or license potential direct marketing
customers to or for a book and home entertainment business;
you also agree not to interfere with any transactions known
to you to be under consideration by the Company or otherwise
create or establish a magazine in competition with Reader's
Digest magazine; i.e., a magazine which contains the general
competitive characteristics of Reader's Digest magazine - a
tight and/or condensed editorial/format. Notwithstanding
the foregoing, the Company shall not unreasonably withhold
its consent to your employment by a competitor of the
Company and expressly consents to your employment by or
association with any entity on the attached list of "Top
Media Companies by Magazine Revenue" provided your
association with or employment by such entity is neither
related to a "back-end business" nor "name value" oriented
(other than the normal course of business in managing a
traditional magazine busines), subject to the preceding.
Such consent shall not operate, however, to establish a
precedent or standard respecting any other entity in
competition with the Company or Reader's Digest magazine
and/or the reasonableness of RDA's consent and in no manner
limits your obligations under Section 4.11 of the Severance
Plan. The provisions in Section 4.11 of the Severance Plan
and this letter concerning competition and competitors shall
apply only to conduct prior to, during the Severance Period
and for a period of one (1) year following the Severance
Period.
Tom, please indicate your acceptance of these
arrangements by signing and dating the letter below and
returning a copy of the letter and executed Waiver by
September 10, 1996. This letter and the attachments set
forth the entire arrangement between you and the Company,
shall be governed by and interpreted in accordance with the
laws of the State of New York applicable to contracts
executed in and to be wholly performed within New York,
supersedes all prior and written communications and
correspondence between you and the Company regarding this
matter, and may not be changed except in writing. In all
instances, the precise terms of the particular benefit plan
and this letter shall govern in the event of an
inconsistency between them and the attachments to this
letter. Except for the amount of severance payments set
forth in Paragraph 2 and the payment schedules in paragraphs
12 and 14, in the event of an inconsistency between the
precise terms of the particular benefit plan and this
letter, the particular benefit plan shall govern.
Very truly yours,
GLENDA K. BURKHART
Glenda K. Burkhart
Agreed to and Accepted as of September 9, 1996
THOMAS M. KENNEY
Thomas M. Kenney
Attachments:
CHART OF TOP MEDIA COMPANIES BY MAGAZINE REVENUE
SEVERANCE PROCEDURES
GENERAL WAIVER AND RELEASE OF CLAIMS FORM
COBRA INFORMATION
SEVERANCE PLAN FOR SENIOR MANAGEMENT
<PAGE>
SEVERANCE PROCEDURES
Pursuant to the policy of The Reader's Digest
Association, Inc. and The Reader's Digest Association, Inc.
Severance Plan for Senior Management ("Severance Plan") ,
employees have no entitlement to severance pay upon
separation unless they meet certain eligibility
requirements, including signing the General Waiver and
Release of Claims Form. A copy of that Form, along with the
Severance Plan is attached. If you choose to sign the Form,
the General Waiver and Release of Claims Form prevents you
from instituting any suit against Reader's Digest or its
affiliated entities and releases Reader's Digest and its
affiliated entities from any claims and causes of action you
might have (except as stated in the General Waiver and
Release of Claims Form). This includes claims of age
discrimination under The Older Workers Benefit Protection
Act which amended the Age Discrimination in Employment Act.
Please take the time to carefully review this form. You
have twenty-one (21) days to review the General Waiver and
Release of Claims. We advise you to consult with an
attorney before signing the General Waiver. Reader's Digest
will become obligated to pay you severance payments only
after you sign and return this letter, the General Waiver
and Release of Claims and meet all other eligibility
requirements of the Severance Plan.
GENERAL WAIVER AND RELEASE OF CLAIMS
Pursuant to the terms of a letter to me dated
August 22, 1996 (the "Letter") in consideration of my being
granted severance payments and other released based benefits
set forth in that letter to which I am not otherwise
entitled, I do hereby, for myself, my heirs, executors, and
administrators, waive, remise, release and forever discharge
The Reader's Digest Association, Inc., its subsidiaries and
affiliates and their shareholders, directors, officers,
employees, representatives, agents, partners and
contractors (collectively, "RDA") of and from all claims and
demands arising prior to this date of every name, type, act
and nature arising or existing by reason of any known or
unknown, past or present act or failure to act.
This General Waiver and Release of Claims includes,
but is not limited to, any claims, demands, complaints,
actions, or suits, which have or might have been asserted
under federal, state or local statutes concerning civil
rights, unlawful employment practices, wrongful discharge,
or retaliatory discharge (including but not limited to
claims under Section 510 of the Employment Retirement Income
Security Act of 1974, as amended); Title VII of the Civil
Rights Act of 1964; 42 USC Section 1981; the Equal Pay Act
of 1963; the Age Discrimination in Employment Act, as
amended by the Older Workers Benefit Protection Act; the
Rehabilitation Act of 1973 (Sections 503 and 504); the
Americans With Disabilities Act; Executive Order 11246, as
amended, and the regulations thereunder; the Civil Rights
Act of 1991; the Family and Medical Leave Act of 1993 and
any and all claims which I now have regarding my employment
and separation from employment with RDA or its affiliates.
This General Waiver and Release of Claims does not
operate to waive or release any claims I may have for the
severance payments and released based benefits described
above, or claims for benefits under The Reader's Digest
Association, Inc. Profit Sharing Plan, The Reader's Digest
Association, Inc. Retirement Plan, The Reader's Digest
Association, Inc. Healthcare Program, The Reader's Digest
Association, Inc. Long Term Disability Plan, The Reader's
Digest Group Life Insurance Plan, The Reader's Digest
Association, Inc. Excess Benefit Retirement Plan, The
Reader's Digest Association, Inc. Deferred Compensation Plan
and The Reader's Digest Association, Inc. Employee Stock
Purchase Plan, Supplemental Retirement Benefit Agreement
between me and RDA, or claims for worker's compensation
benefits.
I acknowledge that I have been advised by RDA to
consult an attorney prior to signing this General Waiver and
Release of Claims, that I have had an opportunity to be
represented by counsel of my choice who has had an
opportunity to review this General Waiver and Release of
Claims and that I have had at least twenty-one (21) days to
consider this release. I warrant that I am executing this
document of my own free will, knowingly and voluntarily. I
am not relying on any promises or representations made to me
other than RDA's promises to provide the release based
benefits set forth in the August 22, 1996 letter. In the
event that any provision of this General Waiver and Release
of Claims is held to be invalid, the remaining provisions
shall continue to be valid and binding. This document is
not an admission of liability or wrongdoing.
I understand that no further severance payments and
release based benefits will be made to me, and I will have
to return all such payments and benefits previously made to
me, if RDA reasonably finds that I have engaged in
competitive activities of the kind described in the Letter
of a nature or have otherwise acted in a manner detrimental
to the best interests of RDA, including violating RDA's
policies such as the Code of Conduct and the Proprietary
Information Policy or disparaging RDA, its employees or its
products.
I understand that I have seven (7) days following the
signing of this General Waiver and Release of Claims to
revoke it and this General Waiver and Release of Claims will
not become effective or enforceable, and consulting payments
not made, until after that seven (7) day revocation period
has elapsed.
By signing below, I certify that by the Date of
Separation I will have returned all RDA property to RDA or
its affiliates.
WITNESS: Date: September 9, 1996
CARMEN F. MOCOLO THOMAS M. KENNEY
Carmen F. Mocolo Thomas M. Kenney
Carmen F. Mocolo Thomas M. Kenney
24-40 38 Street 10 The Byway
Astoria, NY 11103 Bronxville, NY 10708
HUMAN RESOURCES:
______________________________________
(Signature) (Represents Confirmation)
EXHIBIT 10.16
THE READER'S DIGEST ASSOCIATION, INC.
[LOGO]
June 10, 1996
Mr. Kenneth A.H. Gordon
President and Chief Operating Officer
The Reader's Digest Association, Inc.
Pleasantville, NY 10570-7000
Dear Ken:
This letter serves to confirm those payments and benefits that
you will receive, subject to and in accordance with the terms and
conditions of this Agreement in connection with your retirement
from The Reader's Digest Association, Inc. (the "Company") and
your resignation from the Company's Board of Directors, which
will be effective June 30, 1996 (the "Date of Retirement"). A
summary of the financial benefits provided for in this Agreement
is set forth on Attachment A.
1. Retirement From Employment
1.1 You will remain in your position as President and Chief
Operating Officer of the Company until the earlier of such
time as the Company determines or your Date of Retirement.
Upon the Company's determination, you will immediately
execute letters of resignation of such offices and
directorships with the Company and its affiliates as
requested by the Company.
1.2 You will continue to perform your duties in accordance with
the Company's policies and continue to participate in all
applicable Company benefits until your Date of Retirement.
You will remain on the payroll and receive your bi-weekly
salary payment until your Date of Retirement.
2. Compensation Upon Retirement
2.1 You shall receive the following benefits for each year of
the Severance Period defined as the period between July 1,
1996 and June 30, 1998:
2.1.1 The Company shall pay to you as severance pay a total
amount equal to the sum of (a) $550,000 (Five hundred fifty
thousand dollars), plus
(b) the higher of the following:
(i) the highest amount paid to you under The
Reader's Digest Association, Inc. Management
Incentive Compensation Plan (the "Annual
Incentive Plan") during the three plan years
most recently ended prior to the Date of
Retirement; or
(ii) the originally approved target amount of the
highest award, if any, under the Annual
Incentive Plan outstanding on the Date of
Retirement, as such target amount may have
been increased prior to the Date of
Retirement (i.e., $385,000).
Any compensation received by you or granted to you
in lieu of an amount paid under the Annual
Incentive Plan for any one-year period (whether in
the form of restricted stock or otherwise) shall
be deemed to be an amount paid to you under the
Annual Incentive Plan for purposes of this
Section. Any compensation receivable by you in
lieu of an amount payable under the Annual
Incentive Plan for any period shall be deemed to
be an additional target amount for purposes of
this Section. The amount of any non-cash
compensation received or receivable shall be the
greater of the fair market value of such
compensation on the date of award or the cash
amount that would have been received by you in
lieu of such non-cash compensation.
The aggregate amount of severance payable under this
Section shall be paid in equal installments on a bi-
weekly basis, commencing upon the Date of Retirement.
2.1.2 The Company shall maintain in full force and effect,
for your continued benefit for the Severance Period,
all welfare benefit plans and programs or
arrangements in which you participated
immediately prior to the Date of Retirement, provided
that your continued participation is possible under the
general terms and conditions of such welfare plans and
programs. In the event that your participation in any
such plan or program is barred, the Company shall
provide you with benefits substantially similar to
those which you would have been entitled to receive
under such welfare plans and programs had your
participation not been barred.
2.1.3 To the extent the Company continues to own its
private aircraft, the Company shall make available to
you and your immediate family, at the Company's
expense, the Company's private aircraft for two
(2) round-trips, subject to the Company's aviation
policies and to the availability of such aircraft.
3. Long-Term Incentive Plan Benefits
3.1 You shall have the right to exercise your outstanding stock
options and stock appreciation rights under the 1989 and
1994 Key Employee Long-Term Incentive Plans (the "Long Term
Incentive Plans") to the extent they are exercisable or
would become exercisable during the Severance Period as if
your employment with the Company continued during the
Severance Period. Such stock options and stock appreciation
rights shall continue to vest during the Severance Period as
if your employment with the Company continued during the
Severance Period and, upon completion of the Severance
Period, shall vest and be exercisable as if your employment
terminated at that time by reason of either (a) an
involuntary termination without cause or a mutual agreement
(within the terms of the particular award) or (b) retirement
(within the terms of the particular award), if applicable.
3.2 Your outstanding performance units, restricted stock
and awards (other than stock options and stock
appreciation rights) under the Long Term Incentive
Plans shall continue to be outstanding and payable
during the Severance Period as if your employment with
the Company continued during the Severance Period and,
if applicable, shall vest upon completion of the
Severance Period in accordance with the terms of the
award as if your employment terminated at that time by
reason of either (a) an involuntary termination without
cause or a mutual agreement (within the terms of the
particular award) or (b) retirement (within the terms
of the particular award), if applicable. Any such
award that is based on a period of employment shall be
payable on a prorated basis as if your employment had
continued during the Severance Period. If any such
award is subject to specific performance goals, then
the award shall be payable to the extent such
performance goals are attained.
3.3 If any benefits due under Section 3 cannot be paid under the
existing or amended terms of an applicable plan or award
agreement, the Company shall pay you the value of such
benefits at the time they would otherwise be payable if they
were payable under such terms.
4. Retirement Plan Benefits
4.1 The Company shall pay to you an amount equal to the
difference between your monthly retirement benefit payable
under The Reader's Digest Association, Inc. Retirement Plan
(the "Retirement Plan"), the Excess Benefit Retirement Plan
of The Reader's Digest Association, Inc. and The Reader's
Digest Executive Retirement Plan (the "Executive Retirement
Plan") and the amount that would have been payable if your
age and aggregate periods of service under those plans
included the Severance Period. For purposes of determining
Retirement Salary, the Severance Period shall be considered
"years of participation" under the Retirement Plan and
"years of employment" under the Executive Retirement Plan.
Any amount payable under this Section 4.1 shall be payable
at the same time and in the same form as such payments would
have been made under the Retirement Plan.
4.2 In determining your Retirement Income Benefit under the
Executive Retirement Plan, the amount of your SERP Agreement
Benefit shall be offset only with respect to the 15-year
period that benefits are payable under your SERP Agreement.
5. Profit-Sharing Plan Benefits
5.1 Your participation in The Reader's Digest Employees Profit-
Sharing Plan and the Profit -Sharing Benefit Restoration
Plan of The Reader's Digest Association, Inc. (the "Profit-
Sharing Plans") ceases upon your termination of employment
with the Company. However, you shall receive cash payments
equal to the amounts that would have been contributed to
your account had your employment with the Company continued
for the Severance Period, with payments to be made to you by
the Company at the time any contributions have been made for
participants in the Profit-Sharing Plans. In addition, the
Severance Period shall be considered to be additional
Credited Service for purposes of your vesting in any amounts
previously contributed to your account under the Profit-
Sharing Plans.
6. Medical and Dental Benefits; Group Life Insurance Benefits
6.1 You will continue to receive medical and dental benefits
from the Company in accordance with the terms of applicable
plans and programs until your Date of Retirement. After
your Date of Retirement, you will be eligible to receive
employee medical and dental benefits in accordance with the
terms of The Reader's Digest Association, Inc. Healthcare
Program (the "Healthcare Program").
6.2 You are eligible for benefits under COBRA (see attached
information) for 18 months following your Date of Retirement
(commencing July 1, 1996). You must make your election
regarding COBRA within 60 days of your Date of Retirement.
Since you will be eligible for retiree medical and dental
benefits under the Healthcare Program, you may choose, of
course, not to receive COBRA benefits.
6.3 You will continue to receive group life insurance benefits
from the Company in accordance with the terms of The
Reader's Digest Group Life Insurance Plan for the Severance
Period.
7. Other Severance Benefits
7.1 All benefits provided under this Agreement are in lieu of
comparable benefits under The Reader's Digest Association,
Inc. Severance Plan for Senior Management and the Company's
Severance Policy.
7.2 You shall receive, at your election, outplacement counseling
services pursuant to Company policy for a period of up to
two years from the Date of Retirement.
7.3 You shall receive a lump-sum payment for any earned and
unused vacation and floating personal holidays for the
period ending with your Date of Retirement.
7.4 You shall receive reimbursement for financial counseling
services for two years following your Date of Retirement, in
accordance with the terms of The Reader's Digest
Association, Inc. Executive Financial Counseling Plan.
7.5 Any benefits payable under this Agreement shall be reduced
by the amount of any benefits paid under The Reader's Digest
Association, Inc. Severance Plan for Senior Management or
The Reader's Digest Association, Inc. Income Continuation
Plan for Senior Management.
8. The payment of any amounts or benefits under this Agreement
is expressly conditioned on the receipt by the Senior Vice
President, Human Resources of the Company from you of a duly
executed General Waiver and Release of Claims in the form
attached hereto, the repayment by you of any outstanding
advances or loans due the Company and the return by you of
all Company property; you have at least twenty-one (21) days
to execute the General Waiver and Release of Claims. No
payment under Section 2 of this Agreement will be made until
at least seven days have elapsed following the Company's
receipt of your signed General Waiver and Release of Claims.
9. Any reference to a specific plan in this Agreement shall be
deemed to include any similar plan or program of the Company
then in effect that is the predecessor of, the successor to,
or the replacement for, such specific plan.
10. The Company may withhold from any benefits payable under
this Agreement all federal, state, local or other applicable
taxes as shall be required pursuant to any law or
governmental regulation or ruling.
11. In case of your death while any amounts are still payable to
you under this Agreement, the Company shall pay all such
amounts to your designated beneficiary or, if none has been
designated, to your estate as if your employment had
continued until the end of the Severance Period.
12. The Company shall indemnify you and hold you harmless from
any and all liabilities, losses, costs or damages, including
defense costs and expenses (including, without limitation,
fees and disbursements of counsel incurred by you in any
action or proceeding between the parties to this Agreement
or between you and any third party or otherwise) in
connection with all claims, suits or proceeding relating to
or arising from a breach or alleged breach of this Agreement
by the Company.
13. You acknowledge that (i) prior to executing this Agreement,
you had an opportunity to consult with an attorney of your
choosing and review this Agreement with such counsel, (ii)
you are executing this Agreement knowingly and voluntarily
and (iii) you understand all of the terms set forth herein.
14. Acts Detrimental to the Company
14.1 You agree that you will not do any of the following during
the Severance Period:
14.1.1 commit any criminal act against the Company or any
act that would constitute "Cause;"
14.1.2 disclose any information likely to be regarded as
confidential and relating to the Company's business;
14.1.3 solicit the Company's employees to work for a
competitor of the Company;
14.1.4 perform any act detrimental to the Company or its
employees; or
14.1.5 disparage the Company, its senior management or
its products; and likewise the Company's Senior
Management shall not disparage you.
14.2 You agree that any breach or threatened breach of Section
14.1 shall entitle the Company to apply for and to obtain
injunctive relief, which shall be in addition to any and all
other rights and remedies available to the company at law or
in equity.
14.3 You agree that you will not, at any time prior to the end of
the Severance Period, without the prior written consent of
the Senior Vice President, Human Resources of the Company,
become a proprietor, director, partner, employee, consultant
or independent contractor of, or otherwise become affiliated
with (other than as a stockholder with a non-substantial
interest in any such business), any business that both is in
direct competition with the Company and utilizes to any
significant extent, either at the time your relationship
with such business commences or at any time during the
Severance Period, the principal marketing methods utilized
by the Company.
14.4 Upon any proven breach by you of Section 14.1 or 14.3 of
this Agreement, all of your rights and benefits under this
Agreement shall cease and you agree to repay the amount of
any benefits previously paid to you pursuant to Section 2 of
this Agreement.
15. Miscellaneous
15.1 Notices and other communications provided for herein shall
be in writing and shall be effective upon delivery addressed
as follows:
if to the Company:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: Senior Vice President, Human Resources
with a copy to
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: General Counsel
or if to you, at the following address:
Kenneth A. Gordon
70 Hickory Kingdom Road
Bedford, New York 10506
or to such other address as to which either party shall give
notice in accordance with the foregoing.
15.2 This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective
successors and assigns; provided, however, that this
Agreement may not be assigned by either party without the
consent of the other party.
15.3 Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the
remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other
jurisdiction.
15.4 This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and
supersedes any prior agreements, written or oral, with
respect thereto.
15.5 This Agreement may be amended or modified only by a written
agreement duly executed by both of the parties hereto.
15.6 In all instances, the precise terms of this Agreement shall
govern in the event of an inconsistency between this
Agreement and the attachments to this Agreement.
15.7 This Agreement and the attachments thereto set forth the
entire understanding between you and the Company and
supersedes all prior agreements, arrangements and
understandings between you and the Company regarding the
subject matter of this Agreement. This Agreement may be
amended or modified only in writing, signed by both of the
parties hereto. This Agreement shall not be assignable by
either party. Nothing in this Agreement is intended to
confer on any other person any rights or remedies hereunder.
15.8 This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York applicable
to contracts executed in and to be wholly performed within
that State.
Very truly yours,
The Reader's Digest
Association, Inc.
By: GLENDA K. BURKHART
Glenda K. Burkhart
Senior Vice President
Human Resources
Agreed to and accepted:
KENNETH A.H. GORDON
Kenneth A.H. Gordon
Attachments: Attachment A
Severance Procedures
General Waiver and Release of Claims
COBRA Information
<PAGE>
Attachment A
Kenneth A. Gordon
Voluntary Separation from RDA
1. Employment through June 30, 1996:
as President and Chief Operating Officer of The Reader's
Digest Association, Inc. until June 30, 1996
base salary of $550,000 through June 30, 1996, payable bi-weekly
bonus based on Company performance for FY 96 (1996 bonus
target is $385,000)
2. Severance Payments:
Bi-weekly installments for 24 months commencing July 1, 1996
and ending June 30, 1998 based on $550,000 per year (base
salary), plus $385,000 or actual bonus amount for 1996, whichever
is higher
3. Performance Units: (subject to Company performance)
FY 1994-96 (398,333 units)
FY 1995-97 (480,000 units)
FY 1996-98 (550,000 units)
4. Retirement Plans:
RDA Retirement Plan benefits with plan service through June
30, 1998
Executive Retirement Plan benefits with plan service through
June 30, 1998
Pension calculated based upon the highest three consecutive
years of base salary and annual bonus (including Severance
Payments) during the 10-year period ending June 30, 1998
5. Medical and Dental Coverage; Group Life Insurance:
continue employee medical and dental coverage on RDA
Healthcare Program through June 30, 1996
retiree medical and dental coverage under RDA Healthcare
Program effective July 1, 1996
continue group life insurance benefits under RDA Group Life
Insurance Plan through June 30, 1998
6. Outplacement Counseling Services:
outplacement counseling through June 30, 1997
7. Financial Counseling Services:
continued financial counseling through June 30, 1998
8. Vacation and Floating Personal Days:
lump sum payment of all accrued and unused time through June
30, 1996
9. Profit-Sharing Plan:
Plan contributions, if any, for Plan Year 1996
Cash equivalent payments, equal to contribution to the Plan,
if any, for Plan Years 1997 and 1998
10. Stock Options:
continued vesting of options through June 30, 1998, and
eligible to exercise outstanding options (except recovery
options) as if retirement occurs as of June 30, 1998
see attached table
11. Supplemental Retirement Benefit Agreement (SERP):
100% vested SERP benefits; earliest distribution available
July 1, 1996
12. Deferred Compensation Plan:
payments commence January 1997 for any bonus and/or
performance unit deferrals under this Plan
Kenneth A. Gordon
Retirement Date:
June 30, 1996
Vested & Exercisable
Grant Date No. of Price 6/30/96 6/30/98
Options
01/22/90 48,000 $20.00 24,000 24,000
02/01/91 14,000 $29.44 14,000 14,000
02/04/92 14,000 $46.625 14,000 14,000
03/04/93 14,000 $48.00 10,500 14,000
03/10/94 85,000 $41.50 12,750 68,000
03/09/95 16,000 $46.94 1,000 12,000
09/07/95 16,000 $47.31 0 8,000
9/07/95 69,700 $47.31 0 0
<PAGE>
SEVERANCE PROCEDURES
Pursuant to the policy of The Reader's Digest Association,
Inc., employees have no entitlement to severance pay upon
separation unless they meet certain eligibility requirements,
including signing the General Waiver and Release of Claims Form.
A copy of that Form is attached. If you choose to sign the Form,
it prevents you from instituting any suit against Reader's Digest
or its affiliated entities and releases Reader's Digest and its
affiliated entities from any claims and causes of action you
might have (except as stated in the General Waiver and Release of
Claims Form). This includes claims of age discrimination under
The Older Workers Benefit Protection Act which amended the Age
Discrimination in Employment Act. Please take the time to
carefully review this Form. You have twenty-one (21) days to
review the General Waiver and Release of Claims. We advise you
to consult with an attorney before signing the form. Reader's
Digest will become obligated to pay you severance payments and
other release based benefits only after you sign and return this
attached General Waiver and Release of Claims Form and meet all
other eligibility requirements set forth in the attached letter
agreement.
GENERAL WAIVER AND RELEASE OF CLAIMS
Pursuant to the terms of a letter to me dated June 10, 1996,
in consideration of my being granted severance payments and other
release based benefits set forth in that letter to which I am not
otherwise entitled, I do hereby, for myself, my heirs,
executors, and administrators, waive, remise, release and forever
discharge The Reader's Digest Association, Inc., its subsidiaries
and affiliates and their past and present shareholders,
directors, officers, employees, representatives, agents, partners
and contractors (collectively, "RDA") of and from all claims and
demands arising prior to this date of every name, type, act and
nature arising or existing by reason of any known or unknown,
past or present act or failure to act.
This General Waiver and Release of Claims includes, but is
not limited to, any claims, demands, complaints, actions, or
suits, which have or might have been asserted under federal,
state or local statutes concerning civil rights, unlawful
employment practices, wrongful discharge, or retaliatory
discharge (including but not limited to claims under Section 510
of the Employment Retirement Income Security Act of 1974, as
amended); Title VII of the Civil Rights Act of 1964; 42 USC
Section 1981; the Equal Pay Act of 1963; the Age Discrimination
in Employment Act, as amended by the Older Workers Benefit
Protection Act; the Rehabilitation Act of 1973; the Americans
With Disabilities Act; Executive Order 11246, as amended, and the
regulations thereunder; the Civil Rights Act of 1991; the Family
and Medical Leave Act of 1993; the New York State Human Rights
Law; and Article 20-C, Section 740 of the N.Y. Labor Law,
Retaliatory Action By Employees, and any and all claims which I
now have regarding my employment and separation from employment
with RDA or its affiliates.
This General Waiver and Release of Claims does not operate
to waive or release any claims I may have for the severance
payments or other release based benefits described above, or
claims for benefits under The Reader's Digest Association, Inc.
Employees Profit-Sharing Plan, The Reader's Digest Association,
Inc. Retirement Plan, The Reader's Digest Association, Inc.
Healthcare Program, The Reader's Digest Association, Inc. Long
Term Disability Plan, The Reader's Digest Group Life Insurance
Plan and The Reader's Digest Association, Inc. Employee Stock
Purchase Plan, any Supplemental Employee Retirement Benefit
Agreement or claims for worker's compensation benefits.
I acknowledge that I have been advised by RDA to consult an
attorney prior to signing this General Waiver and Release of
Claims, that I have had an opportunity to be represented by
counsel of my choice who has had an opportunity to review this
General Waiver and Release of
Claims and that I have had at least twenty-one (21) days to
consider this release. I warrant that I am executing this
document of my own free will, knowingly and voluntarily. I am
not relying on any promises or representations made to me other
than RDA's promise to make severance payments and other release
based benefits set forth in that June 10, 1996 letter. In the
event that any provision of this General Waiver and Release of
Claims is held to be invalid, the remaining provisions shall
continue to be valid and binding. This document is not an
admission of liability or wrongdoing.
I understand that no further severance payments or other
release based benefits will be made to me, and I will have to
return all such payments and benefits previously made to me, if
RDA reasonably finds that I have engaged in competitive
activities of a nature or have otherwise acted in a manner
detrimental to the best interests of RDA, including violating
RDA's policies such as the Code of Conduct and the Proprietary
Information Policy or disparaging RDA, its employees or its
products.
I understand that I have seven (7) days following the
signing of this General Waiver and Release of Claims to revoke it
(by delivering written notice to the Senior Vice President, Human
Resources, of RDA) and this General Waiver and Release of Claims
will not become effective or enforceable, and severance payments
not made, until after that seven (7) day revocation period has
elapsed.
By signing below, I certify that I have returned all RDA
property to RDA or its affiliates.
WITNESS: Date: June 10, 1996
PATRICIA ARLES KENNETH A. GORDON
Patricia Arles Kenneth A. Gordon
Patricia Arles Kenneth A. Gordon
The Reader's Digest Association, Inc.
EXECUTIVE FINANCIAL COUNSELING PLAN
ARTICLE I
Purpose
1.1 The purpose of the Plan is to reimburse Eligible Executives
of the Company and its Designated Subsidiaries for certain
expenses incurred by them for Financial Counseling.
ARTICLE II
Definitions
2.1 "Authorized Vendor" shall mean:
(a) any accounting, tax, investment and legal vendor selected
by the Company to be available to provide Financial
Counseling to Eligible Executives under the Plan; and
(b) with respect to a particular Eligible Executive, any
accounting, tax, investment or legal vendor who has been
providing Financial Counseling to that Eligible Executive
for at least the immediately preceding two years and who
is approved by the Senior Vice President, Human Resources
of the Company to provide Financial Counseling to the
Eligible Executive under the Plan.
2.2 "Company" shall mean The Reader's Digest Association, Inc..
2.3 "Designated Subsidiary" shall mean a subsidiary of the
Company, 80 per cent or more of the voting power of the
capital stock of which is owned, directly or indirectly by
the Company, that is designated in writing by the Senior Vice
President, Human Resources of the Company, with the approval
of the Chief Executive Officer of the Company.
2.4 "Eligible Executive" shall mean each employee of the Company
or any Designated Subsidiary at Salary Grade Level 17 (or its
equivalent) or above.
2.5 "Eligible Senior Executive" shall mean each employee of the
Company or any Designated Subsidiary at Salary Grade Level 21
(or its equivalent) or above.
2.6 "Financial Counseling" shall mean the following services:
(a) financial planning (including cash flow analysis and
capital planning);
(b) income tax planning (which shall include income tax
preparation and audit support services for Eligible
Senior Executives but shall not include such services for
Eligible Executives);
(c) estate planning (not including preparation of wills,
trust agreements and similar documentation);
(d) insurance planning; and
(e) retirement planning.
Financial Counseling shall not include brokerage or
promoter's fees.
2.7 "Retirement" shall mean termination of employment by an
employee who is at least 55 years of age after at least five
years of employment by the Company or a Designated
Subsidiary.
2.8 "Total Disability" shall mean "Total Disability" as defined
in The Reader's Digest Association, Inc. Long Term Disability
Plan.
ARTICLE III
Reimbursement for Financial Counseling
3.1 Maximum Regular Annual Allowance for Eligible Executives.
The Company and the Designated Subsidiaries shall reimburse
each Eligible Executive (not including Eligible Senior
Executives) for Financial Counseling expenses incurred from
any Authorized Vendor up to the following limits:
(a) $7,500 for each of the first two 12-month periods that
the Eligible Executive participates in the Plan by
incurring Financial Counseling expenses that are
submitted for reimbursement under the Plan or by such
other activity approved by the Senior Vice President,
Human Resources; and
(b) $5,000 for each subsequent 12-month period.
3.2 Maximum Regular Annual Allowance for Eligible Senior
Executives. The Company and the Designated Subsidiaries
shall reimburse each Eligible Senior Executive for Financial
Counseling expenses incurred from any Authorized Vendor up to
the following limits:
(a) $8,000 for each 12-month period that the Eligible Senior
Executive participates in the Plan by incurring Financial
Counseling expenses that are submitted for reimbursement
under the Plan or by such other activity approved by the
Senior Vice President, Human Resources.
3.3 Maximum Allowance for Death, Disability or Retirement. If
the employment of an Eligible Executive with the Company and
all Designated Subsidiaries terminates by reason of death,
Total Disability or Retirement, the Company and the
Designated Subsidiaries shall, notwithstanding such
termination of employment, provide reimbursement for
Financial Counseling expenses incurred from any Authorized
Vendor up to $7,500 for each of the first two 12-month
periods following such termination of employment. In case of
the Eligible Executive's death, reimbursement shall be
provided to the estate or the surviving spouse of the
decedent.
3.4 Maximum Allowance for Severance Termination. If the
employment of an Eligible Executive with the Company and all
Designated Subsidiaries terminates by reason an event that
would entitle the Eligible Executive to benefits under The
Reader's Digest Association, Inc. Severance Plan for Senior
Management (if the Eligible Executive were a participant in
that plan), the Company and the Designated Subsidiaries
shall, notwithstanding such termination of employment,
provide reimbursement for Financial Counseling expenses
incurred from any Authorized Vendor up to $5,000 for the 12-
month period following such termination of employment.
3.5 Request for Reimbursement. The Company shall not be required
to make any reimbursement under the Plan unless the Eligible
Executive (or the Eligible Executive's representative, if
appropriate) submits to the Director Employee Benefits within
180 days after the Financial Counseling expenses are
incurred, a dated, detailed itemized statement from the
Authorized Vendor and a written confirmation by the Eligible
Executive (or the Eligible Executive's representative, if
appropriate) of the accuracy of the statement.
ARTICLE IV
General
4.1 Disclaimer. Neither the Company nor any Designated
Subsidiary makes any recommendation as to the use of any
Authorized Vendor to provide Financial Counseling to an
Eligible Executive and the decision of any Eligible Executive
to use any Authorized Vendor for Financial Counseling or
other services is an individual one. By acceptance and
receipt of reimbursement for Financial Counseling expenses
under the Plan, each Eligible Executive hereby, for the
himself and his heirs, executors, administrators and other
representatives, forever releases and discharges the Company
and its subsidiaries and affiliates and their respective
stockholders, directors, officers, employees and
representatives from any and all claims, demands, liabilities
and losses arising out of or in connection with Financial
Counseling or other services available from any Authorized
Vendor.
4.2 No Employment Contract. Nothing contained in the Plan shall
be construed as a contract of employment between the Company
and any Eligible Executive, or as a right of any Eligible
Executive to continue in the employ of the Company, or as a
limitation of the right of the Company to discharge any
Eligible Executive, with or without cause. No Eligible
Executive shall have any rights or remedies against the
Company arising out of the Plan or his participation therein,
his employment or the termination of his employment with the
Company.
4.3 Unfunded Plan. The Plan shall be administered as an unfunded
plan designed primarily for the purpose of providing benefits
to a select group of members of senior management or highly
compensated employees of the Company. Payments under the
Plan shall at all times be made solely from the general
assets of the Company. No assets shall be segregated or
earmarked in respect of any amount due hereunder. The Plan
and the amounts due hereunder shall not constitute a trust.
4.4 Non-Alienation. An Eligible Executive may not assign,
anticipate, transfer, pledge, hypothecate or alienate in any
manner any interest arising under the Plan, nor shall any
such interest be subject to attachment, bankruptcy
proceedings or to any other legal processes or to the
interference or control of creditors or others.
4.5 Administration and Interpretation. Except as otherwise
provided in the Plan, the Senior Vice President, Human
Resources shall be responsible for interpreting and
administering the Plan. It is intended that any decisions of
the Senior Vice President, Human Resources regarding any
aspect of the Plan, including but not limited to the
interpretation, application or administration of this Plan,
shall be final and binding on all Eligible Executives or
interested parties. The administrator may correct any
defect, supply any omission or reconcile any inconsistency in
the Plan in the manner and to the extent that the
administrator shall deem necessary to carry the Plan into
effect. The Plan and actions taken in connection therewith
shall be governed and construed in accordance with the laws
of the State of New York (regardless of the law that might
otherwise govern under applicable New York principles of
conflict of laws) except to the extent the Employee
Retirement Income Security Act of 1974 shall apply.
4.6 Gender. In the construction of the Plan, the masculine shall
include the feminine and the singular the plural, and vice
versa, in all cases where such meaning would be appropriate.
4.7 Unenforceability. In the event any provision of the Plan, if
challenged, would be declared invalid, illegal or
unenforceable, such provision shall be construed and enforced
as if it had been more narrowly drawn so as not to be
illegal, invalid or unenforceable and the validity, legality
and enforceability of the remaining provisions shall not be
affected or impaired thereby.
4.8 Amendment or Termination. Notwithstanding any other
provision of the Plan, the Board of Directors or the
Compensation & Nominating Committee of the Board of Directors
of the Company (or any successor thereto) may at any time,
and from time to time, amend, in whole or in part, any or all
of the provisions of the Plan, or suspend or terminate the
Plan entirely, retroactively or otherwise; provided, however,
that, unless otherwise required by law, any such amendment,
suspension or termination may not, without the Eligible
Executive's consent, adversely affect the rights of an
Eligible Executive with respect to reimbursable expenses for
Financial Counseling incurred prior to such amendment,
suspension or termination.
4.9 Effective Date. The Plan was originally adopted effective
October 16, 1995.
<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 twelve month period ended June 30, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 258100
<SECURITIES> 18900
<RECEIVABLES> 605500
<ALLOWANCES> 193100
<INVENTORY> 204400
<CURRENT-ASSETS> 1204100
<PP&E> 604400
<DEPRECIATION> 342900
<TOTAL-ASSETS> 1904100
<CURRENT-LIABILITIES> 1113000
<BONDS> 0
<COMMON> (400)
0
28800
<OTHER-SE> 450500
<TOTAL-LIABILITY-AND-EQUITY> 1904100
<SALES> 3098100
<TOTAL-REVENUES> 3098100
<CGS> 1079800
<TOTAL-COSTS> 2753800
<OTHER-EXPENSES> 235000
<LOSS-PROVISION> 428600
<INTEREST-EXPENSE> 2400
<INCOME-PRETAX> 137700
<INCOME-TAX> 57100
<INCOME-CONTINUING> 80600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80600
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
