FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of January 31, 1996, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 86,178,411 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
Page 1 of 20 pages.
THE READER'S DIGEST ASSOCIATION, INC.
Index to Form 10-Q
December 31, 1995
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three and six-month periods
ended December 31, 1995 and 1994 3
Consolidated Condensed Balance Sheets
as of December 31, 1995 and June 30, 1995 4
Consolidated Condensed Statements of Cash Flows
for the six-month periods ended
December 31, 1995 and 1994 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 13
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and six-month periods ended December 31, 1995 and 1994
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
December 31, December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $ 918.6 $ 855.6 $ 1,649.1 $1,566.4
Product, distribution and
editorial expense 312.4 279.3 509.2 563.3
Promotion, marketing and
administrative expense 461.8 415.4 794.7 859.6
Operating profit 144.4 160.9 262.5 226.2
Other income, net 4.8 7.0 7.9 13.2
Income before provision for
income taxes 149.2 167.9 275.7 234.1
Provision for income taxes 54.4 62.8 85.4 103.3
Net income $ 94.8 $ 105.1 $ 148.7 $ 172.4
Earnings per share $ 0.88 $ 0.93 $ 1.37 $ 1.52
Average common shares
outstanding 107.9 113.0 113.2 107.9
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of December 31, 1995 and June 30, 1995
(in millions)
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 156.0 $ 214.6
Short-term investments 88.2 93.0
Receivables, net 668.1 396.4
Inventories 225.7 188.6
Prepaid expenses and other current assets 247.9 218.5
Total current assets 1,385.9 1,111.1
Marketable securities 104.7 224.5
Property, plant and equipment, net 258.7 256.6
Other noncurrent assets 371.7 366.5
Total assets $2,121.0 $1,958.7
Liabilities and stockholders' equity
Accounts payable $ 237.4 $ 224.8
Accrued expenses 351.3 340.2
Income taxes payable 116.2 97.5
Unearned revenue 451.3 391.7
Other current liabilities 21.0 17.9
Total current liabilities 1,177.2 1,072.1
Other noncurrent liabilities 274.9 245.8
Total liabilities 1,452.1 1,317.9
Capital stock 28.0 29.5
Paid-in capital 133.7 118.3
Retained earnings 1,149.8 1,093.5
Net unrealized gains on certain investments 4.5 5.1
Foreign currency translation adjustment ( 6.2) ( 0.3)
Treasury stock, at cost ( 640.9) ( 605.3)
Total stockholders' equity 668.9 640.8
Total liabilities and stockholders' equity $2,121.0 $1,958.7
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six-month periods ended December 31, 1995 and 1994
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Six-month period ended
December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 148.7 $ 172.4
Depreciation and amortization 23.7 21.7
Other, net ( 193.9) ( 102.7)
Net change in cash due to operating activities ( 21.5) 91.4
Cash flows from investing activities:
Proceeds from maturities and sales of short-term
investments and marketable securities 272.7 202.9
Purchases of short-term investments and
marketable securities ( 136.8) ( 109.8)
Other, net ( 40.5) ( 31.1)
Net change in cash due to investing activities 95.4 62.0
Cash flows from financing activities:
Dividends paid ( 92.4) ( 85.8)
Common stock repurchased ( 42.3) ( 88.9)
Other, net 2.7 5.6
Net change in cash due to financing activities ( 132.0) ( 169.1)
Effect of exchange rate changes on cash ( 0.5) 4.5
Net change in cash and cash equivalents ( 58.6) ( 11.2)
Cash and cash equivalents at beginning of period 214.6 183.2
Cash and cash equivalents at end of period $ 156.0 $ 172.0
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in millions, except per share data)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended December 31, 1995 and 1994 are the second fiscal
quarters of fiscal year 1996 and fiscal year 1995, respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting principles
applying certain judgments and estimates which include all
adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information. Operating
results for any interim period are not necessarily indicative of the
results for an entire year due to the seasonality of the company's
business.
(2) Change in Presentation
In the current year the company reclassified certain costs and
expenses in the Consolidated Condensed Statements of Income to more
closely reflect its business and internal reporting practices. There
was no impact on operating profit. Additionally, certain prior year
amounts in the company's Consolidated Condensed Balance Sheet and
Consolidated Condensed Statement of Cash Flows have been reclassified
to conform with the current year's presentation.
(3) Earnings Per Share
Earnings per share is computed by dividing net income, less
preferred stock dividend requirements, of $0.3 in each of the three-
month periods ended December 31, 1995 and 1994 and $0.7 in each of
the six-month periods ended December 31, 1995 and 1994 by the
weighted average number of common shares outstanding during the
period.
(4) Inventories
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
<S> <C> <C>
Raw materials $ 42.9 $ 32.4
Work-in process 20.5 24.7
Finished goods 162.3 131.5
$ 225.7 $ 188.6
</TABLE>
(5) Segment Information
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
December 31, December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 190.3 $ 186.7 $ 367.7 $ 358.5
Books and Home Entertainment 592.9 556.0 1,108.4 1,058.2
Products
Special Interest Magazines 25.8 24.6 45.8 43.4
Other Businesses 109.6 88.3 127.2 106.3
Total revenues $ 918.6 $ 855.6 $ 1,649.1 $ 1,566.4
GEOGRAPHIC AREAS
United States $ 402.3 $ 355.3 $ 692.0 $ 624.0
Europe 390.9 383.2 728.6 726.6
Other Markets 125.4 117.1 228.5 215.8
Total revenues $ 918.6 $ 855.6 $ 1,649.1 $ 1,566.4
</TABLE>
(6)Subsequent Event
In January 1996, the company announced a plan to realign and
streamline its operations and processes and better position itself to
achieve its strategic growth objectives. The plan consists principally
of streamlining the company's organizational structure by reducing the
worldwide workforce by approximately 15%, the strategic repositioning
of the special interest magazines group and the reevaluation of
certain business arrangements that is expected to result in contract
terminations and asset write-downs. In addition, an accrual will be
recorded for various claims against the company. A charge of up to
$225.0 will be reflected in other operating items in the Consolidated
Condensed Statement of Income for the period ended March 31, 1996.
The Reader's Digest Association, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(In millions, except per share data)
Results of Operations
In January 1996, the company announced a plan to realign and
streamline its operations and processes and better position itself
to achieve its strategic growth objectives. The plan consists
principally of streamlining the company's organizational structure
by reducing the worldwide workforce by approximately 15%, the
strategic repositioning of the special interest magazines group and
the reevaluation of certain business arrangements that is expected
to result in contract terminations and asset write-downs. In
addition, an accrual will be recorded for various claims against the
company. A charge of up to $225.0 will be reflected in other
operating items in the Consolidated Condensed Statement of Income
for the period ended March 31, 1996. Since the impact of this
charge will be reflected in third quarter results, the discussion
below (except as noted) excludes the effect of these items.
Three-Month Period Ended December 31, 1995 Compared With Three-Month
Period Ended December 31, 1994
Financial Statement Presentation
In the current year, the company reclassified certain costs and
expenses in the Consolidated Condensed Statements of Income to more
closely reflect its business and internal reporting practices.
There was no impact on operating profit. Additionally, certain
prior year amounts in the company's Consolidated Condensed Balance
Sheet and Consolidated Condensed Statement of Cash Flows have been
reclassified to conform with the current year's presentation.
Revenues/Operating Profit
Worldwide revenues for the second quarter of 1996 increased 7%, to
$918.6 compared with the second quarter of 1995. Higher revenues in
all geographic areas, most significantly the United States,
contributed to this increase. The segments that were the primary
contributors to this 7% increase were Books and Home Entertainment
Products and Other Businesses representing approximately 4% and 2%,
respectively.
Worldwide operating profit decreased 10% to $144.4 in the second
quarter of 1996, compared with $160.9 in the second quarter of 1995.
This $16.5 decrease was primarily because of approximately $18.0 in
higher global paper and postage costs, performance in the company's
European operations and ongoing investments in existing and new
businesses. These factors were partially offset by increased
revenues.
Other Income, Net
Other income, net for the second quarter of 1996 decreased to $4.8
compared with $7.0 a year ago. This decrease was primarily because
of lower interest income ($5.5 in 1996 compared with $9.4 in 1995),
partially offset by the gain on sale of certain securities ($3.6 in
1996 compared with $0.7 in 1995).
Earnings Per Share
Earnings per share declined 5% to $0.88 in the second quarter of
1996, compared with $0.93 for the same period in 1995. The decline
in earnings per share was lower than the decline in net income due
to the reduction in outstanding shares under the company's share
repurchase program.
Income Taxes
The company reduced its overall effective tax rate to 36.5% in
fiscal 1996 from 37.5% in 1995. This decrease was attributable to a
favorable settlement relating to prior years. The company
anticipates that, excluding the effect of the third quarter charge,
the effective tax rate will remain at 36.5% for the remainder of the
year. The third quarter charge is expected to result in a higher
effective tax rate.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine increased 2%, to $190.3, for
the second quarter of 1996 from $186.7 in the second quarter of
1995. This increase was due primarily to an increase in advertising
revenue. The increase in advertising revenues was attributable to
higher revenues in the United States offset by lower advertising
revenue in Europe. Globally, approximately two-thirds of the
increase in advertising revenue was due to rate and one-third was
due to pages. Circulation revenue remained about even as a result of
higher subscription pricing offset by lower paid copies. Operating
profit for Reader's Digest Magazine decreased significantly during
the second quarter of 1996 compared with the same period a year ago.
The effect of increased revenues was more than offset by higher
paper and postage costs and increased promotional spending to retain
high-quality subscribers who purchase the company's other products.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products increased 7%, to
$592.9, for the second quarter of 1996 from $556.0 for the second
quarter of 1995. Excluding the effect of changes in foreign currency
exchange rates, revenues increased 5% compared with the prior year.
This increase was primarily due to increased unit sales in the
United States. Notably, global revenues for music, series books and
video products reported healthy gains, partially offset by lower
general books revenues, compared with the same period a year ago.
Operating profit for Books and Home Entertainment Products decreased
in 1996 compared with 1995 principally due to lower response rates
and performance in Europe.
Special Interest Magazines
Revenues for Special Interest Magazines increased 5%, to $25.8 for
the second quarter of 1996 from $24.6 for the second quarter of
1995. This higher revenue was attributable to an increase in
circulation partially offset by lower advertising revenue. The
increase in circulation revenue was about equally due to higher
circulation levels and subscription pricing. The decline in
advertising revenue was a result of lower advertising pages and
rates. Operating profit increased in 1996 compared with 1995 due to
higher revenues, partially offset by increased paper and postage
costs.
Geographic Areas
United States
Revenues in the United States increased from $355.3 to $402.3, or by
13%, in the second quarter of 1996 compared with the second quarter
of 1995 of which approximately 9% and 3% were attributable to Books
and Home Entertainment Products and Other Businesses, respectively.
Within Books and Home Entertainment Products, virtually all product
lines reported revenue increases. Music products and series books
performed particularly well in the second quarter of 1996 compared
with 1995 due primarily to the launch of a new illustrated book
series and increased membership in music series. The revenue
increase in Other Businesses was due to higher sales at QSP. The
increase in advertising pages for Reader's Digest magazine also
contributed to the overall revenue growth in the United States.
Operating profit increased primarily because of increased
revenues, which were partially offset by the effect of higher paper
and postage costs.
Europe
Revenues in Europe increased from $383.2 to $390.9, or by 2%, in the
second quarter of 1996 compared with the second quarter of 1995.
Excluding the favorable effects of foreign currency exchange rates,
revenues declined 3%. Operating profit decreased significantly in
1996 compared with 1995. These results reflect a general weakness
in the European economies as well as the company's deliberate
investment in restaging its European operations, which began last
spring. This restaging comprises a program to restore long-term
customer and revenue growth by reducing the number of mailings and
mail quantity, modifying promotional mailings and moderating the
rate of price increases. In addition, the company believes that
external factors such as the national and postal strikes in France
adversely affected the second quarter of 1996. These factors and
circumstances resulted in lower performance primarily in Books and
Home Entertainment Products and also in Reader's Digest magazine.
Higher paper costs also contributed to the operating profit decline.
Other Markets
Revenues in Other Markets increased from $117.1 to $125.4, or by 7%,
in the second quarter of 1996 compared with the second quarter of
1995. Excluding the unfavorable effects of foreign currency
exchange rates, revenues increased 16% due to higher sales in all
business segments, particularly Other Businesses and Books and Home
Entertainment Products. The revenue increase in Other Businesses
was due to the acquisition of QSP Canada. Within Books and Home
Entertainment Products, excluding the unfavorable effects of foreign
currency exchange rates, all product lines reported revenue
increases due primarily to a higher priced product mix. Music and
Video products performed particularly well this quarter compared to
the same period a year ago. Operating profit decreased in 1996
compared with 1995, due primarily to higher paper costs, investments
in new countries and the unfavorable effects of foreign currency
exchange rates.
Corporate Expense
Corporate expense increased to $17.2, compared with $16.4 in the
second quarter of 1995, principally due to the timing of certain
expenses.
Six-Month Period Ended December 31, 1995 Compared With Six-Month
Period Ended December 31, 1994
Revenues/Operating Profit
Worldwide revenues for the six-month period ended December 31, 1995
increased 5%, to $1,649.1 compared with the six-month period ended
December 31, 1994. Higher revenues in the United States and Other
Markets, along with the favorable effect of changes in foreign
currency exchange rates contributed to this increase. The segments
that were the primary contributors to this 5% increase were Books
and Home Entertainment Products and Other Businesses representing
approximately 3% and 1%, respectively.
Worldwide operating profit decreased 14% to $226.2 in the six-month
period ended December 31, 1995, compared with $262.5 for the same
period a year ago. This $36.3 decrease was primarily because of
approximately $32.0 in higher global paper and postage costs and
performance in the company's European operations, which were
partially offset by increased revenues and the favorable effect of
changes in foreign currency exchange rates.
Other Income, Net
Other income, net for the six-month period ended December 31, 1995
decreased to $7.9 compared with $13.2 a year ago. This decrease was
primarily because of lower interest income ($11.7 in 1996 compared
with $20.4 in 1995), partially offset by lower expense related to
losses on foreign exchange transactions and hedging activity ($4.0
in 1996 compared with $6.4 in 1995) and the gain on sale of short
term investments and certain securities ($3.6 in 1996 compared with
$1.4 in 1995).
Income Taxes
The company reduced its overall effective tax rate to 36.5% in
fiscal 1996 from 37.5% in 1995. This decrease was attributable to a
favorable settlement relating to prior years. The company
anticipates that, excluding the effect of the third quarter charge,
the effective tax rate will remain at 36.5% for the remainder of the
year. The third quarter charge is expected to result in a higher
effective tax rate.
Earnings Per Share
Earnings per share declined 10% to $1.37 for the six-month period
ended December 31, 1995, compared with $1.52 for the same period in
1994. The decline in earnings per share was lower than the decline
in net income due to the reduction in outstanding shares under the
company's share repurchase program.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine increased 3%, to $367.7, for
the six-month period ended December 31, 1995 from $358.5 for the six-
month period ended December 31, 1994. This increase was due to
increases in advertising and circulation revenue. The increase in
advertising revenues was attributable to increased advertising pages
and rates primarily in the United States. Circulation revenue
benefited from the favorable effect of changes in foreign currency
exchange rates. Operating profit for Reader's Digest Magazine
decreased significantly compared with the same period a year ago.
The effect of higher revenues was more than offset by higher paper
and postage costs and increased promotional spending to retain high-
quality subscribers who purchase the company's other products.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products increased 5%, to
$1,108.4, for the six-month period ended December 31, 1995 from
$1,058.2 for the six-month period ended December 31, 1994. Excluding
the effect of changes in foreign currency exchange rates, revenues
increased 2% compared with the prior year. This increase was
primarily due to increased unit sales in the United States.
Notably, global revenues for series books, music and video products
reported healthy gains, partially offset by lower revenues for
general books. Operating profit for Books and Home Entertainment
Products decreased in 1996 compared with 1995 principally due to
performance in Europe.
Special Interest Magazines
Revenues for Special Interest Magazines increased 6%, to $45.8 for
the six-month period ended December 31, 1995 from $43.4 for the same
period a year ago. This increase was primarily attributable to an
increase in circulation volume and rate. The operating loss
decreased in 1996 compared with 1995 due to the increase in revenues
which more than offset higher paper and postage costs.
Geographic Areas
United States
Revenues in the United States increased from $624.0 to $692.0, or by
11%, in 1996 compared with 1995 of which approximately 8% was
attributable to Books and Home Entertainment Products. Within Books
and Home Entertainment Products, all product lines reported revenue
increases. The decrease in operating profit in 1996 compared with
1995 was due to higher paper and postage costs, partially offset by
higher revenues.
Europe
Revenues in Europe were relatively flat ($728.6 in 1996 compared
with $726.6 in 1995). Excluding the favorable effects of foreign
currency exchange rates, revenues declined 6%. Operating profit
decreased significantly in 1996 compared with 1995. These decreases
were due primarily to lower performance in Books and Home
Entertainment Products and also in Reader's Digest magazine. Higher
paper costs also contributed to the operating profit decline.
Other Markets
Revenues in Other Markets increased from $215.8 to $228.5, or by 6%,
in 1996 compared with 1995. Excluding the unfavorable effects of
foreign exchange, revenues increased 14% primarily due to sales of
Books and Home Entertainment Products, most notably music products.
Also contributing to this increase was Other Businesses due to the
acquisition of QSP Canada. Operating profit decreased in 1996
compared with 1995. The decrease in operating profit was primarily
attributable to higher paper costs, investments in new countries and
the unfavorable effects of foreign currency exchange rates,
partially offset by the increase in revenues.
Corporate Expense
Corporate expense decreased to $28.9, compared with $33.1 for the
six-month period ended December 31, 1995, due to the timing of
certain expenses and a reduction in outside consulting fees.
Forward-Looking Information
As mentioned above, in January 1996 the company announced a plan to
realign and streamline its operations and processes and better
position itself to achieve its strategic growth objectives. The
savings from these actions will help fuel investment in the
company's long term growth initiatives and is not expected to
enhance earnings in fiscal 1996 or 1997.
The company previously reported that it will incur about $50.0 in
higher paper and postage costs in fiscal 1996. The company
continues to develop new ways to offset part of these higher costs
through a combination of prudent pricing and productivity
improvements. The company has elected not to fully and immediately
pass these increases on to its customers through higher prices.
Higher paper and postage costs and increased investment spending are
expected to affect results through the remainder of fiscal 1996.
The company has implemented a program to restore customer and
revenue growth in Europe by reducing the number of mailings and mail
quantity, modifying its promotional mailings and moderating the rate
of price increases. The company's strategic actions are expected to
provide initial benefits, in the form of improving customer response
rates, by the end of fiscal 1996, with improved financial results
in fiscal 1997. Excluding the third quarter charge, and contingent
on Europe's progress, the company expects earnings per share will
be up for the full year fiscal 1996 as compared with 1995. Performance
in the European group is subject to a number of significant variables
and as it is the company's largest operating group, overall
company earnings per share for full year fiscal 1996 are contingent
on this group's progress.
The company seeks to maximize total long-term return to shareholders
and believes that through a combination of investment in existing
businesses and new strategic ventures and alliances it will be able
to achieve double digit earnings per share growth over the long
term.
This section contains forward looking statements. Actual events and
financial results in both the short and long term could differ in
material respects from the events and financial results described
above. Factors that may cause events or results to differ include
the level and rate of progress in the company's program to improve
results in its European business, 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 in
Europe is in turn dependent on factors such as the effectiveness of
the company's marketing strategies to improve customer response
rates, and general economic conditions.
Liquidity and Capital Resources
December 31, 1995 Compared With June 30, 1995
Cash and cash equivalents, short-term investments and marketable
securities decreased $183.2 to $348.9 at December 31, 1995. The
decrease results from dividend payments of $92.4, the repurchase of
Class A nonvoting common stock, at a cost of $42.3, and cash used by
operations of $21.5. In addition, the Company also expended $40.8
for investments in strategic alliances and capital expenditures.
Unrealized gains on short-term investments and marketable securities
were $7.1 and $8.1 at December 31 and June 30, 1995, respectively.
In the second quarter of fiscal 1996, the company paid a $0.45 per
share dividend on its common stock, representing a 13% increase,
compared with $0.40 per share a year ago. At the current rate, the
company will pay a total dividend of $1.75 per share in fiscal 1996
compared with $1.55 in fiscal 1995.
The company repurchased 0.9 shares of Class A nonvoting common stock
in fiscal 1996. The company has repurchased approximately 14.5
shares, through December 31, 1995, since its first program was
announced in February 1992.
The company believes that its liquidity, capital resources and cash
flow are sufficient to fund normal capital expenditures, working
capital requirements, the payment of dividends and the company's
share repurchase program. The company also believes its liquidity,
capital resources and cash flow are sufficient to finance present
plans to expand existing product lines in existing markets, to
identify and develop new products and markets and to enter into
strategic alliances and make small acquisitions.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.22 Agreement dated as of November 14, 1995
between the registrant and an executive officer.
[4 pages] [Management contract or compensatory plan.]
27 Financial Data Schedule. [1 page]
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Reader's Digest
Association, Inc.
(Registrant)
Date: February 13, 1996 By: Stephen R. Wilson
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
George S. Scimone
George S. Scimone
Vice President and Controller
Chief Accounting Officer
EXHIBIT INDEX
Exhibit Page
10.22 Agreement dated as of November 14, 1995 between
the registrant and an executive officer. 16
27 Financial Data Schedule 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the quarter ended December 31,
1996.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 156000
<SECURITIES> 88200
<RECEIVABLES> 902100
<ALLOWANCES> 234000
<INVENTORY> 225700
<CURRENT-ASSETS> 1385900
<PP&E> 609300
<DEPRECIATION> 350600
<TOTAL-ASSETS> 2121000
<CURRENT-LIABILITIES> 1177200
<BONDS> 0
<COMMON> 800
0
28800
<OTHER-SE> 640900
<TOTAL-LIABILITY-AND-EQUITY> 2121000
<SALES> 1649100
<TOTAL-REVENUES> 1649100
<CGS> 563300
<TOTAL-COSTS> 563300
<OTHER-EXPENSES> 859600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1700
<INCOME-PRETAX> 234100
<INCOME-TAX> 85400
<INCOME-CONTINUING> 148700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148700
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
November 14, 1995
Mr. Joseph M. Grecky
13 Pelham Lane
Ridgefield, Connecticut 06877
Dear Joe:
This letter serves to confirm payments and benefits and the
terms thereof relating to your separation from The Reader's
Digest Association, Inc. (the "Company") which will become
effective June 30, 1996, subject to the terms set forth below.
1. You will remain in your position as Senior Vice
President, Human Resources of the Company until such time as the
Company determines, continue to perform your duties in accordance
with the Company's policies and continue to participate in all
Company benefits. You will remain on the payroll and receive
your bi-weekly salary payment until your separation on June 30,
1996. Upon the Company's determination, you will be relieved of
your responsibilities as Senior Vice President and will
immediately execute letter of resignations of such offices of the
Company and its affiliates as required by the Company.
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, but in
no event less than twelve (12) months base pay - in your case,
twelve (12) months. You will also be eligible to receive as
severance pay an additional twelve (12) months base salary. For
purposes of this Agreement, your base salary is $293,000. The
aggregate amount of severance payable (i.e., twenty-four (24)
months) shall be paid in 52 equal installments on a bi-weekly
basis commencing July 1, 1996 through June 30, 1998 ("Severance
Period"). You will also be eligible to receive, as additional
severance pay during the Severance Period, an amount equivalent
to two (2) years of your Fiscal 1996 Target Award under The
Reader's Digest Association, Inc. Management Incentive Plan - in
your case, an amount totaling $314,000, payable during the
Severance Period; the Company will make one payment of $157,000
no earlier than September 1, 1996 and no later than December 31,
1996 and a second payment of $157,000 between January 1, 1997 and
December 31, 1997. As you have requested, both of these payments
will be deferred as if they had been made under the terms and
conditions of the Company's Deferred Compensation Plan. You will
also receive, on or around September 1996, an amount equal to one
hundred percent (100%) of your target bonus ($157,000) for Fiscal
Year 1996 under the Management Incentive Award.
As a condition to eligibility for all of the payments
set forth in paragraph 2 of this Agreement, you must sign the
General Waiver and Release of Claims Form, repay any outstanding
advances or loans due the Company and return all Company
property. No payment will be made until at least seven (7) days
have elapsed following the Company's receipt of your signed
General Waiver and Release of Claims Form. Additional
information regarding the General Waiver and Release of Claims
Form and other severance procedures is attached to this letter.
3. Pursuant to the terms of The Reader's Digest
Association, Inc. Key Employee Long Term Incentive Plans ("Key
Employee Plans"), you will receive one hundred percent (100%) of
the value of the Performance Units awarded for Fiscal Years 1994-
96 (150,000 units), for Fiscal Years 1995-97 (160,000 units) and
for Fiscal Years 1996-98 (200,000 units). Payment will be made
at the time all awards are made under the Key Employee Plans.
Payment of each of these amounts is conditioned upon your
execution of the General Waiver and Release of Claims Form.
4. Pursuant to the Severance Plan, provided you execute
the General Waiver and Release of Claims Form, 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"), the Excess Benefit
Retirement Plan of The Reader's Digest Association, Inc. and
Executive 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 and all base salary and deferred payments
described in paragraph 2 of the Agreement. In addition, the
Severance Period shall be considered to be additional age and
credited service for all purposes (including vesting) under the
Executive Retirement Plan. Such amount shall be paid by the
Company consistent with the terms of the Severance Plan.
Commencing 15 years after you commence benefits under
the Executive Retirement Plan, the Company will increase your
annual retirement benefits under the Executive Retirement Plan by
the amount the Executive Retirement Plan payment has been reduced
for the Company's payments under the SRBA, subject to and in
accordance with the Executive Retirement Plan.
5. Your medical and/or dental coverage will continue
through June 30, 1996. Pursuant to the Severance Plan, effective
July 1, 1996, provided you execute the General Waiver and Release
of Claims Form, you will be entitled to continued participation
in the Company's medical, dental and group term insurance plans
for the duration of your severance payments (until June 30,
1998), 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 payments. You are
eligible for benefits under COBRA (see attached information) for
eighteen (18) months following your termination (commencing July
1, 1996). You must make your election regarding COBRA within
sixty (60) days of June 30, 1996. Since you are eligible to
continue to receive medical and/or dental benefits under this
Agreement for the Severance Period, you may choose, of course,
not to receive COBRA benefits. Pursuant to the terms of the
Severance Plan, effective July 1, 1998, provided you execute the
General Waiver and Release of Claims Form, you will be entitled
to retiree medical and/or dental benefits substantially similar
to those available to retirees under The Reader's Digest
Associaiton, Inc. Retiree Medical and Dental Expense Plan.
6. Provided you execute the General Waiver and Release of
Claims Form, pursuant to the Severance Plan, you are eligible for
outplacement counseling services for a period of up to one (1)
year or reimburse you for clerical/secretarial services in an
amount not to exceed $20,000. Please let me know if you are
desirous of such services, which will be available to you until
the end of the Severance Period.
7. Provided you execute the General Waiver and Release of
Claims Form, you will continue to receive financial counseling
services until June 30, 1998, under the identical circumstances
and terms as currently provided to you.
8. Provided you execute the General Waiver and Release of
Claims Form, the Company will pay for all regular and usual
membership dues and assessments of the Union League Club until
June 30, 1998.
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 June 30, 1996.
10. You will be eligible for a contribution to The Reader's
Digest Association, Inc. Employees Profit-Sharing Plan ("Profit
Sharing Plan") and the Company's Profit Sharing Benefit
Restoration Plan, both for Plan Year 1996 (based upon your 1996
Plan Year earnings). Your account will be settled on or around
September, 1996, based on a June 30, 1996 valuation. All of the
preceding is subject to the precise terms of those plans, as are
requirements regarding repayment of any outstanding loans to the
Profit Sharing Plan.
Provided you execute the General Waiver and Release of
Claims Form, the Company will make cash payments to you in
amounts that would have been contributed to your account under
the Profit Sharing Plan and the Company's Profit Sharing Benefit
Restoration Plan had you been a participant in these plans
through June 30, 1998, based upon the severance payments (base
salary equivalent only) made to you pursuant to paragraph 2 of
this Agreement. The payments shall be made promptly after the
contributions, if any, in respect of the Fiscal Years ending June
30, 1997 and 1998 are made to the Profit Sharing Plan.
11. Your currently outstanding stock options (a) will
continue to be exercisable and will continue to vest until June
30, 1998 in accordance with all of the other terms of the
applicable stock option grant and the Key Employee Plans, and (b)
will vest on July 1, 1998 and continue to be exercisable
thereafter as if your employment terminated on that date by
reason of Retirement (as defined in the Key Employee Plans).
12. You are also eligible to receive benefits under your
Supplemental Retirement Benefit Agreement executed on August 25,
1988 ("SRBA"), subject to and in accordance with the SRBA's
terms.
13. Any amounts that you have deferred under The Reader's
Digest Association, Inc. Deferred Compensation Plan will be paid
to you under the terms of that plan; provided, however, the
Severance Period shall be considered as part of your employment
period for purposes of this plan.
14. 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.
15. In case of your death while any amounts are still due
or payable to you under this Agreement or any other applicable
plans, the Company shall pay all such amounts to your designated
beneficiary or, if none has been designated, to your estate.
Please let me know if you need additional information
regarding your benefits under the Profit Sharing Plan, The
Reader's Digest Employee Stock Purchase Plan, Group Universal
Life Insurance, SRBA, RDA Retirement Plan, Excess Benefit
Retirement Plan and Executive Retirement Plan.
The Company expects that you will continue to adhere to all
of the Company's policies, practices and procedures, 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."
Joe, please indicate your acceptance of these arrangement by
signing and dating the letter below and returning a copy of the
letter and executed General Waiver and Release of Claims Form to
me no later than November 30, 1995. 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, supersede
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.
Very truly yours,
Paul A. Soden
Agreed to and Accepted as of , 1995
Joseph M. Grecky
Date
Attachments: SEVERANCE PROCEDURES
GENERAL WAIVER AND RELEASE OF CLAIMS FORM
SEVERANCE PLAN FOR SENIOR MANAGEMENT
COBRA INFORMATION
