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 March 31, 1997
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.
incorporation or organization) Employer
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 April 30, 1997, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 84,489,263 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
Index to Form 10-Q
March 31, 1997
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 nine-month periods ended March 31,
1997 and 1996 3
Consolidated Condensed Balance Sheets
as of March 31, 1997 and June 30, 1996 4
Consolidated Condensed Statements of Cash Flows
for the nine-month periods ended March 31, 1997 and 1996 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 14
<TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and nine-month periods ended March 31, 1997 and 1996
(In millions, except per share data)
(unaudited)
Three-month period ended Nine-month period ended
March 31, March 31,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
Revenues $ 684.3 $ 747.5 $ 2,202.9 $ 2,396.6
Product, distribution
and editorial expense 237.5 258.2 756.6 821.5
Promotion, marketing
and administrative 395.3 414.8 1,215.6 1,274.4
expense
Other operating items -- 245.0 -- 245.0
Operating profit (loss) 51.5 (170.5) 230.7 55.7
Other income, net 7.7 8.5 15.4 16.4
Income (loss) before
provision for income 59.2 (162.0) 246.1 72.1
taxes
Provision (benefit)
for income taxes 21.6 (48.0) 89.8 37.4
Net income (loss) 37.6 (114.0) 156.3 34.7
Earnings (loss) per share 0.35 (1.06) 1.45 0.31
Average common shares
outstanding 106.2 107.9 106.8 107.9
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 1997 and June 30, 1996
(In millions)
(unaudited)
March 31, June 30,
1997 1996
<C> <S> <S>
Assets
Cash and cash equivalents $ 192.0 $ 258.1
Short-term investments 5.9 18.9
Receivables, net 506.9 412.4
Inventories 202.6 204.4
Prepaid expenses and other current assets 267.1 310.3
Total current assets 1,174.5 1,204.1
Marketable securities 30.0 97.2
Property, plant and equipment, net 242.6 261.5
Other noncurrent assets 338.1 341.3
Total assets $1,785.2 $1,904.1
Liabilities and stockholders' equity
Accounts payable 171.2 216.0
Accrued expenses 389.7 457.3
Income taxes payable 57.2 67.3
Unearned revenue 398.7 354.9
Other current liabilities 20.8 17.5
Total current liabilities 1,037.6 1,113.0
Other noncurrent liabilities 327.6 312.2
Total liabilities 1,365.2 1,425.2
Capital stock 28.9 28.4
Paid-in capital 141.3 138.3
Retained earnings 995.0 984.0
Foreign currency translation adjustment (27.3) (14.2)
Net unrealized losses on certain (0.4) (1.3)
investments
Treasury stock, at cost (717.5) (656.3)
Total stockholders' equity 420.0 478.9
Total liabilities and stockholders' equity $1,785.2 $1,904.1
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine-month periods ended March 31, 1997 and 1996
(In millions)
(unaudited)
Nine-month period
ended
March 31,
1997 1996
<C> <S> <S>
Cash flows from operating activities
Net income $ 156.3 $ 34.7
Depreciation and amortization 34.4 35.7
Other, net (118.6) 31.5
Net change in cash due to operating 72.1 101.9
activities
Cash flows from investing activities
Proceeds from maturities and sales of
short-term investments and marketable 119.1 343.0
securities
Purchases of short-term investments and (31.3) (193.6)
marketable securities
Other, net (23.8) (53.8)
Net change in cash due to investing 64.0 95.6
activities
Cash flows from financing activities
Dividends paid (145.3) (141.2)
Common stock repurchased (66.3) (45.5)
Other, net 15.3 24.3
Net change in cash due to financing (196.3) (162.4)
activities
Effect of exchange rate changes on cash (5.9) (1.4)
Net change in cash and cash equivalents (66.1) 33.7
Cash and cash equivalents at beginning of 258.1 214.6
period
Cash and cash equivalents at end of period 192.0 248.3
See accompanying notes to consolidated condensed financial statements.
</TABLE>
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended March 31, 1997 and 1996 are the third fiscal
quarters of fiscal year 1997 and fiscal year 1996, respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting principles
applying certain judgments and estimates which include all
adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information. Operating
results for any interim period are not necessarily indicative of the
results for an entire year due to the seasonality of the company's
business.
Certain prior year amounts in the company's consolidated condensed
financial statements have been reclassified to conform with the
current year's presentation.
(2) Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing net income (loss),
less preferred stock dividend requirements, of $0.3 in each of the
three-month periods ended March 31, 1997 and 1996 and $1.0 in each
of the nine-month periods ended March 31, 1997 and 1996 by the
weighted average number of common shares outstanding during the
period.
(3) Inventories
March 31, June 30,
1997 1996
Raw materials $ 14.5 $ 33.0
Work-in progress 25.7 19.9
Finished goods 162.4 151.5
$ 202.6 $ 204.4
(4) Revenues by Business Segments and Geographic Areas
<TABLE>
Three-month period Nine-month period
ended ended
March 31, March 31,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 178.3 $ 181.0 $ 540.8 $ 548.7
Books and Home 461.1 520.2 1,449.3 1,628.6
Entertainment Products
Special Interest Magazines 17.8 22.8 55.5 68.6
Other Businesses 27.1 23.5 157.3 150.7
Total revenues $ 684.3 $ 747.5 $2,202.9 $2,396.6
GEOGRAPHIC AREAS
United States $ 308.8 $ 316.7 $ 974.6 $1,008.7
Europe 276.6 328.7 906.2 1,057.3
Pacific and Other Markets 98.9 102.1 322.1 330.6
Total revenues $ 684.3 $ 747.5 $2,202.9 $2,396.6
</TABLE>
(5) Other Operating Items
As described in Note 2 to the company's consolidated financial
statements included in its 1996 Annual Report to Stockholders, the
company recorded a charge relating primarily to streamlining of the
company's organizational structure and the strategic repositioning of
certain businesses in the third quarter of 1996. The components of
this charge, as well as reserve balances remaining at March 31, 1997,
were:
Total
Charged Activity Remaining
Employee retirement & $104.4 $ 53.3 $ 51.1
severance benefits
Other items 51.5 36.9 14.6
Business repositioning 48.1 47.2 0.9
Total $204.0 $137.4 $ 66.6
(6) Debt
The company entered into a Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 with a syndicate of
domestic and foreign banks (the credit agreement). The credit
agreement, which has a term of five years, permits competitive advance
and revolving credit borrowings of up to $400 by the company and its
designated subsidiaries. Interest rates can be based on: the prime
rate, the federal funds rate, the London Interbank Offered Rate
(LIBOR), and money market rates. The proceeds of the borrowings are
to be used for general corporate purposes, including acquisitions,
share repurchases and commercial paper backup. The credit agreement
contains certain restrictions on incurrence of debt, liens and
guarantees of indebtedness. The company must also comply with certain
financial covenants, including a calculation of consolidated tangible
net worth. Borrowings may be denominated in U.S. Dollars and various
foreign currencies. At March 31, 1997, there were no borrowings
outstanding under the credit agreement.
(7) Subsequent Event
In April 1997, the company announced a program to invest up to $400
over the next four years primarily in more aggressive publishing and
promotion initiatives. In conjunction with the implementation of this
plan, the company expects to record fourth quarter charges of up to
$100 for the realignment of certain business processes and operations.
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Results of Operations
Three-Month Period Ended March 31, 1997 Compared With Three-Month
Period Ended March 31, 1996
Worldwide revenues for the third quarter of 1997 decreased to
$684.3, or by 8%, compared with $747.5 in the third quarter of 1996.
Excluding the adverse effect of changes in foreign currency exchange
rates, revenues decreased 7%. Revenues declined in all geographic
areas, particularly in the company's European operations. The
decrease in revenues was predominantly due to lower unit sales,
lower-priced product offerings and sales of a lower-priced product
mix in Books and Home Entertainment Products. Tactical
implementation of many simultaneous strategic initiatives, including
varying the quantity and frequency of promotional mailings,
moderating product pricing and introducing greater promotion variety
and less aggressive sweepstakes, along with more product-focused
offers, also contributed to lower worldwide revenues in the third
quarter of 1997. The company reported worldwide operating profit of
$51.5 in the third quarter of 1997, compared with an operating loss
of $170.5 in the third quarter of 1996. The 1996 operating loss
reflects charges for other operating items taken in the third
quarter of 1996 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. Excluding the effect of other operating items in 1996,
worldwide operating profit decreased by 31% in the third quarter of
1997 compared with the third quarter of 1996. These operating
results reflect lower than anticipated revenues and proportionately
higher related costs in Pacific and Other Markets, and the impact of
the company's strategic actions to restore long-term growth in
Europe, partially offset by the benefits of cost-containment
initiatives.
The company reported net income of $37.6, or $0.35 per share in the
third quarter of 1997, compared with a net loss of $114.0, or $1.06
per share in the third quarter of 1996. Excluding the effect of
other operating items, earnings per share was $0.51 in 1996.
Earnings per share declined 31% in 1997, compared with adjusted 1996
results.
Other Income, Net
Other income, net decreased in the third quarter of 1997 to $7.7,
compared with $8.5 in the prior year. This decrease was primarily
because of lower interest income, lower gains on sales of certain
investments and higher interest expense in 1997, which were
partially offset by higher gains on foreign exchange transactions
and hedging activity.
Income Taxes
The overall effective tax rate was 36.5% for the third quarter of
1997 and is expected to remain at this rate for the remainder of the
year. For the third quarter of 1996, the reported tax benefit was
at the rate of 29.7%. This rate included the tax benefit of other
operating items recorded in the third quarter of 1996. It also
included the re-estimation of the year-to-date effective tax rate,
excluding other operating items, downward by one percentage point to
35.5%. The lower effective rate in 1996 was primarily attributable
to favorable settlements relating to prior years.
Geographic Areas
United States
Revenues in the United States decreased from $316.7 in 1996 to
$308.8, or by 2%, in 1997. This decrease was primarily attributable
to the exclusion of revenues due to the sale of Travel Holiday
magazine in the third quarter of 1996. Also, in 1997, Books and
Home Entertainment Products revenues declined slightly due to lower
unit sales, which were partially offset by a higher-priced product
mix. Within Books and Home Entertainment Products, declines in
Condensed Books and video products revenues were partially offset by
increased general books sales. The higher general books revenues
were primarily attributable to a more popular product offered in
1997. The declines in Condensed Books and video products were
caused by lower Condensed Book membership and lower customer
response to promotional mailings. Operating profit increased in
1997 compared with 1996 due to the benefit of cost-containment
initiatives.
Europe
Revenues in Europe decreased from $328.7 in 1996 to $276.6, or by
16%, in 1997. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 12%. The revenue
decrease was primarily due to lower-priced product offerings and
sales of a lower-priced product mix and, to a lesser extent, lower
unit sales of Books and Home Entertainment Products. Within this
segment revenues declined in all product lines except video
products. Operating profit decreased significantly in 1997 compared
with 1996 as a result of the revenue decrease, which was partially
offset by the benefit of lower product returns and bad debts as well
as the continued successful implementation of cost-containment
initiatives. Current year results were also impacted by the
company's ongoing actions to restore long-term growth in this region
and the continuing general weakness in European economies. These
actions include the selective reduction of the number of promotional
mailings and mail quantity in a given mailing, variation of
promotional formats and moderation of product prices.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $102.1 in 1996
to $98.9, or by 3%, in 1997. Lower Books and Home Entertainment
Products revenues were partially offset by increased Reader's Digest
magazine circulation revenues in new countries. Within Books and
Home Entertainment Products, the decline in revenues was due to
lower unit sales across most product lines. Higher revenues in
Latin America, reflecting product expansion in Brazil and Argentina,
were more than offset by significant revenue declines in Australia,
because of lower customer response to promotional mailings, and
South Africa, because of substantially lower mail quantities and
customer response rates. Operating results declined significantly
in 1997 compared with 1996, primarily because of lower than expected
revenues, higher proportionate promotional spending and continuing
investments in new country expansion.
Corporate Expense
Corporate expense in 1997 decreased to $8.2, compared with $10.0 in
1996, due principally to the benefit of cost-containment
initiatives.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $181.0 in 1996
to $178.3, or by 1%, in 1997. Circulation and advertising revenues
were about even quarter-over-quarter excluding the adverse effect of
changes in foreign currency exchange rates. Circulation declines in
several European countries were offset by increased circulation
levels in Latin America, Eastern Europe and Thailand. A lower
number of advertising pages in Europe were offset by higher pages in
the United States and Pacific and Other Markets. Circulation
declines in certain European markets, including the company's major
markets, and the decline of print advertising's share of the overall
European advertising market negatively impacted advertising revenue.
Operating profit for Reader's Digest Magazine decreased
significantly in the third quarter of 1997 compared with the same
period a year ago. The decrease reflects increased promotional
spending and investments in new countries, as well as lower
revenues.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$520.2 in 1996 to $461.1, or by 11%, in 1997, principally
attributable to the company's European operations. All product
lines reported lower revenues, predominantly due to lower unit sales
and, to a lesser extent, lower-priced product offerings and sales of
a lower-priced product mix. Tactical implementation of many
simultaneous strategic initiatives, including varying the quantity
and frequency of promotional mailings, moderating product pricing
and introducing greater promotion variety and less aggressive
sweepstakes, along with more product-focused offers, contributed to
lower revenues in the third quarter of 1997. Operating profit for
Books and Home Entertainment Products decreased significantly in
1997 compared with 1996. These operating results were affected by
lower than anticipated responses to promotional mailings and
increased promotional spending in Pacific and Other Markets, and the
impact of the company's strategic actions to restore long-term
growth in Europe.
Special Interest Magazines
Revenues for Special Interest Magazines decreased from $22.8 in 1996
to $17.8, or by 22%, in 1997. This decrease was primarily
attributable to the exclusion of revenues due to the sale of Travel
Holiday in the third quarter of 1996. Excluding prior year revenues
from Travel Holiday, revenues increased 11% due almost equally to
increased circulation and advertising revenues. The increase in
circulation revenues reflects higher average subscription prices,
while the increase in advertising revenues is a result of increased
advertising pages. Excluding prior year operating results for
Travel Holiday, operating performance improved in 1997 compared with
1996 primarily as a result of the higher revenues.
Nine-Month Period Ended March 31, 1997 Compared With Nine-Month
Period Ended March 31, 1996
Worldwide revenues for the nine-month period ended March 31, 1997
decreased to $2,202.9, or by 8%, compared with $2,396.6 for the nine-
month period ended March 31, 1996. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 7%.
Revenues declined in all geographic areas, particularly in the
company's European operations. The decrease in revenues was
predominantly due to lower unit sales and, to a lesser extent, lower-
priced product offerings and sales of a lower-priced product mix in
Books and Home Entertainment Products. Tactical implementation of
many simultaneous strategic initiatives, including varying the
quantity and frequency of promotional mailings, moderating product
pricing and introducing greater promotion variety and less
aggressive sweepstakes, along with more product-focused offers, also
contributed to lower worldwide revenues in 1997. Worldwide
operating profit increased to $230.7 in the nine-month period ended
March 31, 1997, compared with $55.7 in the nine-month period ended
March 31, 1996. The 1996 results reflect charges for other
operating items taken in the third quarter of 1996 of $245.0 ($169.8
after tax, or $1.57 per share). Excluding the effect of other
operating items in 1996, worldwide operating profit decreased by 23%
in the nine-month period ended March 31, 1997, compared with the
same period a year ago. These operating results reflect the impact
of the company's strategic actions to restore long-term growth in
Europe and higher proportionate costs in Pacific and Other Markets,
partially offset by the benefits of cost-containment initiatives.
The company reported net income of $156.3, or $1.45 per share in the
nine-month period ended March 31, 1997, compared with $34.7, or
$0.31 per share in the nine-month period ended March 31, 1996.
Excluding the effect of other operating items, earnings per share
was $1.89 in 1996. Earnings per share declined 23% in 1997,
compared with adjusted 1996 results.
Other Income, Net
Other income, net for the nine-month period ended March 31, 1997
decreased to $15.4, compared with $16.4 a year ago. This decrease
was primarily because of lower interest income and higher interest
expense in 1997, which were partially offset by higher gains on
foreign exchange transactions and hedging activity.
Income Taxes
The overall effective tax rate for nine-month period ended March 31,
1997 was 36.5%, and is expected to remain at this rate for the
remainder of the year, compared with a reported rate of 51.8% for
the nine-month period ended March 31, 1996. Excluding the effect of
other operating items, the effective tax rate was 35.5% for the nine-
month period ended March 31, 1996. The lower effective rate in 1996
was primarily attributable to favorable settlements relating to
prior years.
Geographic Areas
United States
Revenues in the United States decreased from $1,008.7 in 1996 to
$974.6, or by 3%, in 1997. This decrease was primarily attributable
to lower unit sales in Books and Home Entertainment Products.
Revenues were also adversely affected by the exclusion of revenues
due to the sale of Travel Holiday magazine in the third quarter of
1996. Within Books and Home Entertainment Products, the lower unit
sales were principally caused by declines in Condensed Books and
music products. The decrease in Condensed Books sales was caused by
lower customer response to promotional offers and lower membership
retention rates. Music products declined primarily due to lower
customer response to promotional mailings. Operating profit
decreased in 1997 compared with 1996 due to lower revenues and
timing of expenses partially offset by the benefit of cost-
containment initiatives.
Europe
Revenues in Europe decreased from $1,057.3 in 1996 to $906.2, or by
14%, in 1997. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 11%. The decrease in
revenues was primarily due to lower unit sales and, to a lesser
extent, lower-priced product offerings and sales of a lower-priced
product mix within Books and Home Entertainment Products. Operating
profit decreased significantly in 1997 compared with 1996. Current
year results were affected by the company's ongoing actions to
restore long-term growth in this region and the continuing general
weakness in European economies. These actions include the selective
reduction of the number of promotional mailings and mail quantity in
a given mailing, variation of promotional formats, and moderation of
product prices. The impact of these actions was partially offset by
the benefit of lower product returns and bad debts, and the
implementation of cost-containment initiatives.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $330.6 in 1996
to $322.1, or by 3%, in 1997. This decrease was caused by lower
Books and Home Entertainment Products revenues; however, increased
Reader's Digest magazine circulation revenues in new countries
offset more than one-half of this decline. Within Books and Home
Entertainment Products, the decline in revenues was due to lower-
priced product offerings and sales of a lower-priced product mix, as
well as lower unit sales in 1997. Higher revenues in Latin America,
reflecting product expansion in Argentina and Brazil, were offset
primarily by significant revenue declines in South Africa, because
of substantially lower mail quantities and customer response rates,
including the effect of promotional mailing variations, and in
Australia, due to lower customer response to promotional mailings.
Operating profit decreased significantly in 1997 compared with 1996,
primarily because of lower than expected revenues, higher
proportionate promotional spending, and continuing investments in
new country expansion.
Corporate Expense
Corporate expense in 1997 decreased to $32.7 compared with $38.9 in
1996 due principally to the benefit of cost-containment initiatives
and the timing of expenses.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $548.7 in 1996
to $540.8, or by 1%, in 1997. Circulation and advertising revenues
were about even year-over-year excluding the adverse effect of
changes in foreign currency exchange rates. Within advertising
revenues, higher advertising rates per page were offset by a lower
number of advertising pages sold. Increased circulation levels in
Latin America, Eastern Europe and Thailand were offset by
circulation declines in several European countries and the United
States. Operating profit for Reader's Digest Magazine decreased
significantly in the nine-month period ended March 31, 1997 compared
with the same period a year ago. The decrease reflects lower
revenues, increased promotional spending and investments in new
countries, partially offset by the benefit of cost-containment
initiatives.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$1,628.6 in 1996 to $1,449.3, or by 11% in 1997, principally
attributable to the company's European operations. Most product
lines reported significantly lower revenues, primarily due to lower
unit sales and, to a lesser extent, lower-priced product offerings
and sales of a lower-priced product mix. Tactical implementation of
many simultaneous strategic initiatives, including varying the
quantity and frequency of promotional mailings, moderating product
pricing and introducing greater promotion variety and less
aggressive sweepstakes, along with more product-focused offers,
contributed to lower revenues in 1997. Operating profit for Books
and Home Entertainment Products decreased significantly in 1997
compared with 1996. These operating results were affected by the
impact of the company's strategic actions to restore long-term
growth in Europe, lower than anticipated responses to promotional
mailings in Pacific and Other Markets, and lower customer response
to Condensed Books promotional mailings and lower membership
retention rates.
Special Interest Magazines
Revenues for Special Interest Magazines decreased from $68.6 in 1996
to $55.5, or by 19%, in 1997. This decrease was primarily
attributable to the exclusion of revenues due to the sale of Travel
Holiday in the third quarter of 1996. Excluding prior year revenues
from Travel Holiday, revenues increased 6% due primarily to higher
advertising revenues as a result of increased advertising pages
sold. Operating performance improved in 1997 compared with 1996
primarily reflecting the increase in advertising revenues.
Forward-Looking Information
The company has launched a program to invest up to $400 over four
years primarily in more aggressive publishing and promotion
initiatives. The majority of this spending will negatively impact
future operating results, particularly in fiscal 1998; however, in
fiscal 1999 and 2000 it is expected that operating results should
improve compared to 1998 as the effect of the spending will be
offset by the returns from these initiatives. The objective of the
plan is to stabilize the erosion of the company's customer base and
to grow the number and maximize the lifetime value of the company's
customers through the retention of existing customers and the
generation of new and younger customers. The plan also seeks to
expand the development of new products based upon the identification
of emerging consumer trends and interests, and to expand into
additional direct marketing selling channels. The plan comprises
various projects, including increased implementation of innovative
promotional programs, selective programs to improve price
competitiveness, and the continued upgrading and automation of the
infrastructure of the company. These initiatives are expected to
produce customer-driven revenue growth and increased shareholder
value over the long-term. The long-term goals of the investment
program are: percentage customer growth in the low single digits,
percentage revenue growth in the high single digits, and operating
profit growth and operating margins in a sustainable 10 percent
range.
As part of the strategy associated with the investment plan, the
company is internally shifting its focus away from the traditional
measure of performance -- earnings per share -- toward more value-
based measures, including: growth in number of customers, retention
of customers, conversion of customers to multi-product long-term
buyers, generation of new and younger customers, and growth in
revenues, operating profit and cash flows.
In conjunction with the implementation of the investment plan, the
company expects to record fourth quarter charges up to $100
primarily for the realignment of certain business processes and
operations. The company anticipates that full-year fiscal 1997
earnings per share will be in the range of $1.70, excluding any
fourth quarter charges, as a result of lower than expected responses
to many of the third quarter promotional mailings in most markets.
Continuing weakness of European economies has also contributed to
the recovery of these markets taking longer than previously
expected. Operating results for fiscal 1998 are expected to be
below 1997 levels, due to the continued effect of the foregoing
factors, the lack of customer- and revenue-led growth momentum in
the business and spending related to the investment plan.
The company's continuing strategy involves the tactical
implementation of many simultaneous initiatives which vary on a
country by country basis. Such initiatives include varying the
quantity and frequency of promotional mailings, moderating product
pricing, introducing greater promotion variety and less aggressive
sweepstakes, along with more product-focused offers. The company
has experienced lower response rates than anticipated to recent
promotional mailings and believes that these results have been
affected by the implementation of these initiatives. The company
believes these actions are essential to reducing customer fatigue,
attracting and retaining new customers and renewing long-term
customer satisfaction to build enduring value for shareholders. The
company will continue to refine its strategy as necessary.
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 stabilize and grow its customer base and improve
customer response rates, especially the impact of modified and
varied promotional formats on customer responses, the ability to
identify customer trends, the ability to expand into new channels of
distribution, the effectiveness of selective price reductions, the
cost and effectiveness of upgrading the automation of the company's
infrastructure, as well as the appeal of the company's mix of
products, the accuracy of management's assessment of the current
status of the company's business, the evolution of the company's
organizational and structural capabilities, and general economic
conditions.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and marketable
securities decreased $146.3 to $227.9 at March 31, 1997 compared
with June 30, 1996. The decrease was primarily due to dividend
payments of $145.3 and the repurchase of Class A nonvoting common
stock, at a cost of $66.3, exceeding cash provided by operations of
$72.1.
In both the third quarter of 1997 and 1996, the company paid a $0.45
per share dividend on its common stock. At the current rate, the
annualized dividend will be $1.80 per share in 1997 compared with
$1.75 in 1996.
In October 1996, the company's Board of Directors approved a program
to purchase up to 5.0 million shares of the company's Class A
nonvoting common stock. The company repurchased approximately 1.7
million shares of Class A nonvoting common stock in the nine-month
period ended March 31, 1997. From the announcement of its first
repurchase program in February 1992 through March 31, 1997, the
company has repurchased approximately 16.8 million shares of Class A
nonvoting common stock, leaving an authorized amount of
approximately 4.2 million shares remaining under the current
program.
The company entered into a Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 with a syndicate of
domestic and foreign banks (the credit agreement). The credit
agreement, which has a term of five years, permits competitive
advance and revolving credit borrowings of up to $400 by the company
and its designated subsidiaries. Interest rates can be based on:
the prime rate, the federal funds rate, the London Interbank Offered
Rate (LIBOR), and money market rates. The proceeds of the
borrowings are to be used for general corporate purposes, including
acquisitions, share repurchases and commercial paper backup. The
credit agreement contains certain restrictions on incurrence of
debt, liens and guarantees of indebtedness. The company must also
comply with certain financial covenants, including a calculation of
consolidated tangible net worth. There were no borrowings
outstanding under the credit agreement.
The company believes that its liquidity, capital resources, cash
flow and borrowing capacity are sufficient to fund normal capital
expenditures, working capital requirements, the payment of dividends
and the company's share repurchase program. The company also
believes its liquidity, capital resources, cash flow and borrowing
capacity are sufficient to finance present plans to expand existing
product lines in existing markets, to identify and develop new
products and markets and to enter into strategic alliances and make
small acquisitions.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule. [1 page]
(b) Reports on Form 8-K
The company filed a report on Form 8-K on March 31, 1997 which
included a copy of a press release advising that the company's
1997 third quarter and fiscal year earnings would be below market
expectations.
The company filed a report on Form 8-K on April 23, 1997 which
included a copy of a press release containing the company's
financial results for the quarter ended March 31, 1997, and a
copy of a press release announcing the company's $400 million
investment program.
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: May 12, 1997 By: /s/ Stephen R. Wilson
Stephen R. Wilson
Executive Vice President and
Chief Financial Officer
(and authorized signatory)
EXHIBIT INDEX
Exhibit Page
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Condensed Statement of Income and Consolidated Condensed
Balance Sheet for the nine-month period ended March 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 192,000
<SECURITIES> 5,900
<RECEIVABLES> 690,800
<ALLOWANCES> 183,900
<INVENTORY> 202,600
<CURRENT-ASSETS> 1,174,500
<PP&E> 602,900
<DEPRECIATION> 360,300
<TOTAL-ASSETS> 1,785,200
<CURRENT-LIABILITIES> 1,037,600
<BONDS> 0
<COMMON> 100
0
28,800
<OTHER-SE> 391,100
<TOTAL-LIABILITY-AND-EQUITY> 1,785,200
<SALES> 2,202,900
<TOTAL-REVENUES> 2,202,900
<CGS> 1,972,200
<TOTAL-COSTS> 1,972,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,600
<INCOME-PRETAX> 246,100
<INCOME-TAX> 89,800
<INCOME-CONTINUING> 156,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,300
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
</TABLE>
