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, 1997
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
Identificati
on 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 exchange
Title of each class on which registered
Class A Nonvoting Common Stock
par value $.01 per share New York Stock Exchange
Stock Class B Voting Common Stock New York Stock Exchange
par value $.01 per share
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 August 29, 1997,
was approximately $164,280,722 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 August 29, 1997, 84,605,586 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, 1997. 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 December 12, 1997. 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
Books and Home Entertainment Products 3
Condensed Books 3
Series Books 3
General Books 4
Music 4
Television and Video 4
Production and Fulfillment 5
Direct Marketing Operations 5
Management Information Systems and Customer List 7
Enhancement
Special Interest Magazines 7
QSP, Inc. 8
Competition and Trademarks 8
Employees 8
Executive Officers of the Company 9
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 11
HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 12
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS on Form 8-K 13
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.
For fiscal 1997, 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 16 to the Company's
consolidated financial statements appearing in the Company's
1997 Annual Report to Stockholders, which Note is
incorporated herein by reference.
In fiscal 1997, the Company's businesses were 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 operated the Company's school and youth group
fundraising business and focused on developing new products
and entering new marketing channels. For financial
information by geographic area, see Note 16 to the Company's
consolidated financial statements appearing in the
Company's 1997 Annual Report to Stockholders, which Note
is incorporated herein by reference.
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," "Life In These United States," "Humor In
Uniform," and "All In A Day's Work," and other
regular features, including "Heroes For Today," "It
Pays To Enrich Your Word Power," "News From The World Of
Medicine," "Tales Out of School," "Virtual Hilarity," and
"The Verbal Edge." DeWitt and Lila Wallace founded Reader's
Digest magazine in 1922. Today, Reader's Digest has a
worldwide circulation of almost 28 million and approximately
100 million readers each month, generating revenues of
$729.2 million in fiscal 1997, as compared with $739.8
million in fiscal 1996 and $732.9 million in fiscal 1995.
Reader's Digest is published in 48 editions and 19 languages,
including a Slovak language edition that began publication in
July 1997. In addition, a Korean edition, an Indian
edition, a braille edition and a recorded edition are
published by third parties pursuant to licenses.
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 95% 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.
Reader's Digest is truly a global magazine. Many of its
international editions have the largest paid circulation
for monthly 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
27.7 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 useof sweepstakes entries.
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
$558.9 million, or 77% of the total revenues of
Reader's Digest magazine, in the fiscal year ended June 30,
1997.
Advertising
In fiscal 1997, Reader's Digest carried 13,484
advertising pages: 1,075 advertising pages in its United
States--English language edition and 12,409 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
$170.3 million, or 23% of the total revenues of
Reader's Digest magazine, in the fiscal year ended June 30,
1997.
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 factcheck 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.
Production and Fulfillment
All editions of Reader's Digest are printed by
independent third parties. The United States edition is
printed exclusively by one printer in Pennsylvania under a
10-year contract that commenced 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."
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.
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."
Condensed Books
Reader's Digest Condensed Books is a continuing series
of condensed versions of current popular fiction.
Condensation reduces the length of an existing text, while
retaining the author's style, integrity and purpose. Today,
16 editions of Condensed Books, published in 13 languages,
are marketed in 24 countries. In fiscal 1997, Condensed
Books generated worldwide revenues of $305.0 million, as
compared with $370.4 million in fiscal 1996 and $392.1
million in fiscal 1995.
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.
Series Books
The Company markets two types of series books:
reading series and illustrated series. These book series may
be openended 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 1997, series books
generated worldwide revenues of $209.5 million, as compared
with $264.3 million in fiscal 1996 and $236.6 million in
fiscal 1995.
Reading series marketed in the United States include
Today's Best Nonfictionr, 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 10 countries in
three languages and The World's Best Reading is published in
eight 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, children's books and books on subjects such as
history, travel, religion, health, nature and the home.
General books are published in 16 languages and are
marketed in 37 countries. In fiscal 1997, general books
generated worldwide revenues of $675.9 million, as compared
with $753.5 million in fiscal 1996 and $808.7 million in fiscal
1995.
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 its books for
retail sale in stores, through third-party distributors.
The Company has entered into strategic alliances with
third parties, such as Meredith Corporation and Dove
Audio, Inc., giving the Company direct marketing rights with
respect to books and other products created by those parties
or jointly with those parties or bearing their brands.
Music
The Company publishes recorded music packages on
cassettes and compact discs, which it sells principally by
direct mail. 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 17,000selection 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 32 countries,
offering different music products in the various international
markets because of diverse tastes.
In fiscal 1997, music products generated worldwide
revenues of $404.2 million, as compared with $460.1 million
in fiscal 1996 and $435.9 million in fiscal 1995.
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 five Emmy
awards, and have appeared on the Disney Channel and the
Discovery Channel. The Company continues to expand its
video operations in the United States and in
international markets and is presently marketing video
products principally by direct mail in the United States and
30 other countries. Most of the Company's original programs
have been licensed to cable television networks. The
Company also sells its home video products through
retail establishments. In fiscal 1997, home video products
generated worldwide revenues of $243.5 million, as compared
with $241.3 million in fiscal 1996 and $218.7 million in
fiscal 1995.
In November 1995, the Company formed a strategic
alliance with the Public Broadcasting Service ("PBS") to
develop, acquire, create and distribute television series,
miniseries and specials for initial broadcast on PBS. 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 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."
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. 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
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 direct
response television, telemarketing and the Internet, as well
as expanded direct marketing channels, such as catalogs and
clubs. 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 two 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 new Company catalogs.
The Company is adapting the editorial content and
the marketing methods of its magazines and books and
home entertainment products to new technologies, such as
computer online services. In 1997, the Company launched
Reader's Digest World, a World Wide Web site for shopping and
information about the Company's products.
To promote the sale of its products in the United
States, the Company usually offers a sweepstakes in its
promotional mailings. Prizes totaled about $15 million for the
1997 edition 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 and most international markets, 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 over 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.
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.
Special Interest Magazines
The Company publishes several special interest
magazines that it deems consistent with its image, editorial
philosophy and market expertise. The Family Handymanr
magazine provides instructions and guidance for "do-it-
yourself" home improvement projects. New Choices: Living Even
Better After 50r magazine is aimed at active, mature
readers and provides information on entertainment, travel,
health and leisure time activities. American Health for
WomenTM magazine provides helpful information on medicine,
nutrition, psychology and fitness as those issues relate to
women. In 1997, the Company acquired Walkingr magazine,
which provides information on health and fitness for walking
enthusiasts. These magazines are sold by subscription and on
the newsstand. Like most magazines, the Company's special
interest magazines are highly dependent on advertising
revenue. Each of these magazines publishes 10 issues per
year, except Walking, which publishes six times per year.
The Company also publishes Moneywise magazine, a magazine
devoted to helping families manage their finances, in the
United Kingdom.
The following table sets forth the circulation rate base
of each of the Company's United States special interest
magazines at June 30, 1997, as well as the number of
advertising pages carried for the fiscal year ended June 30,
1997. Circulation rate base data is as reported to ABC.
Number of
Circulation Advertising
Rate Base Pages Carried
The Family Handyman 1,000,000 580
American Health for Women 900,000 461
New Choices: Living Even Better 600,000 486
After 50
Walking 625,000 327
Moneywise had a circulation rate base of 107,800 as of
the end of fiscal 1997 and carried 515 pages of advertising.
Of total revenues of $81.9 million for the Company's
special interest magazines in fiscal 1997, 61% was
generated by circulation revenues and 39% 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.
Competition and Trademarks
Although Reader's Digest magazine is a unique and
wellestablished 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, 1997, the Company employed
approximately 5,900 persons worldwide; approximately 2,200 were
employed in the United States and 3,700 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
George V. Grune (68) Mr. Grune returned to the Company to
serve as Chairman of the Board
and ChiefExecutive Officer on
August 10, 1997, after having
previously served as Chairman of
the Board of the Company until
his retirement in August 1995
and as Chief Executive Officer
until August 1994. Mr.Grune first
joined the Company in 1960.
Melvin R. Laird (75) 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.
M. John Bohane (61) Mr. Bohane has been Senior Vice
President of the Company and
President, International
Operations since September 8,
1997. He first joined the Company
in 1964 and served in a number of
executive capacities, including
President, Direct Marketing Group,
until leaving the Company in July
1991. Prior to rejoining the
Company, Mr. Bohane served as
President and Chief Executive
Officer of Newfield Publications
from April 1994 to July 1995 and
as Vice President of Corporate
Database Marketing of Time-Warner,
Inc., from April 1992 to December
1993.
Peter J.C. Davenport (57) Mr. Davenport has been Senior
Vice President, Global Marketing of
the Company since September 8,
1997. He served as Senior
Vice President, Global Direct
Marketing from January 1994
until his retirement in March
1997 and as Vice President,
Global Direct Marketing from
September 1991 to January 1994.
Mr.Davenport first joined the
Company in 1958.
Richard A. Garvey (49) Mr. Garvey has been Senior Vice
President,Corporate Planning and
New Business Development since
September 8, 1997 and was a Vice
President and Group President,
Global Marketing and New Channels
of the Company from the time he
joined the Company in September
1996. He was previously Vice
President, Marketing of LEGO
Systems, Inc. (children's
educational and entertainment
products).
Marcia M. Lefkowitz (53) Ms. Lefkowitz has been a
Senior Vice President and
President of Reader's Digest U.S.A.
since September 8, 1997.Prior
thereto, Ms. Lefkowitz served as
the Company's Senior Consultant
for Marketing and Marketing
Systems Projects from
November 1995, as Vice
President, Marketing, Reader's
Digest U.S.A. from July 1993,
Vice President, MarketingSystems
from February 1993 and Vice
President, Global New Business
Development prior thereto. Ms.
Lefkowitz joined the Company in
1967.
Barbara J. Morgan (52) 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.
George S. Scimone (50) Mr. Scimone has been Vice President
and Chief Financial Officer of
the Company since September 8,
1997. Prior thereto, he was a
Vice President and President,
Reader's Digest U.S.A. from
November 1996 and Vice
President and Corporate Controller
from September 1995. Prior to
joining the Company, Mr.Scimone
was Business Chief Financial
Officer, Electrical Distribution
and Control of General Electric
Company.
Christopher P. Willcox (50) Mr.Willcox has beenSenior 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 June1994
and Assistant Managing Editor
from 1990 to 1991. He joined the
Company in 1988.
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 totaling approximately 52,000 square feet 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,
and 21,000 square feet in Ridgefield, Connecticut.
The Company owns approximately 1,613,200 square feet
and leases approximately 531,000 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 207,000 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.
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, 1997.
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 1997 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
1997 Annual Report to Stockholders is incorporated herein by
reference.
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 1997
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 18 through 29 of the Company's 1997 Annual Report
to Stockholders, together with the report thereon of KPMG
Peat Marwick LLP appearing on page 30, 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 December 12, 1997 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 December 12,
1997 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
December 12, 1997 is incorporated herein by reference.
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
December 12, 1997 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 17 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.*
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.*
*Denotes a management contract or compensatory plan.
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 October 10, 1996).*
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, filed as Exhibit 10.15 to
the registrant's Form 10-K for the year ended June 30,
1996, is incorporated herein by reference.*
10.16 Agreement dated as of June 10, 1996 between the
registrant and Kenneth A. Gordon, filed as Exhibit 10.16
to the registrant's Form 10-K for the year ended June 30,
1996, is incorporated herein by reference.*
10.17 The Reader's Digest Association, Inc. Executive
Financial Counseling Plan, filed as Exhibit 10.17
to the registrant's Form 10-K for the year ended June
30, 1996, is incorporated herein by reference.*
*Denotes a management contract or compensatory 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.*
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.*
10.23 Termination Agreement dated as of April 1, 1996 between
the registrant and Martin J. Pearson, filed as Exhibit
10.24 to the registrant's Form 10-Q for the quarter ended
December 31, 1996, is incorporated herein by reference.*
10.24 Agreement dated June 18, 1997 between the registrant and
James P. Schadt.*
10.25 Agreement dated as of August 1, 1997 between the
registrant and Martin J. Pearson.*
10.26 Agreement dated August 10, 1997 between the registrant
and James P. Schadt.*
10.27 US$400,000 Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 between
the registrant, the Borrowing Subsidiaries, The Chase
Manhattan Bank and J.P. Morgan Securities Inc., filed as
Exhibit 10.23 to the registrant's Form 10-Q for the
quarter ended December 31, 1996, is incorporated herein by
reference.
13 Financial information appearing at pages 12 through 31
of the registrant's 1997 Annual Report to
Stockholders, together with the report thereon of KPMG
Peat Marwick LLP appearing on page 30 (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.
*Denotes a management contract or compensatory plan.
(b) Reports on Form 8-K
During the three months ended June 30, 1997, the
Company filed the following report on Form 8-K:
Form 8-K dated April 23, 1997 containing a copy of
the Company's quarterly earnings news release for the
third fiscal quarter and a copy of the Company's news
release announcing its $400 million investment program
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: George V. Grune
(George V. Grune)
Chairman and Chief Executive Officer
Date: September 25, 1997
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
George V. Grune Chairman and Chief September 25, 1997
(George V. Grune) Executive Officer
and Director
Melvin R. Laird Vice President and September 25, 1997
(Melvin R. Laird) Senior Counsellor
and Director
George S. Scimone Vice President and September 25, 1997
(George S. Scimone) Chief Financial
Officer
John S. Gross Vice President and September 25, 1997
(John S. Gross) Controller
(Chief Accounting
Officer)
Lynne V. Cheney Director September 25, 1997
(Lynne V. Cheney)
M. Christine DeVita Director September 25, 1997
(M.Christine DeVita)
James E. Preston Director September 25, 1997
(James E. Preston)
Robert G. Schwartz Director September 25,1 997
(Robert G. Schwartz)
Walter V. Shipley Director September 25, 1997
(Walter V. Shipley)
C.J. Silas Director September 25, 1997
(C.J. Silas)
William J. White Director September 25, 1997
(William J. White)
THE READER'S DIGEST ASSOCIATION, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of KPMG Peat Marwick LLP, Independent Auditors*
Financial Statements:
Consolidated Statements of Income--For the Years Ended June
30, 1997, 1996 and 1995 *
Consolidated Balance Sheets--June 30, 1997 and 1996 *
Consolidated Statements of Cash Flows--For the Years Ended
June 30, 1997,1996 and 1995 *
Consolidated Statements of Changes in Stockholders' Equity--
For the Years Ended June 30, 1997, 1996 and 1995 *
Notes to Consolidated Financial Statements *
____________
*Incorporated by reference to the Company's 1997
Annual Report to Stockholders. See Item 8 of the Annual Report
on Form 10-K.
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
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.
LookSmart, Ltd. (formerly NetGet Ltd.)
Pegasus Investment, Inc.
Pegasus Sales, Inc.
Pleasantville Music Publishing, Inc.
QSP, Inc.
Reader's Digest Sub Eight, Inc. (formerly Gift USA, Inc.)
VideOvation, Inc.
QSP Distribution Services, Inc.
Family Reading Program Corp.
R.D. Manufacturing Corporation
RD Publications, Inc.
RD Large Edition, Inc.
RD Walking, 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 14, 1997, relating
to the consolidated balance sheets of The Reader's Digest
Association, Inc. and subsidiaries as of June 30, 1997 and
1996, 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, 1997,
which reports appear in or are incorporated by reference in
the June 30, 1997 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 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Statement of Income and Consolidated
Balance Sheet for the twelve-month period ended June 30, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 69,100
<SECURITIES> 2,600
<RECEIVABLES> 592,500
<ALLOWANCES> (166,200)
<INVENTORY> 167,800
<CURRENT-ASSETS> 925,800
<PP&E> 670,000
<DEPRECIATION> (355,200)
<TOTAL-ASSETS> 1,643,800
<CURRENT-LIABILITIES> 1,013,100
<BONDS> 0
<COMMON> 200
0
28,800
<OTHER-SE> 317,000
<TOTAL-LIABILITY-AND-EQUITY> 1,643,800
<SALES> 2,839,000
<TOTAL-REVENUES> 2,839,000
<CGS> 2,646,200
<TOTAL-COSTS> 2,646,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> 210,200
<INCOME-TAX> 76,700
<INCOME-CONTINUING> 133,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,500
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</TABLE>
THE READER'S DIGEST EXECUTIVE RETIREMENT PLAN
(Effective As of July 1, 1992)
As amended by
Amendment No. 1, effective July 8, 1994
Amendment No. 2, effective July 1, 1995
Amendment No. 3, effective October 16, 1995
Amendment No. 4, adopted October 10, 1996
TABLE OF CONTENTS
ITEM ARTICLE PAGE
DEFINITIONS 1 1
ELIGIBILITY AND PARTICIPATION 2 4
TERMINATION OF EMPLOYMENT 3 5
AMOUNT OF RETIREMENT INCOME BENEFIT 4 5
MODES AND TIME OF BENEFIT PAYMENT 5 7
DEATH BENEFIT 6 8
MEDICAL BENEFITS 7 9
TOTAL DISABILITY 8 9
GENERAL PROVISIONS 9 10
The Reader's Digest Executive Retirement Plan
Effective as of July 1, 1992, The Reader's Digest
Executive Retirement Plan has been adopted by the Board
of Directors of The Reader's Digest Association, Inc. to
read as follows:
ARTICLE 1
Definitions
The following words and phrases as used herein shall
have the following meanings, unless a different meaning
is plainly required by the context:
BENEFICIARY: The person or persons (including a trust
or estate) who are entitled to receive
any benefits under the Plan by reason
of the death of a Participant.
BOARD: The Board of Directors of The Reader's Digest
Association, Inc.
COMPANY: The Reader's
Digest Association, Inc. or any
successor corporation by merger,
purchase, consolidation or otherwise.
COMPENSATION The compensation committee appointed
COMMITTEE: by Board of Directors
EARLY RETIREMENT The first day of any month coincident with or subsequent to
DATE: a Participant's (i) attainment of age fifty-five (55) and
(ii) completion of Periods of Service plus
attainment of an age which, when added together, equal or
exceed sixty-five (65).
EMPLOYER: The Company and
any subsidiary of the Company which,
with the approval of the Board and
subject to such conditions as the
Board may impose, adopts this Plan,
and any successor or successors of any
of them. For purposes of this Plan, a
subsidiary shall include any
corporation at least fifty-one percent
(51%) of the voting stock of which is
owned by the Company or its
stockholders or by one or more
corporations fifty-one percent (51%)
of the voting stock of which is owned
by the Company or its stockholders.
ENHANCED The enhanced retirement benefits
RETIREMENT payable to Participants and their joint
BENEFITS: or contingent annuitants and
Beneficiaries in accordance with the
applicable provisions of this Plan.
EXCESS PLAN: The Excess Benefit Retirement Plan of
The Reader's Digest Association, Inc.,
effective January 1, 1976 as may be
amended and restated from time to
time.
EXCESS PLAN The benefit under the Excess Plan expressed as a single life
BENEFIT annuity for the life of the Participant calculated as of
the Participant's benefit commencement date under the
Plan.
MANAGEMENT Any compensation award under The
INCENTIVE BONUS: Reader's Digest Association, Inc.
Management Incentive Compensation
Plan, or any similar or equivalent
plan.
NORMAL The first day of the month coincident with or next following
RETIREMENT DATE: a Participant's 65th birthday.
PLAN: The Reader's Digest Executive Retirement
Plan, effective July 1, 1992 as may be
amended and restated from time to
time.
PARTICIPANT: An individual who participates in the
Plan in accordance with the terms
herein.
POSTPONED The first day of the month coincident with or next following
RETIREMENT DATE: a Participant's termination of employment after his Normal
Retirement Date.
PROFIT SHARING The Reader's Digest Employees Profit-Sharing Plan,
PLAN: effective January 1, 1963 and as restated as of July 1, 1992
and as may be further amended and restated from time to
time.
PROFIT SHARING Beginning with the fiscal year
PLAN BENEFIT: commencing on July 1, 1989 and for
each fiscal year thereafter, the sum of (1)
the amount of employer contributions
under the Profit Sharing Plan
allocated to the Participant and
contribution equivalents under the
Profit-Sharing Benefit Restoration
Plan of The Reader's Digest
Association, Inc. which exceeds 6% of
the sum of the Participant's (i)
annual base salary and (ii) Management
Incentive Bonus and (2) the amount in
(1) above multiplied by 8% per year
for each year prior to the
Participant's benefit commencement
date under the Plan, expressed as a
single life annuity for the life of
the participant based on an 8%
interest rate and the PBGC mortality
tables for healthy males calculated as
of the Participant's benefit
commencement date under the Plan.
RETIREMENT INCOME The retirement benefits payable to Participants and their
BENEFIT: joint or contingent annuitants and Beneficiaries in
accordance with the applicable provisions of this Plan.
RETIREMENT PLAN: The Reader's Digest Association, Inc.
Retirement Plan or QSP, Inc.
Retirement Plan, as restated as of
July 1, 1992 and as such plans may be
further amended and restated from time
to time.
RETIREMENT PLAN The benefit payable to the Participant
BENEFIT: under the Retirement Plan and any
retirement plan of any subsidiary of
the Company expressed as a single life
annuity for the life of the
Participant calculated as of the
Participant's benefit commencement
date under the Plan.
RETIREMENT SALARY: The average annual regular or
basic salary of a Participant and
Management Incentive Bonus including
all amounts contributed by the
Employer on behalf of the Participant
under a cafeteria plan as described
in Section 125 of the Internal
Revenue Code of 1986, as
amended (the "Code"), but
excluding severance pay, bonuses
which are not Management
Incentive Bonuses, contributions
made under any other deferred
compensation plan on behalf of a
Participant or other extra
compensation, during the three
consecutive years in the last ten
years of employment which are
counted under the
Retirement Plan (or fewer, if
applicable) which provides the
highest such average. For purposes
of this definition, the Management
Incentive Bonus shall be determined
by reference to amounts payable with
respect to the same period for which
the annual regular or basic salary is
determined.
SERP AGREEMENT: The Supplemental Retirement Benefit
Agreements as pertaining to
individual Participants.
SERP AGREEMENT The retirement benefit payable in the
BENEFIT: form of a 15 year certain annuity
calculated as of the Participant's benefit
commencement date specified in the
SERP Agreement, reduced by the
annual benefit which would be payable
in the form of a 15 year certain
annuity calculated as of the
Participant's benefit commencement
date under the Plan and which is
attributable solely to employee
contributions using an annual
interest assumption of 8%.
SPOUSE: The spouse of Participant who is legally married
to the Participant on the earlier of
(i) the date of the Participant's
death, or (ii) the Participant's benefit
commencement date.
TOTAL DISABILITY: The period during which an individual
has a total disability as provided
under The Reader's Digest Association,
Inc. Long Term Disability Plan.
All terms not defined herein shall have the
same meanings as set forth in the Retirement Plan.
ARTICLE 2
Eligibility and Participation
Section 2.1 Unless otherwise determined by the
Board or the Compensation Committee, eligibility to participate
in the Plan shall be determined from time to time by the
Senior Vice President, Human Resources, with the approval
of the Chief Executive Officer, in their discretion, but
shall be limited to senior officers, senior management
and other key employees of an Employer. Each
Employee who has been designated to participate in
the Plan shall commence participation on the date of
his designation.
Section 2.2 When an Employee first becomes
a Participant in the Plan, the Senior Vice President,
Human Resources may notify him promptly of that fact and
of his rights hereunder.
Section 2.3 Participants eligible for
Enhanced Retirement Benefits shall be those Participants
in positions at salary grade level 20 and higher
designated from time to time by the Senior Vice
President, Human Resources and approved by the Chief
Executive Officer.
ARTICLE 3
Termination of Employment
Section 3.1 If a Participant's employment with
the Employer is terminated prior to his Early Retirement
Date other than by reason of death or Total
Disability, no benefits shall be provided hereunder.
Section 3.2 If a Participant's employment with
the Employer is terminated on or after his Normal
Retirement Date, he shall be entitled to the benefits
under the Plan. If a Participant's employment with
the Employer is terminated on or after his Early
Retirement Date but before his Normal Retirement Date,
he shall be entitled to the benefits under the Plan
only with the consent of the Compensation Committee.
Section 3.3 If a Participant's employment with
the Employer is terminated by reason of death, his Spouse
shall be entitled to the benefits under Article 6.
Section 3.4 If a Participant's employment with the
Employer is terminated by reason of a Total Disability on
or after October 1, 1996, he shall be entitled to the
benefits under Article 8.
ARTICLE 4
Amount of Retirement Income Benefit
Section 4.1 Normal Retirement Benefit.
A Participant's annual rate of Retirement Income Benefit
in the form of a single life annuity for the life of
the Participant commencing on his Normal Retirement Date
shall be equal to (1)(i) three percent (3%) of
his Retirement Salary multiplied by his years or fractions of years
of Credited Service for the first fifteen (15) years plus
(ii) one percent (1%) multiplied by his years or
fractions of years of Credited Service for each of the
next twenty (20) years, offset by (2) the sum of such
Participant's (i) Retirement Plan Benefit, (ii) Excess
Plan Benefit, (iii) SERP Agreement Benefit with
respect to persons who terminated employment prior to October 1, 1996
and (iv) Profit Sharing Plan Benefit. For persons terminating
on or after October 1, 1996, the SERP Agreement
Benefit shall annually offset the Retirement Income
Benefit provided in this Article for fifteen (15) years, commencing with
the first year during which the Retirement Income
Benefits hereunder are being paid.
Section 4.2 Early Retirement Benefit. A
Participant who retires before his Normal Retirement Date but on
or after his Early Retirement Date and who is
otherwise entitled to a benefit under the Plan may
elect with the consent of the Compensation Committee
to receive the Retirement Income Benefit described in
this Article prior to his Normal Retirement Date. The
amounts under Section 4.1(1) shall be reduced by .4167 percent
(.004167) for each month by which the Participant's benefits
commencement date under this Plan precedes the
Participant's attainment of age 62.
Section 4.3 Postponed Retirement Benefit.
Any Participant who continues in the employ of the
Employer after Normal Retirement Date shall not be
entitled to receive his Retirement Income Benefit until he
actually retires. A Participant who continues in the
employ of the Employer beyond the Normal Retirement
Date shall have his Retirement Income Benefit determined
by counting all years or fractions of years of Credited
Service and for purposes of determining the Retirement
Salary of such Participant all periods of employment with
the Employer shall be taken into account.
Section 4.4 Enhanced Retirement Benefit.
For purposes of Article 4, a Participant who is eligible
for Enhanced Retirement Benefits shall be entitled
to an additional year of Credited Service for each completed
year of Period of Service beginning after four full
years of Credited Service but only to the extent the
Participant's age at date of hire by the Employer or
Affiliate exceeds 45 and only to the extent Credited Service is less than
20 years. Additional years of Credited Service under
this Section 4.4 shall not be included for
purposes of determining eligibility for retirement at an
Early Retirement Date.
ARTICLE 5
Modes and Time of Benefit Payment
Section 5.1 If a Participant or Beneficiary
is entitled to a benefit hereunder, the Compensation
Committee shall in its sole discretion determine to pay to
such Participant a series of payments in one of the
forms of payment permitted under Article 6 of the
Retirement Plan (excluding any lump sum payment option,
except as described herein), with the payments under the
selected form having an aggregate value actuarially
equivalent to such amount payable under Article 4 of
this Plan, based on the actuarial equivalent factors as
defined in the Retirement Plan. The
Compensation Committee shall in its sole
discretion determine when such payments shall commence;
provided, however, that in no event shall benefits
hereunder commence later than one year after the
Participant terminates employment with the Employer
after attainment of Normal Retirement Date or
Postponed Retirement Date. Notwithstanding the
foregoing, the Compensation Committee may, in its sole
discretion, accelerate the remaining unpaid portion of
such payments into one or more payments having in the
aggregate an equivalent actuarial value, based on the
PBGC mortality tables for healthy males and one
hundred twenty (120) percent of the PBGC immediate
interest rate then in effect. If a Participant who
is receiving a Retirement Income Benefit or who has
previously received a Retirement Income Benefit shall
return to the employ of the Employer as an Employee and
such employment is substantial, the Retirement Income
Benefit shall cease for as long as he continues to be so
employed. Upon a subsequent termination of employment
with the Employer, the Retirement Income Benefit of
such Employee shall be recomputed based on his
Retirement Salary and years or fraction of years of
Credited Service prior and subsequent to his re-
employment date and reduced by the Retirement Income
Benefit previously received by him. In determining
such previously received benefit,
equivalent actuarial value shall be based on the
PBGC mortality tables for healthy males and one hundred
twenty (120) percent of the PBGC immediate interest rate
then in effect. For purposes of this Article,
an Employee's employment with the Employer shall be substantial if
he renders forty (40) or more Hours of Service (except
for Hours of Service credited as a result of back pay)
in a calendar month.
ARTICLE 6
Death Benefit
Section 6.1 In the event of a married
Participant's death while in the employ of the Employer
prior to his benefit commencement date under the Plan
after attainment of age fifty-five (55) and the completion
of a five-year Period of Service (without regard to any
break-in-service rules applicable under the Retirement
Plan), his Spouse shall receive, commencing on the
first working day of the month following the
Participant's death, the benefit under the Plan in the
form and amount such Spouse would otherwise have received
under the 50% qualified joint and survivor annuity form
if the Participant had terminated employment with the
Employer on the day before his death and had been
entitled to benefits under the Plan at the time of
termination in the form of a 50% qualified joint and
survivor annuity.
Section 6.2 In the event of a Participant's
death after benefits under the Plan have commenced,
his Beneficiary shall receive any amounts provided
under the form of payment under which the Participant
was receiving such benefits at the time of his death.
ARTICLE 7
Medical Benefits
Section 7.1 If any Participant terminates
employment
with the Employer on or after his Early Retirement
Date, such Participant and his Spouse with the consent
of the Compensation Committee shall be eligible to
receive the benefits provided under The Reader's
Digest Association, Inc. Medical and Dental Expense
Plan for Retirees and Disabled Individuals (the
"Retiree Health Plan") as if the Participant had met the
eligibility requirements under such plan, provided that
the Participant or Spouse makes the contributions
required under such plan.
Section 7.2 If a married Participant dies while
in the employ of the Employer prior to his benefit
commencement date under the Plan after attaining age fifty-
five (55) and the completion of a five-year Period of
Service (without regard to any break-in-service rules
applicable under the Retirement Plan), his Spouse shall
be eligible to receive the benefits provided under the
Retiree Health Plan as if the Participant had retired
prior to his death having satisfied the eligibility
requirements of such plan, provided that such Spouse
makes the contributions required under such plan.
Section 7.3 If a married Participant dies
following the Participant's retirement from the
Employer after
attaining his Early Retirement Date, his Spouse shall
be eligible to receive the benefits provided under the
Retiree Health Plan as if the Participant had retired
prior to his death having satisfied the eligibility
requirements of such plan, provided that such Spouse
makes the contributions required under such plan.
ARTICLE 8
Total Disability
Section 8.1 If a Participant terminates
employment by reason of a Total Disability on or after October 1,
1996, he shall be entitled to an annual disability benefit of
60% of the average of the Management Incentive Bonus paid
with respect to the three years prior to the fiscal year
in which he had a Total Disability up to a maximum benefit
of $24,000 per month. The disability benefit will be
paid until the
earliest to occur of (i) laps of five (5) years from
the date of such termination of employment, (ii)
attainment of
age 65, or (iii) termination of Total Disability.
This benefit shall be in addition to any benefit paid
under The Reader's Digest Long-Term Disability Plan.
Section 8.2 If a Participant dies during the
period when payments are being made under Section 8.1, his
Spouse may receive the benefit specified in Section 6.1.
Section 8.3 If a Participant has an Early
Retirement Date or Normal Retirement Date during the period
when payments are being made under Section 8.1, he shall
be eligible for Retirement Income Benefits as provided
herein.
ARTICLE 9
General Provisions
Section 9.1 The Employer shall only have
a contractual obligation to make payments to the
Participant or Beneficiary, as applicable, referred to
herein when due, and the amounts of such payments shall
not be held in trust for the Participant or Beneficiary,
as applicable, but shall be paid from the general assets
of the Employer. This Plan is intended to constitute an
unfunded plan and no assets shall
be segregated or earmarked in respect of any amount
due hereunder.
Section 9.2 Nothing contained herein shall
confer any right on a Participant to be continued in the employ
of the Company or any other Employer, or as a limitation
of the right of the Company or Employer to
discharge any Participant with or without cause, nor shall anything
herein affect the right of the Participant to participate in
and receive benefits under and in accordance with any
pension, profit sharing, incentive compensation or other
benefit plan or program of any Employer. Nothing
herein shall be construed as a contract of employment
between the Employer and any Participant.
Section 9.3 This Plan shall be binding upon
any successor to or purchaser of substantially all the assets
of the Company or an Employer with respect to such
Employer's Employees. The
Board reserves the right at any time and
from time to time to modify, amend or terminate in whole
or in part any or all of the provisions of the Plan.
Upon any such termination of this Plan, the Company may
in its sole discretion accelerate payment of all
benefits that are in pay status on the date of
termination and benefits to which a Participant or
Beneficiary, as applicable, would be entitled under
the terms of the Plan then in effect based on events
which occur prior to the date of termination of the Plan.
In no event, however, shall any modification,
amendment or plan termination by the Board deprive
any Participant or Beneficiary, as applicable, of any
amount which is payable to such person under the Plan by
reason of the Participant's attainment of age 65 or
death prior to such modification, termination or
amendment.
Section 9.4 No right or interest of a Participant
subject to voluntary or involuntary alienation,
assignment or transfer of any kind.
Section 9.5 The administration of this Plan and
the interpretation thereof, including the authority to
decide all questions that arise thereunder, shall
be the responsibility of the Compensation Committee or such
other person or entity as the Company shall
designate. The decisions and interpretations of such administrator of
the Plan shall be final and binding upon each Employer
that shall have adopted this Plan, Employees of such
Employers, each Participant and his Beneficiary, and other
interested parties.
Section 9.6 The Company shall have the right
to deduct from any payment to be made pursuant to this
Plan any Federal, state, local or other taxes required by
law to be withheld.
Section 9.7 If any payment to be made under
this Plan is to be made on account of a Participant
who was employed by an Employer that shall have adopted
this Plan, other
than the Company, the cost of such benefit payment
shall be borne by the Employer of the Employee.
Section 9.8 This Plan shall be construed,
regulated and administered for all purposes according to
the laws of the State of New York and the United States.
Section 9.9 No member of the Board, no Employee
and no member of the Compensation Committee (nor the
Compensation Committee itself) shall be liable for any
act or action hereunder, including acts of omission
or commission, by any other member or Employee or by any
agent to whom duties in connection with the
administration of the Plan
have been delegated or, except in circumstances
involving bad faith, gross negligence or fraud, for
anything done or omitted to be done by himself.
Section 9.10 Wherever any words are used in this
Plan in the masculine gender they shall be construed as
though they were also used in the feminine gender in
all cases where
they would so apply, and wherever any words are used
herein in the singular form they shall be construed
as though they were also used in the plural form in all
cases where they would so apply.
Section 9.11 In the event any provision of this
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.
June 18, 1997
Mr. James P. Schadt
Chairman and Chief Executive Officer
The Reader's Digest Association, Inc.
Pleasantville, NY 10570-7000
Dear Jim:
This Agreement sets forth the terms and conditions under
which The Reader's Digest Association, Inc. (the "Company")
agrees to continue to employ you and you agree to continue
to serve as an executive of the Company.
1. The term of this Agreement shall be from the date
first written above until September 30, 2000; provided,
however, that the term of this Agreement shall be
automatically extended for one year on each anniversary of
the date first written above unless the Board of Directors
of the Company shall determine otherwise and notify you in
writing one month in advance of such anniversary of such
determination. The expiration date described in this
paragraph, as it may be extended, is hereinafter referred to
as the "Agreement Expiration Date". Upon expiration or
termination of this Agreement, you may continue as an
employee of the Company on an "at-will" basis, subject to
the determination of the Board of Directors.
2. During the term of this Agreement, you shall serve as
Chairman of the Board and Chief Executive Officer of the
Company, and you shall devote substantially all of your
business time to the business and affairs of the Company,
reporting only to the Board of Directors of the Company with
such authority and responsibilities as are typical for
executives in your position at similarly situated companies
in the industry.
3. The Company shall pay you an annual base salary at a
rate at least equal to your current annual base salary and
you shall continue to participate in the Company's employee
benefits plans and programs (including, but not limited to,
incentive compensation, retirement, welfare and perquisite
plans and programs) on at least substantially the same basis
as your current participation, as such salary or
participation may be increased or supplemented from time to
time; provided, however, that your annual base salary and
employee benefits participation may be reduced as part of
and consistent with a good faith senior management-wide
reduction, but only if the extent of your reduction is no
greater than that of other senior management personnel; and
provided further, however, that the Company may replace,
substitute or supersede any current employee benefits with
benefits that are in good faith believed by the Company to
be at least comparable.
4. Reference is made to the agreement dated April 1,
1996 (the "Termination Agreement") between you and the
Company relating to payments and benefits that you will
receive in connection with a termination of your employment
with the Company under certain circumstances. Unless
otherwise defined in this Agreement, terms that are defined
in the Termination Agreement shall have the same meanings
when used in this Agreement.
(a) The Company may terminate your employment at any
time for any reason.
(b) If your employment is terminated by you for Good
Reason or if your employment is terminated by the Company
other than for Cause, then, in lieu of any continuing
payments or benefits hereunder, you shall receive the
payments and benefits provided for in the Termination
Agreement under the terms and conditions of the Termination
Agreement, except that the Severance Period under the
Termination Agreement shall be the greater of:
(1) the period of two years immediately following
the Date of Termination; or
(2) the period commencing on the Date of
Termination and ending on the Agreement Expiration
Date.
(c) During the Severance Period described in Paragraph
4(b) and so long as the Company honors its obligations to
you, you shall not, without the prior written consent of the
Company, become a proprietor, director, partner, or employee
of, or consultant or advisor to, or otherwise become
connected with, any business that is in direct competition
with the Company (other than as a stockholder with a non-
substantial interest in any such business).
5. While you are employed, you will be indemnified by
the Company to the fullest extent permitted by law for acts
taken within the scope of your employment.
6. This Agreement, together with the Termination
Agreement, constituted our entire understanding with respect
tot he subject matter hereof and supersedes any prior
agreements, written or oral, with respect thereto. This
Agreement shall be governed 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.
/s/ GLENDA K. BURKHART
Glenda K. Burkhart
Senior Vice President,
Strategic Planning and
Human Resources
Agreed to and accepted
as of June 18, 1997.
/s/ JAMES P. SCHADT
James P. Schadt
August 10, 1997
Mr. James P. Schadt
Chairman and Chief Executive Officer
The Reader's Digest Association, Inc.
Pleasantville, NY 10570-7000
Dear Jim:
As you know, you have entered into an agreement dated
April 1, 1996 with The Reader's Digest Association, Inc.
(the "Company") relating to payments and benefits that you
will receive in connection with a termination of your
employment with the Company under certain circumstances.
The April 1, 1996 Agreement has been modified and
supplemented by letter agreements dated June 18, 1997 and
July 10, 1997 and as so modified and supplemented is
referred to herein as the "Agreement". The purpose of this
letter agreement is to further clarify and supplement the
terms and conditions of the Agreement and to provide for the
resignation by you of all your employment positions and
directorships with the Company. In all other respects, the
Agreement is hereby ratified and confirmed in its entirety.
Unless otherwise defined herein, terms that are defined in
the Agreement shall have the same meanings when used in this
letter agreement.
1. You hereby resign from all employment positions
and directorships with the Company, its subsidiaries,
affiliates and related foundations and the Company hereby
accepts your resignation, effective as of Monday, August 11,
1997. For all purposes relating to the termination of your
employment, whether pursuant to the Agreement or otherwise,
including, but not limited to, any severance, pension,
stock, stock option, compensation, benefits or similar
plans, your resignation shall be treated as a termination of
employment by the Company Without Cause. You shall be paid
salary through August 10, 1997. In addition, you shall be
entitled to a 100% joint and survivor life annuity with your
spouse as of the date hereof commencing at age 62 in the
amount of $300,000 per year (payable throughout the lifetime
of both you and that spouse) reduced by your annual
retirement benefits payable under The Reader's Digest
Association, Inc., Retirement Plan and the Excess Benefit
Retirement Plan of The Reader's Digest Association, Inc.
commencing at age 62 and converted to the form of a 100%
joint and survivor annuity. The benefit provided herein
shall be in lieu of all benefits under The Reader's Digest
Executive Retirement Plan and in lieu of any benefits under
Section 4.1 or 4.2 of the Agreement.
2. You have reviewed the terms of the initial press
release respecting the termination of your employment. The
Company agrees that it will not issue any disparaging
statements about you or your performance.
3. For the balance of the term of the Agreement
(i.e., through September 30, 2000), you will be entitled to
conduct your personal business affairs and search for new
employment, business opportunities and/or board engagements.
To assist you in connection therewith, and in full
satisfaction of your rights with respect to financial
counseling, car allowance, travel and entertainment
expenses, office accommodation, use of the Company's
apartment (which you are promptly relinquishing), use of the
Company's airplane or other property, and any country club
or similar membership, Company shall pay you a lump-sum,
within fifteen days after the date hereof, in the amount of
$100,000.
4. You shall be entitled to the following benefits:
(a) the right to host the Company's table, in
your name,(already paid for) for ten (10) guests at the
October, 1997, Norwalk Hospital Annual Gala and the
November, 1997, Stamford Symphony;
(b) the right to remove and retain, two (2) Dewey
paintings and photograph of Dobbs Ferry by the Detroit Photographic Company
currently in your office; provided, however, that you will
reimburse the Company to the extent the appraised value of
such artwork (as determined by an independent
appraiser selected by the Company) shall exceed
$10,000.
5. The Company shall match your charitable
contributions to Norwalk Hospital (on the basis of a $2.00
contribution by the Company for each $1.00 contribution made
by you) up to a maximum amount of $20,000 per year for the
balance of the term of the Agreement (i.e., through
September 30, 2000).
6. This is to confirm that, notwithstanding the
termination of your employment, your right to indemnify for
acts taken during the course of your employment with the
Company continues to the same extent as presently provided.
7. Upon expiration of the Severance Period, you will
become eligible to receive medical and dental benefits
equivalent to and upon the same terms (including payment of
employee and/or retiree premiums) that would have been
available to you under applicable Company plans had you
retired on the date hereof and been eligible to receive
benefits under all such plans.
8. You shall not be required to seek or obtain other
employment or in any other way mitigate damages as a
condition for receiving the compensation and benefits set
forth in the Agreement (as supplemented and modified hereby)
and any proceeds received by you from subsequent employment
shall not reduce or offset any such compensation or
benefits.
9. The Agreement (as supplemented and modified
hereby) shall take precedence over and control in the event
of any conflict or ambiguity between the Agreement and any
of the Company's plan documents or program documents.
10. Any unvested securities or rights that you have
shall continue to vest during the Severance Period as if
your employment with the Company continued during that
period. Notwithstanding the foregoing, this provisions
shall not require vesting of securities or rights, including
those issued under the Company's Key Employee Long Term
Incentive Plans, which by their terms will vest only upon
the satisfaction of performance criteria are satisfied or
such change in control occurs. You shall have a period of
three years from the expiration of the Severance Period to
exercise any outstanding vested Company stock options or
vested stock appreciation rights or until expiration of the
term of the option or appreciation rights, if earlier.
11. The Company shall reimburse you for reasonable
legal expenses incurred in connection with the negotiation
of your resignation. For purposes hereof, fees and expenses
of twenty five thousand dollars ($25,000) shall be
considered reasonable.
The Agreement (as supplemented and modified hereby)
shall be governed 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.
/s/ JAMES E. PRESTON
James E. Preston
Director
Agreed to and Accepted as of
August 11, 1997.
/s/ JAMES P. SCHADT
James P. Schadt
Exhibit 10.25
THE READER'S DIGEST ASSOCIATION, INC.
READER'S DIGEST ROAD
PLEASANTVILLE, NY 10570-7000
August 1, 1997
Mr. Martin J. Pearson
15 River Road
Unit 213
Cos Cob, Connecticut 06807
Dear Martin:
This letter serves to confirm the additional
understandings between The Reader's Digest Association, Inc.
(the "Company") and you regarding your separation from the
Company, effective as of June 30, 1997. This letter
supplements a certain letter agreement between you and the
Company dated as of April 1, 1996 (the "Agreement").
The Company will provide you with the following additional
benefits and payments (provided you execute the General Waiver
and Release of Claims form referred to in Section 8 of the
Agreement):
1. The Company will waive your fourth (4th) and fifth
(5th) year contributions (each payment of $20,200 to your
Supplemental Retirement Benefits Agreement dated as of June 8,
1994 (the "SRBA") and you will be deemed fully vested under the
SRBA, subject to and in accordance with its terms;
2. During the severance period, you will continue to
have the use of your company car while you remain in the U.S.
Upon return to Australia, and for the remaining months of your
severance period, you will receive a cash allowance of $1,100
which represents the cost of leasing your company car,
insurance and repairs. You will be liable for any income tax
assessment on the car usage in the U.S. and the cash payment in
Australia.
3. You will receive the following benefits in
connection with your personal relocation to Australia:
a) one way airfare to Australia, at the Company's expense,
for you and, if necessary, your spouse; and
b) tax preparation assistance to enable you to prepare your
personal United States and Australian tax returns for the
tax year in which you relocate to Australia.
You acknowledge that the Company is under no
obligation to provide these relocation benefits to you.
Moreover, all of these benefits shall not be available to you
if your relocation occurs after the end of the Severance
Period.
4. In calculating your retirement benefits
under the Agreement, your "final average compensation" shall
also include Severance Payments made under the Agreement
otherwise calculated in accordance with the terms of the
applicable plans.
In consideration for these benefits and payments, you
agree you will not during the Severance Period (as defined in
the Agreement), without the prior written consent of the Chief
Executive Officer, become a proprietor, director, partner or
employee of, or otherwise become connected with Time Warner,
Bertelsman and/or Rodale (or their affiliates) in the United
States, and/or Bertelsman, Time Warner and/or IMP (or their
affiliates) in Australia (other than as a stockholder with a
nonsubstantial interest in any such business). You also agree
that if during the Severance Period, you commit any criminal
act against the Company, or any act that would constitute Cause
as defined herein, or if you disclose any information regarded
as confidential and relating to the Company's business, or if
you solicit advertising clients against the interest of the
Company or solicit the Company's employees to work for a
competitor of the Company, or if you perform any 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 under this letter agreement 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. For
purposes of this paragraph, "Cause" shall mean improper
communication of confidential information obtained in the
course of employment, material violation of Company rules,
including but not limited to a material violation of the
Company's Proprietary and Confidential Information Policy or a
material violation of the Company's Code of Conduct if you had
continued to be employed by the Company.
Please signify your agreement with the above by signing on
the line below and returning a copy of this agreement to me.
THE READER'S DIGEST
ASSOCIATION, INC.
By:/s/ Suzanne Pilnick
Suzanne Pilnick
Title: Acting Senior Vice President,
Strategic Planning and Human
Resources
Agreed and Accepted:
/s/MARTIN J. PEARSON
Martin J. Pearson
Dated: August 28, 1997
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
BUSINESS SEGMENT FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------
In millions 1997(3) 1996(4) 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Reader's Digest Magazine $ 729.2 $ 739.8 $ 732.9
Books and Home Entertainment Products 1,850.5 2,099.4 2,099.8
Special Interest Magazines 81.9 91.9 95.6
Other Businesses 181.0 170.6 143.9
Intersegment(1) (3.6) (3.6) (3.7)
- -------------------------------------------------------------------------------------------------------------------
$2,839.0 $3,098.1 $3,068.5
- -------------------------------------------------------------------------------------------------------------------
Operating profit
Reader's Digest Magazine $ 42.7 $ 11.2 $ 78.3
Books and Home Entertainment Products 175.6 192.0 339.3
Special Interest Magazines 0.4 (21.1) (0.8)
Other Businesses 22.5 (9.9) 31.1
Corporate Expense (48.4) (62.9) (56.0)
- -------------------------------------------------------------------------------------------------------------------
$ 192.8 $ 109.3 $ 391.9
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets
Reader's Digest Magazine $ 410.4 $ 358.3 $ 365.0
Books and Home Entertainment Products 881.8 981.1 973.7
Special Interest Magazines 76.4 66.4 88.6
Other Businesses 75.1 76.9 51.0
Corporate(2) 200.1 421.4 480.4
- -------------------------------------------------------------------------------------------------------------------
$1,643.8 $1,904.1 $1,958.7
- -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization
Reader's Digest Magazine $ 11.2 $ 11.8 $ 11.6
Books and Home Entertainment Products 27.8 30.4 27.8
Special Interest Magazines 2.0 1.6 2.4
All other 5.7 5.0 2.9
- -------------------------------------------------------------------------------------------------------------------
$ 46.7 $ 48.8 $ 44.7
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures
Reader's Digest Magazine $ 22.9 $ 14.7 $ 13.6
Books and Home Entertainment Products 75.9 36.8 32.9
All other 11.8 8.1 3.8
- -------------------------------------------------------------------------------------------------------------------
$ 110.6 $ 59.6 $ 50.3
===================================================================================================================
GEOGRAPHIC FINANCIAL INFORMATION
Years ended June 30,
----------------------------------
In millions 1997(3) 1996(4) 1995
Revenues
United States $1,236.4 $1,278.9 $1,196.9
Europe 1,172.2 1,379.7 1,455.8
Pacific and Other Markets 439.8 445.6 424.9
Interarea (9.4) (6.1) (9.1)
- -------------------------------------------------------------------------------------------------------------------
$2,839.0 $3,098.1 $3,068.5
- -------------------------------------------------------------------------------------------------------------------
Revenues interarea
United States $ 2.9 $ 3.2 $ 4.3
Europe 5.3 2.4 3.2
Pacific and Other Markets 1.2 0.5 1.6
- -------------------------------------------------------------------------------------------------------------------
$ 9.4 $ 6.1 $ 9.1
- -------------------------------------------------------------------------------------------------------------------
Operating profit
United States $ 133.8 $ 16.6 $ 151.7
Europe 94.1 110.0 225.5
Pacific and Other Markets 13.3 45.6 70.7
Corporate Expense (48.4) (62.9) (56.0)
- -------------------------------------------------------------------------------------------------------------------
$ 192.8 $ 109.3 $ 391.9
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets
United States $ 661.0 $ 664.9 $ 587.6
Europe 542.2 563.4 669.4
Pacific and Other Markets 240.5 254.4 221.3
Corporate(2) 200.1 421.4 480.4
- -------------------------------------------------------------------------------------------------------------------
$1,643.8 $1,904.1 $1,958.7
===================================================================================================================
</TABLE>
(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.
(3)Operating profit for 1997 reflects the allocation of other operating items of
$35.0 to the business segment and geographic financial information as follows
(refer to note TWO in Notes to Consolidated Financial Statements for further
information): Reader's Digest Magazine $5.6, Books and Home Entertainment
Products $25.5, Other Businesses $0.5, Corporate Expense $3.4, and United States
$15.3, Europe $7.4, and Pacific and Other Markets $8.9.
(4)Operating profit for 1996 has been restated in the current year to reflect
the allocation of other operating items of $235.0 to the business segment and
geographic financial information as follows (refer to note TWO in Notes to
Consolidated Financial Statements for further information): Reader's Digest
Magazine $37.6, Books and Home Entertainment Products $130.1, Special Interest
Magazines $21.4, Other Businesses $42.1, Corporate Expense $3.8, and United
States $151.0, Europe $63.5, and Pacific and Other Markets $16.7.
12
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Dollars in millions, except per share data
Management's discussion and analysis as it pertains to geographic and business
segment information has been written excluding the effects of the 1997 fourth
quarter charges of $35.0 and the 1996 third quarter charges of $245.0
(together, referred to as the operating charges) in order to analyze the results
on a comparable basis. In addition, in 1996 reported results include $10.0 of
savings recognized as a result of the finalization of the company's lease
termination program in the United Kingdom.
o Results of Operations
1997 v. 1996 Worldwide revenues for 1997 decreased to $2,839.0, or by 8%,
compared with $3,098.1 for 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 principally 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. External factors, including weak
European economies and increased competitive pressures globally, impacted
revenues. 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, also contributed to lower worldwide revenues in 1997.
Worldwide operating profit increased to $192.8 in 1997, compared with
$109.3 in 1996. The 1997 and 1996 results reflect operating charges of $35.0
($22.2 after tax, or $0.21 per share) and $245.0 ($169.8 after tax, or $1.57 per
share), respectively. Excluding the effects of the operating charges, worldwide
operating profit decreased by 36% in 1997, compared with the same period a year
ago. These operating results reflect the impact of lower revenues and higher
inventory write-offs as a result of lower customer response to third and fourth
quarter promotional mailings, partially offset by the benefits of cost-
containment initiatives.
The company reported net income of $133.5, or $1.24 per share in 1997,
compared with $80.6, or $0.73 per share in 1996. Excluding the effects of the
operating charges, earnings per share decreased 37% to $1.45 in 1997, compared
with $2.30 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.
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 decreased due to higher paper
and postage costs and unfavorable results 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.
Other Income, Net
1997 v. 1996 Other income, net for 1997 decreased to $17.4, compared with $28.4
a year ago. This decrease was primarily because of lower interest income ($11.4
in 1997, compared with $21.5 in 1996), lower gains on the sales of certain
investments ($7.0 in 1997, compared with $15.8 in 1996), and higher interest
expense ($7.0 in 1997, compared with $2.4 in 1996), which were partially offset
by higher gains on foreign exchange transactions and hedging activity ($8.5 in
1997, compared with a loss of $6.1 in 1996).
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).
Income Taxes
1997 v. 1996 The overall effective tax rate for 1997 was 36.5%, compared with a
reported rate of 41.5% for 1996. Excluding the effects of other operating items,
the effective tax rate was 36.5% and 35.5% in 1997 and 1996, respectively. The
lower effective rate in 1996 was primarily attributable to favorable settlements
relating to prior years.
1996 v. 1995 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.
o Geographic Areas
1997 OPERATING PROFIT BY GEOGRAPHIC AREA
[PIE CHART]
Pacific and
Other Markets 8%
United States 55%
Europe 37%
Excludes other operating items and Corporate Expense.
13
<PAGE>
Operating Profit by Geographic Area
<TABLE>
<CAPTION>
Other
As operating As
1997 reported items adjusted
- ---------------------------------------------------------
<S> <C> <C> <C>
United States $133.8 $ 15.3 $149.1
Europe 94.1 7.4 101.5
Pacific and Other Markets 13.3 8.9 22.2
Corporate Expense (48.4) 3.4 (45.0)
- ---------------------------------------------------------
$192.8 $ 35.0 $227.8
=========================================================
<CAPTION>
Other
As operating As
1996(1) reported items adjusted
- ---------------------------------------------------------
<S> <C> <C> <C>
United States $ 16.6 $151.0 $167.6
Europe 110.0 63.5 173.5
Pacific and Other Markets 45.6 16.7 62.3
Corporate Expense (62.9) 3.8 (59.1)
$109.3 $235.0 $344.3
=========================================================
</TABLE>
(1)Results for 1996 include the effects of third quarter charges ($245.0) and
fourth quarter savings on the finalization of the company's lease termination
program in the United Kingdom ($10.0).
United States
1997 v. 1996 Revenues in the United States decreased from $1,278.9 in 1996 to
$1,236.4, 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 and music
products sales was caused by lower customer response to promotional offers.
Operating profit decreased 11% to $149.1 in 1997 compared with $167.6 in 1996
due to lower revenues and lower customer response to promotional mailings,
partially offset by lower paper costs and the benefit of cost-containment
initiatives.
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 general 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.
Europe
1997 v. 1996 Revenues in Europe decreased from $1,379.7 in 1996 to $1,172.2, or
by 15%, in 1997. Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 12%. 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. Revenues declined in all product lines within Books and Home
Entertainment Products, except for video products. Operating profit decreased
from $173.5 in 1996 to $101.5, or by 41%, in 1997. Current year results were
affected by increased competitive pressures, the continuing general weakness in
European economies, and the company's ongoing actions to restore long-term
growth in this region. These actions include the selective modification 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
items was partially offset by the benefit of lower product returns and bad
debts, and the implementation of cost-containment initiatives.
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. Higher paper costs also contributed to the
operating profit decline.
Pacific and Other Markets
1997 v. 1996 Revenues in Pacific and Other Markets decreased from $445.6 in
1996 to $439.8, or by 1%, 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 almost three-quarters 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, primarily in Condensed Books
and general books. Higher revenues in Latin America, reflecting product
expansion in Brazil and Argentina, were offset primarily by significant revenue
declines in South Africa, because of substantially lower mail quantities and
customer response rates and the country's economic climate, and in Australia,
due to lower customer response to promotional mailings, including the effect of
promotional mailing variations, and increased competitive pressures. Operating
profit decreased 64% in 1997 to $22.2, primarily because of higher proportionate
promotional spending, continuing investments in new country expansion, and
higher inventory write-offs as a result of the lower customer response rates.
14
<PAGE>
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.
o Business Segments
1997 OPERATING PROFIT BY BUSINESS SEGMENT
[PIE CHART]
Other Business 8%
Readers Digest Magazine 18%
Books and Home
Entertainment
Products 74%
Excludes other operating items and Corporate Expense.
Operating Profit by Business Segment
<TABLE>
<CAPTION>
Other
As operating As
1997 reported items adjusted
- --------------------------------------------------------------------
<S> <C> <C> <C>
Reader's Digest Magazine $ 42.7 $ 5.6 $ 48.3
Books and Home
Entertainment Products 175.6 25.5 201.1
Special Interest
Magazines 0.4 -- 0.4
Other Businesses 22.5 0.5 23.0
Corporate Expense (48.4) 3.4 (45.0)
- --------------------------------------------------------------------
$192.8 $ 35.0 $227.8
====================================================================
<CAPTION>
Other
As operating As
1996(1) reported items adjusted
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Reader's Digest Magazine $ 11.2 $ 37.6 $ 48.8
Books and Home
Entertainment Products 192.0 130.1 322.1
Special Interest
Magazines (21.1) 21.4 0.3
Other Businesses (9.9) 42.1 32.2
Corporate Expense (62.9) 3.8 (59.1)
- ---------------------------------------------------------------------
$109.3 $235.0 $344.3
=====================================================================
</TABLE>
(1)Results for 1996 include the effects of third quarter charges ($245.0) and
fourth quarter savings on the finalization of the company's lease termination
program in the United Kingdom ($10.0).
Reader's Digest Magazine
1997 v. 1996 Revenues for Reader's Digest Magazine decreased from $739.8 in
1996 to $729.2, or by 1%, in 1997. Circulation revenues were about even year-
over-year, and advertising revenues increased slightly from the prior year,
excluding the adverse effect of changes in foreign currency exchange rates.
Increased circulation levels in Latin America, Eastern Europe and Thailand were
offset by lower paid copies in several European countries and the United States.
The increase in advertising revenues was attributable to a higher number of
advertising pages sold in Pacific and Other Markets and the United States,
offset by a lower number of pages in Europe, and, to a lesser extent, a higher
average price per page in the United States offset by a lower average price per
page in Pacific and Other Markets. Operating profit for Reader's Digest Magazine
decreased in 1997 to $48.3 compared with $48.8 in 1996. The decrease reflects
lower revenues, increased promotional spending and investments in new countries,
partially offset by lower paper costs and the benefit of cost-containment
initiatives.
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.
15
<PAGE>
Books and Home Entertainment Products
1997 v. 1996 Revenues for Books and Home Entertainment Products decreased from
$2,099.4 in 1996 to $1,850.5, or by 12%, in 1997, principally attributable to
the company's European operations. Excluding the adverse effect of changes in
foreign currency exchange rates, revenues decreased 10%. 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. External factors, including weak European economies and increased
competitive pressures globally, impacted revenues. 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, contributed to lower
revenues in 1997. Operating profit for Books and Home Entertainment Products
decreased in 1997 to $201.1 compared with $322.1 in 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, higher inventory write-offs
as a result of lower customer response to promotional mailings in the third and
fourth quarter, and lower customer response to Condensed Books promotional
mailings.
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.
Special Interest Magazines
1997 v. 1996 Revenues for Special Interest Magazines decreased from $91.9 in
1996 to $81.9, or by 11%, 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. Excluding prior year revenues from Travel Holiday,
revenues increased 8% in 1997 compared with 1996. The acquisition of Walking
magazine in the third quarter of 1997 accounted for 3% of the increase in
revenues. Revenues also increased due almost equally to higher circulation
levels and advertising pages sold in 1997. Operating performance improved in
1997 compared with 1996 primarily reflecting the increases in circulation and
advertising revenues.
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 exclusion of revenues due 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.
Other Businesses
1997 v. 1996 Revenues for Other Businesses, net of intersegment sales,
increased in 1997 to $177.4, or by 6%, compared with the prior year, primarily
due to growth in the merchandise catalog business in the United Kingdom, higher
sales at QSP in the United States and the introduction of a merchandise catalog
business in the United States. Operating profit decreased because of costs
associated with the launch of the company's World Wide Web navigation service,
LookSmart, in 1997 and higher proportionate promotional costs associated with
the launch of the catalog business in the United States, which were partially
offset by increased profits at QSP.
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.
Corporate Expense
Corporate Expense in 1997 decreased 24% to $45.0 compared with $59.1 in 1996 due
principally to lower recruiting and relocation expenses and the benefit of cost-
containment initiatives. 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.
16
<PAGE>
o Forward-Looking Information
In the third quarter of 1997, the company launched a strategic investment
program of initiatives to be completed over a three-year period. The majority of
this spending may negatively impact 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 program comprises various projects,
including increased implementation of creative promotional programs, product
development initiatives, selective programs to moderate price increases,
innovative uses of technology, such as data mining, and the realignment of
business processes and operations. The investment program spending is being
adjusted as the company continues to move on specific initiatives.
As part of the strategy associated with the investment program, the company
is internally emphasizing growth in number of customers, retention of customers,
conversion of customers to multi-product long-term buyers, generation of new
customers, and growth in revenues, operating profit and long-term cash flow.
Operating results for fiscal 1998 are expected to be below 1997 levels, due
to spending related to the investment program and poor business performance in
the second half of 1997 that reduced the number of customers carried into 1998.
The company expects to record additional charges in fiscal 1998 associated with
the realignment of business processes and operations as the program is
finalized. Excluding the effect of charges, first quarter fiscal 1998 earnings
per share are forecast to be significantly lower than the first quarter of
fiscal 1997.
The statements contained in this report, if not historical, are forward-
looking statements, which involve risks and uncertainties that could cause
actual results to differ materially from the financial results described in the
forward-looking statements. These risks and uncertainties include the ability of
the company to respond to competitive pressures, 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 moderation of prices, the cost and effectiveness of the
realignment of business processes and operations, the evolution of the company's
organizational and structural capabilities, 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, and general economic conditions.
o Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and marketable securities
decreased $271.8 to $102.4 at June 30, 1997, compared with $374.2 at June 30,
1996. This decrease was primarily due to dividend payments ($193.3), the
repurchase of 1.7 million shares of Class A nonvoting common stock ($66.3) and
capital expenditures ($110.6), exceeding cash provided by operations ($97.3).
The 1997 full-year dividend payment increased to $1.80 per share, or by 3%
compared with 1996. In 1997, the company kept its quarterly dividend on common
stock at $0.45 per share, consistent with 1996 levels. On July 11, 1997, the
company announced a reduction in its quarterly dividend to $0.225 per share.
Capital expenditures in 1997 amounted to $110.6 and were primarily for the
acquisition of new office facilities to consolidate premises in the United
Kingdom and for management information systems equipment.
In the fourth quarter of 1997, the company entered into an agreement with
The Chase Manhattan Bank for a line of credit of $75.0 (the line of credit) for
a term of one year to be used for general corporate purposes. The loans under
the line of credit are payable on demand and bear interest at a floating rate
based on the cost of funds of the bank plus a margin.
The company is a party to 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 $400.0 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
line of credit or 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, the company's share repurchase
program, and 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.
17
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------
In millions, except per share data 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,839.0 $3,098.1 $3,068.5
Product, distribution and editorial expense 1,026.7 1,079.8 1,049.7
Promotion, marketing and administrative expense 1,584.5 1,674.0 1,626.9
Other operating items 35.0 235.0 --
- -------------------------------------------------------------------------------
Operating profit 192.8 109.3 391.9
Other income, net 17.4 28.4 30.6
- -------------------------------------------------------------------------------
Income before provision for income taxes 210.2 137.7 422.5
Provision for income taxes 76.7 57.1 158.5
- -------------------------------------------------------------------------------
Net income $ 133.5 $ 80.6 $ 264.0
- -------------------------------------------------------------------------------
Earnings per share $ 1.24 $ 0.73 $ 2.35
- -------------------------------------------------------------------------------
Average common shares outstanding 106.7 107.9 112.0
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------
In millions 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 69.1 $ 258.1
Receivables, net 426.3 412.4
Inventories 167.8 204.4
Prepaid expenses and other current assets 262.6 329.2
- -------------------------------------------------------------------------------------
Total current assets 925.8 1,204.1
Marketable securities 30.7 97.2
Other long-term investments 42.3 39.8
Property, plant and equipment, net 314.8 261.5
Intangible assets, net 59.1 58.4
Other noncurrent assets 271.1 243.1
- -------------------------------------------------------------------------------------
Total assets $1,643.8 $1,904.1
- -------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 211.8 $ 204.0
Accrued expenses 373.6 457.3
Income taxes payable 22.1 67.3
Unearned revenue 356.5 354.9
Other current liabilities 49.1 45.0
- -------------------------------------------------------------------------------------
Total current liabilities 1,013.1 1,128.5
Postretirement and postemployment benefits other than pensions 153.3 147.5
Other noncurrent liabilities 131.4 149.2
- -------------------------------------------------------------------------------------
Total liabilities 1,297.8 1,425.2
- -------------------------------------------------------------------------------------
Stockholders' equity:
Capital stock 29.0 28.4
Paid-in capital 141.8 138.3
Retained earnings 924.2 984.0
Foreign currency translation adjustment (33.4) (14.2)
Net unrealized losses on certain investments (0.3) (1.3)
Treasury stock, at cost (715.3) (656.3)
- -------------------------------------------------------------------------------------
Total stockholders' equity 346.0 478.9
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,643.8 $1,904.1
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 133.5 $ 80.6 $ 264.0
Depreciation and amortization 46.7 48.8 44.7
Gain on marketable securities and investments (7.0) (15.8) (8.9)
Changes in assets and liabilities:
Accounts receivable, net (27.5) (26.1) 6.8
Inventories 20.2 (25.7) (15.7)
Unearned revenue 7.7 5.3 (5.4)
Accounts payable and accrued expenses (33.7) 157.0 23.7
Other, net (42.6) (111.9) (56.9)
- --------------------------------------------------------------------------------
Net change in cash due to operating activities 97.3 112.2 252.3
- --------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from maturities and sales of marketable
securities and short-term investments 107.3 393.1 405.8
Purchases of marketable securities and short-term
investments (23.1) (194.3) (144.2)
Capital expenditures (110.6) (59.6) (50.3)
Proceeds from other long-term investments, net 2.1 13.3 4.3
Other, net (8.1) (2.1) (10.0)
- --------------------------------------------------------------------------------
Net change in cash due to investing activities (32.4) 150.4 205.6
- --------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (193.3) (190.1) (175.5)
Common stock repurchased (66.3) (62.9) (280.2)
Other, net 13.5 37.8 15.4
- --------------------------------------------------------------------------------
Net change in cash due to financing activities (246.1) (215.2) (440.3)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (7.8) (3.9) 13.8
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents (189.0) 43.5 31.4
Cash and cash equivalents at beginning of year 258.1 214.6 183.2
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 69.1 $ 258.1 $ 214.6
- --------------------------------------------------------------------------------
Supplemental information
Cash paid for interest $ 5.3 $ 2.0 $ 1.4
Cash paid for income taxes $ 72.2 $ 158.5 $ 168.8
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Stock Net
------------------------------- Foreign Unrealized
Unamortized Currency (Losses)
Preferred Common Restricted Paid-In Retained Translation Gains on Treasury
In millions, except per share data Stock Stock Stock Capital Earnings Adjustment Investments Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $28.8 $1.4 $(0.6) $ 90.3 $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
various plans -- -- (0.1) 28.0 -- -- -- (1.4) 26.5
Dividends on common stock
($1.55 per share) -- -- -- -- (174.2) -- -- -- (174.2)
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 $28.8 $1.4 $(0.7) $118.3 $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
various plans -- -- (1.1) 20.0 -- -- -- 11.9 30.8
Dividends on common stock
($1.75 per share) -- -- -- -- (188.8) -- -- -- (188.8)
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 $28.8 $1.4 $(1.8) $138.3 $ 984.0 $(14.2) $(1.3) $(656.3) $ 478.9
Net income -- -- -- -- 133.5 -- -- -- 133.5
Translation adjustment -- -- -- -- -- (19.2) -- -- (19.2)
Common stock repurchased -- -- -- -- -- -- -- (66.3) (66.3)
Common stock issued under
various plans -- -- 0.6 3.5 -- -- -- 7.3 11.4
Dividends on common stock
($1.80 per share) -- -- -- -- (192.0) -- -- -- (192.0)
Dividends on preferred
stock -- -- -- -- (1.3) -- -- -- (1.3)
Net unrealized gains on
certain
investments, net of tax -- -- -- -- -- -- 1.0 -- 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $28.8 $1.4 $(1.2) $141.8 $ 924.2 $(33.4) $(0.3) $(715.3) $ 346.0
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except per share data
o 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.
Certain prior year amounts have been reclassified to conform to the current
year 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
In 1997, the company adopted 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." This statement requires that certain assets be
reviewed for impairment and, if impaired, remeasured at fair value, whenever
events or circumstances indicate that the carrying amount of the asset may not
be recoverable. This adoption did not have a material effect on the company's
results of operations, financial position or cash flow for 1997.
In 1997, the company adopted the fair value disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation." As permitted by this
statement, the company did not change the method of accounting for its stock
options and other stock-based employee compensation awards.
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
$166.2, $193.1, $227.8 and $209.5 at June 30, 1997, 1996, 1995 and 1994,
respectively. Additions to the allowances amounted to $548.7, $627.8 and $659.8
and amounts written off amounted to $575.6, $662.5 and $641.5 during the years
ended June 30, 1997, 1996 and 1995, 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 last-in, 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 available-for-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
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 and specifically identifiable anticipated
transactions, 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.
Foreign currency option contracts that reduce the company's exposure to the
effects of fluctuating foreign currencies on its earnings do not meet the
criteria for hedge accounting; however, option contracts that are designated as
hedges and that reduce the company's exposure to the effects of fluctuating
foreign currencies on specifically identifiable anticipated transactions, where
it is probable that the transactions will occur, meet the criteria for hedge
accounting. Forward contracts meet the criteria for hedge accounting as they are
designated as, and are effective as, hedges of specifically identified foreign
currency denominated assets and liabilities.
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, net. If an option contract is terminated before its maturity,
the unamortized premium associated with the contract is written off and included
in other income, net. Option contracts that do not qualify for hedge accounting
are recorded at fair market value, and changes in market value on such
instruments are included in other income, net. The carrying value of option
contracts is included in prepaid expenses and other current assets. Forward
contracts are reflected in the company's balance sheet at market value and
included in receivables, net and accounts payable, and changes in market value
on these instruments are included in other income, net. In the event that the
underlying foreign currency denominated asset or liability is extinguished or
terminated prior to the forward contract's maturity, the company's policy is to
enter into a separate forward contract to offset any changes from that date in
market value on the original contract.
Depreciation and Amortization
Property, plant and equipment are stated at cost, except for property, plant and
equipment that have been impaired, for which the carrying amount is reduced to
the estimated fair market value. 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 five 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.
22
<PAGE>
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 the
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 ten 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.
Stock-Based Compensation
Compensation cost is recognized for stock-based compensation using the intrinsic
value method. Under this method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. The company's policy is to grant stock options at
fair market value at the date of grant.
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 over a period of 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 $942.9, $972.5 and $945.8 were incurred for the years
ended June 30, 1997, 1996 and 1995, respectively. Prepaid promotion costs,
included in prepaid expenses and other current assets, amounted to $44.3 and
$54.2 at June 30, 1997 and 1996, respectively.
Deferred promotion costs, included in other noncurrent assets, amounted to
$119.6 and $98.9 at June 30, 1997 and 1996, 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.
o TWO Other Operating Items
In the fourth quarter of 1997, the company recorded charges of $35.0 ($22.2
after tax, or $0.21 per share), relating primarily to the realignment of the
organization and operations. The company expects to record additional charges in
1998 for the realignment of business processes and operations as components of
the plan are finalized.
The realignment of the organization and operations covers the separation of
employee positions from the worldwide workforce by the end of 1998 primarily
through involuntary severance programs. Also, included in other items in the
table below, are a contract termination relating to the discontinuance of a
distributor relationship and the discontinuance of individual products in
certain business units.
The components of the $35.0 charge, as well as reserve balances remaining
at June 30, 1997, are:
<TABLE>
<CAPTION>
Total
Charged Activity Remaining
- -----------------------------------------------------------
<S> <C> <C> <C>
Employee severance benefits $23.6 $0.2 $23.4
Other items 11.4 -- 11.4
- -----------------------------------------------------------
$35.0 $0.2 $34.8
===========================================================
</TABLE>
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 other operating items originally recorded in
1994, relating to losses on lease terminations and provisions for certain claims
against the company.
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 related 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 charges related to the streamlining included the separation of
approximately 1,300 employees from the worldwide workforce through a combination
of voluntary and involuntary severance programs. Also associated with the
streamlining and included in other items in the table below, are asset write-
downs, contract terminations and the outsourcing of certain functions where it
is cost-beneficial to the company.
The strategic repositioning related primarily to the special interest
magazines in the United States and a publishing and book club business in the
United Kingdom. As a result of this repositioning, Travel Holiday magazine was
sold in 1996, and the publishing and book club business was sold in 1997.
23
<PAGE>
The components of the $204.0 charge, as well as reserve balances remaining at
June 30, 1997, are:
Total
Charged Activity Remaining
- ----------------------------------------------------------
Employee retirement and
severance benefits $104.4 $ 71.1 $ 33.3
Other items 51.5 39.3 12.2
Business repositioning 48.1 47.4 0.7
- ----------------------------------------------------------
$204.0 $157.8 $ 46.2
==========================================================
o THREE Other Income, Net
1997 1996 1995
- ----------------------------------------------------------
Interest income $ 11.4 $ 21.5 $ 40.1
Interest expense (7.0) (2.4) (3.3)
Gains on the sales of
certain investments 7.0 15.8 8.9
Gain (loss) on foreign
exchange 8.5 (6.1) (10.3)
Other, net (2.5) (0.4) (4.8)
- ----------------------------------------------------------
$ 17.4 $ 28.4 $ 30.6
==========================================================
o FOUR Inventories
1997 1996
- ----------------------------------------------------------
Raw materials $ 17.4 $ 33.0
Work-in-progress 26.5 19.9
Finished goods 123.9 151.5
- ----------------------------------------------------------
$167.8 $204.4
==========================================================
Inventories would have been $12.0 and $16.3 higher than the amounts
reported at June 30, 1997 and 1996, respectively, had the FIFO method of
inventory been used for U.S. inventory.
o FIVE Financial Instruments
Marketable Debt Securities
Unrealized Fair
1997 Cost Losses Value
- -----------------------------------------------------------
Debt securities
maturing within:
1 year $ 2.6 $ -- $ 2.6
1 to 3 years 31.1 (0.4) 30.7
- -----------------------------------------------------------
$33.7 $(0.4) $33.3
===========================================================
Unrealized Fair
1996 Cost 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
===========================================================
The fair value of investments is based upon quoted market prices. Proceeds
from maturities and sales were $107.3, $393.1 and $405.8 for the years ended
June 30, 1997, 1996 and 1995 including realized losses of $0.7 in 1997 and gains
of $6.0 and $8.7 in 1996 and 1995, respectively. Short-term investments are
included in prepaid expenses and other current assets.
Derivative Financial Instruments
The company is a party to financial instruments with off-balance sheet risk.
These financial instruments are used in the normal course of business to manage
the company's exposure to fluctuations in foreign exchange rates.
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/
Principal Carrying Fair
1997 Amounts Value Value Maturity
- --------------------------------------------------------
Forward Contracts
Assets $ 28.0 $28.0 $28.0 1998
Liabilities $ 28.0 $27.9 $27.9 1998
Option Contracts
Assets $181.5 $10.5 $12.1 1998
========================================================
Notional/
Principal Carrying Fair
1996 Amounts Value Value Maturity
- --------------------------------------------------------
Forward Contracts
Assets $ 25.4 $25.4 $25.4 1997
Liabilities $ 25.4 $25.4 $25.4 1997
Option Contracts
Assets $300.6 $ 9.6 $10.5 1997
========================================================
24
<PAGE>
o SIX Property, Plant and Equipment
1997 1996
- -----------------------------------------------------------------
Land $ 14.0 $ 17.9
Buildings and building improvements 303.4 240.4
Printing and fulfillment equipment 44.8 53.2
Furniture, fixtures and equipment 285.9 269.0
Leasehold improvements 21.9 23.9
- -----------------------------------------------------------------
670.0 604.4
Accumulated depreciation
and amortization (355.2) (342.9)
- -----------------------------------------------------------------
$ 314.8 $ 261.5
=================================================================
o SEVEN Intangible Assets
1997 1996
- -----------------------------------------------------------------
Distribution rights, contracts, subscription
lists and other $ 71.9 $ 67.8
Excess of cost over fair value of net
assets of businesses acquired 75.5 78.6
- -----------------------------------------------------------------
147.4 146.4
Accumulated amortization (88.3) (88.0)
- -----------------------------------------------------------------
$ 59.1 $ 58.4
=================================================================
o 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 equity and fixed income 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:
<TABLE>
<CAPTION>
U.S. Plans
-------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.8% 7.8% 7.8%
Compensation increase rate 5.3% 5.3% 5.3%
Long-term rate of return on
plan assets 9.5% 9.5% 9.5%
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
International Plans
-------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 4-15% 4-15% 5-15%
Compensation increase rate 3-13% 3-13% 4-13%
Long-term rate of return on
plan assets 5-16% 5-16% 6-16%
=========================================================================================================================
</TABLE>
Components of the company's consolidated net periodic pension cost are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 19.4 $ 20.9 $ 18.8
Interest cost 46.1 44.4 40.1
Actual return on plan assets (151.7) (118.5) (103.3)
Net amortization and deferral 94.2 65.6 54.9
Special items -- 2.5 --
- -------------------------------------------------------------------------------------------------------------------------
$ 8.0 $ 14.9 $ 10.5
=========================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
Over- Under- Over- Under-
funded funded funded funded
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 827.8 $ 2.5 $ 716.2 $ 3.9
Projected benefit
obligation (541.8) (78.9) (528.8) (78.8)
- ---------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 286.0 (76.4) 187.4 (74.9)
Unrecognized net gain (231.3) (1.8) (131.5) (1.6)
Unrecognized net
(asset) liability (22.3) 0.4 (27.5) 0.2
Unrecognized prior
service cost 8.7 4.6 9.4 6.1
Additional minimum
liability -- (2.4) -- (3.4)
- ---------------------------------------------------------------------
Prepaid (accrued)
pension cost $ 41.1 $(75.6) $ 37.8 $(73.6)
- ---------------------------------------------------------------------
Accumulated benefit
obligation $ 472.2 $ 70.7 $ 441.8 $ 69.7
- ---------------------------------------------------------------------
Vested benefit
obligation $ 460.2 $ 64.6 $ 429.5 $ 63.6
=====================================================================
</TABLE>
o 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.
25
<PAGE>
Components of the company's costs for postretirement benefits are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.5 $ 2.9 $ 3.0
Interest cost 7.1 6.1 6.8
Amortization of net gain (0.7) (1.1) (0.3)
Special items -- 3.4 --
- -------------------------------------------------
$ 8.9 $11.3 $ 9.5
=================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Retirees (including covered dependents) $ 74.2 $72.0
Fully eligible active participants 3.5 3.3
Other active participants 21.4 22.4
Unrecognized net gain 20.3 17.3
- ---------------------------------------------------------
$119.4 $115.0
=========================================================
</TABLE>
The health care inflation assumption used to determine the postretirement
benefits liability was 11.0% for 1997 and 12.0% for 1996, decreasing to 8.0% by
the year 2001 with respect to medical benefits, and 10.0% for 1997 and 10.5% for
1996, 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, 1997, by approximately $12.8 and increase the related interest and service
costs for 1997 by approximately $1.6. A discount rate of 7.8% for 1997, 1996 and
1995 was used in determining the accumulated postretirement benefits liability.
o TEN Employee Compensation Plans
The 1989 and 1994 Key Employee Long Term Incentive Plans (the 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). Under the plans, options have been granted with exercise prices
not less than 100% of the fair market value of the company's common stock at the
time of the grant, with an exercise term as determined by the committee, not to
exceed ten years. The options have vesting terms as determined by the committee,
but generally become exercisable over three or four years.
The company has adopted the disclosure provisions of SFAS No. 123, and as
permitted by this statement has continued to measure compensation cost as the
excess of the quoted market price of the company's stock at the grant date over
the amount the employee must pay for the stock. Accordingly, no compensation
expense is recognized for stock option awards other than in the case of
restricted stock awards and stock appreciation rights.
SFAS No. 123 requires disclosure of pro forma net income and earnings per
share as if the fair value-based method had been applied in measuring
compensation cost for stock-based awards granted in 1997 and 1996.
Management believes that 1997 and 1996 pro forma amounts are not
representative of the effects of stock-based awards on future pro forma net
income and earnings per share because these pro forma amounts exclude the pro
forma compensation expense related to unvested stock options granted before
1996. In addition, certain options vest over several years, and awards in future
years may occur, whose terms and conditions may vary.
Reported and pro forma net income and earnings per share amounts are set
forth below:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------
<S> <C> <C> <C>
Net income As reported $133.5 $80.6
Pro forma $126.5 $77.5
Earnings per share As reported $ 1.24 $0.73
Pro forma $ 1.17 $0.71
================================================
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 is
$9.32 and $14.80, respectively. The fair values of the options granted were
estimated on the date of their grant using the Black-Scholes option-pricing
model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 6.3% 6.4%
Expected life 5.1 years 7.8 years
Expected volatility 23.5% 24.4%
Expected dividend yield 3.7% 3.0%
======================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Options
Options in thousands Outstanding Exercisable
-------------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Options Life (yrs.) Price Options Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.00 - $29.44 460 3.36 $26.17 451 $26.14
$35.56 - $39.81 130 9.35 38.09 -- --
$40.31 - $43.56 2,768 7.97 41.41 770 41.51
$45.06 - $49.50 3,417 6.86 47.16 1,919 47.25
$50.94 - $55.12 118 8.05 51.38 21 53.42
----- -----
6,893 7.14 43.35 3,161 42.88
=====================================================================================
</TABLE>
26
<PAGE>
Changes in outstanding options are as follows:
<TABLE>
<CAPTION>
Shares Weighted
Subject to Average
Options in thousands Options Exercise Price
- -----------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994 4,753 $39.64
Granted 1,271 46.82
Exercised (343) 24.93
Canceled (127) 43.92
- -----------------------------------------------------------------
Outstanding at June 30, 1995 5,554 42.09
Granted 1,303 47.20
Exercised (400) 31.11
Canceled (423) 44.62
- -----------------------------------------------------------------
Outstanding at June 30, 1996 6,034 43.76
Granted 1,722 41.04
Exercised (130) 25.67
Canceled (733) 44.53
- -----------------------------------------------------------------
Outstanding at
June 30, 1997 6,893 $43.35
- -----------------------------------------------------------------
Options exercisable at
June 30, 1997 3,161 $42.88
- -----------------------------------------------------------------
Options available for grant at
June 30, 1997 2,383
=================================================================
</TABLE>
Under the 1989 Employee Stock Purchase Plan (the ESPP), which was amended
and restated in 1994, the company is authorized to issue up to 1,650,000 Class A
shares principally to its full-time employees in the United States, nearly all
of whom are eligible to participate. Under the terms of the ESPP, employees can
choose every six months to have up to ten percent of their annual base earnings
withheld to purchase Class A shares. The purchase price of the shares is 85% of
the lower of the fair market value of the Class A stock on the first or last day
of the six-month purchase period. Approximately 50% of eligible employees have
participated in the plan in the last three years. In addition, several
international subsidiaries of the company have employee stock purchase plans
(together with the ESPP, the ESPP plans) under which the company is authorized
to issue up to 300,000 Class A shares to its full-time employees. The terms of
the plans in most locations are essentially the same as the ESPP, except for one
location, where the terms are based upon a five-year withholding period, and the
purchase price of the shares is 85% of the value of the Class A stock on the
first day of the purchase period. Under the ESPP plans, the company sold
239,026, 194,162 and 124,851 shares to employees in 1997, 1996 and 1995,
respectively.
The weighted average fair value of these purchase rights granted in 1997
and 1996 is $13.13 and $11.72, respectively. The fair values of the purchase
rights were estimated on the date of their grant using the Black-Scholes option-
pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.4% 5.3%
Expected life 1.0 years 0.8 years
Expected volatility 29.5% 16.8%
Expected dividend yield 4.3% 3.6%
=================================================
</TABLE>
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. 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 $0.6, $1.3 and $0.3 for the years ended June 30,
1997, 1996 and 1995, respectively.
Additionally, the company granted 8,000 and 12,200 stock appreciation
rights to an executive officer in 1997 and 1996, respectively.
The company contributed $5.0 to its profit-sharing plan for fiscal 1997.
The company's contribution to its profit-sharing plan related to fiscal 1996 was
$5.3 and related to fiscal 1995 was the issuance of 200,898 Class B shares with
a value of $8.7. The company contributed 274,812 Class B shares with a value of
$11.2 in 1995 to its profit-sharing plan in fulfillment of its 1994 contribution
obligation.
o ELEVEN Income Taxes
United States and International income before provision for income taxes are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------
<S> <C> <C> <C>
United States $162.5 $ 59.7 $215.5
International 47.7 78.0 207.0
- ------------------------------------------------------
$210.2 $137.7 $422.5
======================================================
</TABLE>
Components of the company's provision for income taxes are as
follows:
1997 1996 1995
- -----------------------------------------------------------------
Current
Federal $10.0 $ 40.1 $ 57.8
State and local 3.2 16.1 15.2
International 22.0 75.8 92.3
- -----------------------------------------------------------------
$35.2 $132.0 $165.3
- -----------------------------------------------------------------
Deferred
Federal $28.5 $(44.8) $ 1.7
State and local 6.7 (8.7) 0.3
International 6.3 (21.4) (8.8)
- -----------------------------------------------------------------
$41.5 $(74.9) $ (6.8)
- -----------------------------------------------------------------
$76.7 $ 57.1 $158.5
=================================================================
27
<PAGE>
The differences between the effective income tax rate and the statutory
U.S. federal income tax rate are as follows:
1997 1996 1995
- --------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
International operations (0.9) (1.1) (0.6)
State taxes, net 2.6 2.1 2.4
Other operating items -- 6.0 --
Other, net (0.2) (0.5) 0.7
- --------------------------------------------------------------------
Effective tax rate 36.5% 41.5% 37.5%
====================================================================
The major components of the deferred tax assets and liabilities are
as follows:
1997 1996
- ---------------------------------------------------------------------
Assets:
Deferred compensation and other
employee benefits $ 92.8 $ 91.2
Accounts receivable and other
allowances 30.7 52.0
Other, net 123.4 124.2
- ---------------------------------------------------------------------
$246.9 $267.4
- ---------------------------------------------------------------------
Liabilities:
Deferred promotion costs $ 4.8 $ 15.7
Deferred compensation and other
employee benefits 7.0 6.6
Other, net 57.4 28.4
- ---------------------------------------------------------------------
$ 69.2 $ 50.7
- ---------------------------------------------------------------------
$177.7 $216.7
=====================================================================
The balance sheet classification of the deferred tax assets and liabilities
is as follows:
1997 1996
- -------------------------------------------------------------------------
Prepaid expenses and other current assets $ 67.9 $114.0
Other noncurrent assets 122.1 117.9
Other current liabilities 2.5 2.0
Other noncurrent liabilities 9.8 13.2
- -------------------------------------------------------------------------
$177.7 $216.7
=========================================================================
Net operating loss carryforwards totaling $138.8 at June 30, 1997, the
majority of which may be carried forward indefinitely, are available to reduce
future tax of certain subsidiaries and are related to a number of foreign
jurisdictions.
o TWELVE Accrued Expenses
1997 1996
- -----------------------------------------------------
Compensation and other
employee benefits $ 85.3 $103.4
Royalties and copyrights payable 33.1 42.1
Taxes, other than income taxes 19.1 16.9
Other, principally operating
expenses 236.1(1) 294.9(2)
- -----------------------------------------------------
$373.6 $457.3
=====================================================
(1)Includes $81.0 relating primarily to the realignment of the organization and
operations, and the streamlining of the company's organizational structure.
Refer to Note TWO for further explanation.
(2)Includes $123.8 relating primarily to the streamlining of the company's
organizational structure and the strategic repositioning of certain
businesses. Refer to Note TWO for further explanation.
o THIRTEEN Debt
In the fourth quarter of 1997, the company entered into an agreement with The
Chase Manhattan Bank for a line of credit of $75.0 (the line of credit) for a
term of one year to be used for general corporate purposes. The loans under the
line of credit are payable on demand and bear interest at a floating rate based
on the cost of funds of the bank plus a margin.
The company is a party to 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 $400.0 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. The credit agreement obligates the company to
pay a facility fee of .055% of the total commitment, whether used or unused, as
well as a utilization fee of .05% of loans outstanding and administrative fees.
Fees are payable quarterly in arrears. At June 30, 1997, there were no
borrowings outstanding under the line of credit or the credit agreement.
International lines of credit totaled $93.8 and $110.0 at June 30, 1997 and
1996, respectively, of which $30.4 and $24.5 were outstanding at a weighted
average interest rate of 6.1% and 6.3%, respectively. These lines of credit
expire at various dates throughout 1998. Borrowings under these lines of credit
are included in other current liabilities.
28
<PAGE>
o FOURTEEN Capital Stock
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
First Preferred Stock, par value $1.00 per
share; authorized 40,000 shares; issued
and outstanding 29,720 shares $ 3.0 $ 3.0
Second Preferred Stock, par value $1.00
per share; authorized 120,000 shares;
issued and outstanding 103,720 shares 10.3 10.3
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
119,428,472 shares 1.2 1.2
Class B voting common stock, par value
$0.01 per share; authorized 25,000,000
shares; issued and outstanding
21,716,057 shares 0.2 0.2
Unamortized restricted stock (1.2) (1.8)
- -----------------------------------------------------------------
$ 29.0 $ 28.4
- -----------------------------------------------------------------
Common stock in treasury, at cost;
34,826,886 and 33,494,062 Class A
shares in 1997 and 1996, respectively $(715.3) $(656.3)
=================================================================
</TABLE>
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 1997, the company announced its fifth 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 16,000,000 shares of Class A
nonvoting common stock. The company has repurchased a total of 16,768,000 shares
of which 768,000 are related to the fifth program.
o FIFTEEN 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 provided 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. Rental expense amounted to $31.7,
$32.4 and $31.7 in 1997, 1996 and 1995, respectively, and sublease income
amounted to $7.0, $6.9 and $7.1 in 1997, 1996 and 1995, respectively.
Future minimum rental commitments, net of sublease income, for
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Minimum Minimum
Rental Sublease
Payments Income Net
- ------------------------------------------------
<S> <C> <C> <C>
1998 $19.8 $4.7 $15.1
1999 10.5 0.5 10.0
2000 7.6 0.4 7.2
2001 5.4 0.2 5.2
2002 5.0 0.2 4.8
Later years 26.0 0.3 25.7
================================================
</TABLE>
o SIXTEEN Segments
Segment information is located on page 12 of this annual report.
29
<PAGE>
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
As discussed in the Notes to Consolidated Financial Statements, in 1997 the
company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
August 14, 1997
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.
/s/ George V. Grune
George V. Grune
Chairman and Chief Executive Officer
/s/ George S. Scimone
George S. Scimone
Vice President and
Chief Financial Officer
30
<PAGE>
The Reader's Digest Association, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In millions, except per
share data 1997(1) 1996(2) 1995 1994(3) 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues $2,839.0 $3,098.1 $3,068.5 $2,806.4 $2,868.6 $2,614.0 $2,345.1 $2,009.7 $1,832.0
Operating profit $ 192.8 $ 109.3 $ 391.9 $ 393.7 $ 352.7 $ 330.2 $ 292.0 $ 240.1 $ 206.7
Net income $ 133.5 $ 80.6 $ 264.0 $ 246.3 $ 207.3 $ 234.4 $ 209.1 $ 176.0 $ 151.5
Earnings per share before
cumulative effect of
accounting
changes/extraordinary
items $ 1.24 $ 0.73 $ 2.35 $ 2.34 $ 2.16 $ 1.95 $ 1.74 $ 1.48 $ 1.28
Cumulative effect of
accounting changes/
extraordinary items -- -- -- (0.23) (0.42) -- -- -- --
Earnings per share $ 1.24 $ 0.73 $ 2.35 $ 2.11 $ 1.74 $ 1.95 $ 1.74 $ 1.48 $ 1.28
Dividends per common share $ 1.80 $ 1.75 $ 1.55 $ 1.35 $ 1.15 $ 0.80 $ 0.57 $ 0.38 $ 0.28
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Cash and cash equivalents,
short-term
investments and
marketable securities $ 102.4 $ 374.2 $ 532.1 $ 766.9 $ 723.4 $ 804.0 $ 649.7 $ 588.4 $ 505.1
Total assets $1,643.8 $1,904.1 $1,958.7 $2,049.4 $1,872.4 $1,932.3 $1,605.3 $1,434.3 $1,173.7
Stockholders' equity $ 346.0 $ 478.9 $ 640.8 $ 791.0 $ 806.3 $ 934.9 $ 759.6 $ 634.1 $ 449.2
Average common shares
outstanding 106.7 107.9 112.0 115.7 118.7 119.8 119.4 118.3 117.8
Book value per common share $ 2.98 $ 4.18 $ 5.66 $ 6.70 $ 6.65 $ 7.56 $ 6.12 $ 5.07 $ 3.57
===========================================================================================================================
<CAPTION>
In millions, except per
share data 1988 1987
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income Statement Data
Revenues $1,712.0 $1,420.1
Operating profit $ 213.3 $ 149.8
Net income $ 142.3 $ 94.7
Earnings per share before
cumulative effect of
accounting changes/
extraordinary items $ 1.19 $ 0.72
Cumulative effect of
accounting changes/
extraordinary items -- 0.06
Earnings per share $ 1.19 $ 0.78
Dividends per common share $ 0.22 $ 0.17
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Cash and cash equivalents,
short-term investments and
marketable securities $ 411.7 $ 370.2
Total assets $1,054.2 $ 881.4
Stockholders' equity $ 345.4 $ 238.4
Average common shares
outstanding 118.1 119.2
Book value per common share $ 2.69 $ 1.77
===========================================================================================================================
</TABLE>
(1) Results for 1997 include the effect of fourth quarter charges (aggregate
pre-tax charges of $35.0, or $0.21 per share).
(2) 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).
(3) 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).
SELECTED QUARTERLY FINANCIAL DATA
and DIVIDEND AND MARKET INFORMATION (Unaudited)
<TABLE>
<CAPTION>
Stock Price Range
Operating Net Income (Loss) High - Low
Profit Dividends
In millions, except per share data Revenues (Loss) Amount Per Share Per Share Class A Class B
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997(1)
First Quarter $644.0 $ 46.6 $ 34.6 $ 0.32 $0.45 $43 1/2 - 38 1/2 $40 1/4 - 36 1/8
Second Quarter 874.6 132.6 84.1 0.78 0.45 $41 - 34 3/4 $38 1/8 - 33 1/8
Third Quarter 684.3 51.5 37.6 0.35 0.45 $40 1/4 - 28 3/4 $36 7/8 - 27
Fourth Quarter 636.1 (37.9) (22.8) (0.22) 0.45 $30 - 22 1/2 $27 7/8 - 22
- ---------------------------------------------------------------------------------------------------------------------------------
$2,839.0 $192.8 $ 133.5 $ 1.24 $1.80 $43 1/2 - 22 1/2 $40 1/4 - 22
- ---------------------------------------------------------------------------------------------------------------------------------
1996(2)
First Quarter $730.5 $ 81.8 $ 53.9 $ 0.50 $0.40 $47 7/8 - 43 7/8 $44 - 40 3/8
Second Quarter 918.6 144.4 94.8 0.88 0.45 $52 - 46 3/4 $47 7/8 - 43 1/8
Third Quarter 747.5 (170.5) (114.0) (1.06) 0.45 $51 3/8 - 45 1/4 $47 - 41 5/8
Fourth Quarter 701.5 53.6 45.9 0.42 0.45 $47 3/4 - 40 1/2 $43 1/4 - 37
- ---------------------------------------------------------------------------------------------------------------------------------
$ 3,098.1 $109.3 $ 80.6 $ 0.73 $1.75 $52 - 40 1/2 $47 7/8 - 37
=================================================================================================================================
</TABLE>
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, 1997, there were approximately 700 holders of record of the
company's Class A stock, and 100 holders of record of the company's
Class B stock.
(1) Results for 1997 include the effect of fourth quarter charges (aggregate
pre-tax charges of $35.0, or $0.21 per share).
(2) 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).
31
