SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):September 16, 1998
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-10434 13-1726769
(State or other juris- (Commission File (I.R.S. Employer
diction of incorporation Number) Identification No.)
or organization)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(914) 238-1000
ITEM 5. Other Events.
Filed herewith as Exhibit 99.1 is a copy of the
company's news release, issued today, relating to the Company's
strategic initiatives.
ITEM 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial statements of business acquired
Not applicable
(b) Pro forma financial information
Not applicable
(c) Exhibits
Number Description
99.1 Press Release of The Reader's Digest
Association, Inc. dated September 16, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
(Registrant)
by: GEORGE S. SCIMONE
George S. Scimone
Senior Vice President and Chief
dated: September 16, 1998 Financial Officer
EXHIBIT INDEX
Exhibit No. Description
99.1 Press Release of The Reader's Digest
Association, Inc. dated September 16, 1998
Contacts: Janice Conklin (212) 303-8568 Stephen Morello
(914) 244-7717
READER'S DIGEST ANNOUNCES PLANS TO REDUCE COSTS, REDEPLOY ASSETS
IN ORDER TO ENHANCE GROWTH AND PROFITABILITY
Expense Base to be Reduced by $300 - $350 Million Over Next 3
Years
Asset Sales to Realize at Least $200 Million in the Next Year,
Including Sale of Top Pieces from Company's Art Collection
Quarterly Dividend To Be Lowered from $0.225 to $0.05 as Company
Seeks to Invest in Growth Opportunities
Company To Make 2 Acquisitions: American Woodworker and
Good Catalog Company
PLEASANTVILLE, NY, September 16, 1998 -- The Reader's Digest
Association, Inc. [NYSE: RDA, RDB] today announced several moves
designed to reduce the company's costs, better leverage its
strengths and position the company to pursue growth opportunities
going forward.
As a result of these steps announced today, the company expects
to reduce its expense base by between $300 and $350 million over
the next three years, and to realize at least $200 million from
asset sales in the next year. The company also expects to see a
$100 to $150 million increase in profitability on an annualized
basis in three years. For the fiscal year ended June 30, 1999,
the company anticipates that the improved profitability will be
incremental to the modestly improved results it previously has
said it expects.
Thomas O. Ryder, who joined Reader's Digest as Chairman and Chief
Executive Officer in May, said the actions announced today were
the second phase of a three-phase approach to redirecting the
company. It follows the July reorganization of the company's
business units.
"Today we are announcing a specific plan to reduce costs and
better leverage our assets in order to position us for growth.
These actions will help us reach our key operating objectives: to
serve current customers better and get new ones; to be better,
faster and cheaper than our competitors; to free up critical
dollars to fund new projects; and to invest in internal growth
opportunities as well as strategic acquisitions.
"Reader's Digest has great strengths, ranging from our unmatched
global brand and infrastructure, product development
capabilities, database, direct marketing skills and absence of
debt. The changes announced today set the stage for us to seize
tremendous opportunities and help provide the funding for our
growth," he said.
Mr. Ryder also announced agreement on two small acquisitions
which illustrate the company's growth strategy, which will be
developed in coming months. Reader's Digest will purchase the
American Woodworker business from Rodale Press, which leverages
the company's existing leadership in the do-it-yourself field;
and the acquisition of the Good Catalog Company, which offers
products attractive to segments of Reader's Digest's customer
database.
In remarks given today at an analyst meeting, Mr. Ryder outlined
the company's plan in four major areas: cost reductions and re-
engineering; leveraging its asset base; eliminating or scaling
back unproductive businesses; and growth-oriented new
acquisitions.
Cost Reduction, Re-Engineering Efforts Outlined
Mr. Ryder commented, "We are changing a cost structure that was
built for a company much larger than we are today.
Fundamentally, we are going to get smaller and more profitable
first so that we can become larger and more profitable in the
future."
These efforts are concentrated in three areas: a refocus of
mailings and related cost structures; outsourcing activities not
within the company's core skill set; and leveraging the company's
purchasing power.
A. Refocusing Mailings
One of the key issues to address, Mr. Ryder explained, is the
saturation of U.S. and other markets with mailings that chase the
last marginal dollar of revenue without covering the overhead
they created. This saturation diminished mailing effectiveness.
To address these problems across its businesses, the company will
cut back on the number of individual mailings by 20-25%,
eliminating those mailings with the lowest probability of
success. This will enable the company to focus on the best
opportunities and increase response rates. The company will
eliminate the product development costs and overheads associated
with the marginal mailings, a critical step the company never
took previously when it temporarily slowed the number of
mailings.
More specifically, in order to improve profitability at Reader's
Digest magazine, the company will:
Reduce the circulation rate base in the regular U.S. edition by
10-20%, which should improve overall profitability while reducing
advertising and circulation revenue in the short term. Reader's
Digest will still be the largest circulation magazine in the
world, larger than the next three magazines in the world
combined;
Send less direct mail overall by eliminating the least productive
mailings;
Intensify marketing to younger constituencies, who are vital to
the long-term health of the franchise; and
Broaden the audience and build brand support by selling the
magazine through direct response television and radio, as well as
increase efforts on the Reader's Digest Large Edition for Easier
Reading and a Spanish-language version of the U.S. edition.
B. Focus on Core Skills
The second major element of the company's expense reduction
effort is to outsource a number of support and related
activities. These activities include warehousing, lettershop
work, payroll management, call center management, magazine
fulfillment and LAN maintenance and coding.
In addition, the company is also looking at combining functions
internally -- creating service utilities that support multiple
businesses and locations.
C. Leverage Purchasing Power
Mr. Ryder noted that while Reader's Digest is the largest
individual customer for many of its suppliers, much of the
company's buying is done as if it were dozens of small companies.
To address this situation, the company is working to consolidate
suppliers; standardize certain practices in order to increase
purchasing power; partner with major suppliers early in the
manufacturing process; and improve inventory and working capital
management.
As a result of these and other efforts, Mr. Ryder indicated that
the company hoped to achieve a 10-15% reduction in its $850
million addressable cost base over time.
Company to Eliminate Unproductive Businesses
The company announced that it would change, close or sell
businesses that offer little prospect of profitability as
currently conceived. These actions include:
Dramatically scaling back the adult trade book business;
Scaling back efforts in children's publishing in the United
States and United Kingdom, and instead focus efforts on the
direct mail Young Families business;
Eliminating or sharply curtailing video or music businesses in
some markets outside the U.S.;
Terminating the Today's Best Nonfiction book series in the
U.S. and most markets outside the U.S.;
Reexamining the proprietary publishing efforts in the Nordic
countries, Benelux, Italy and South Africa; and
Ending several unsatisfactory alliances.
The company said that it expects to complete all of these efforts
within the next 18 months. The company also expects that the
annualized reduction of all expenses will total $300 to $350
million in its Fiscal Year ended June 30, 2001.
Company to Leverage Asset Base
Mr. Ryder also announced several steps designed to get greater
value for shareholders from existing assets and resources. These
include:
The company's art collection. As announced on September 15,
1998, Reader's Digest will sell the 39 top pieces from its
corporate art collection, including works by Monet, Van Gogh,
Modigliani, Matisse, Renoir and others. These pieces represent
the overwhelming percentage of value in the collection, and are
estimated to bring a total approaching $100 million at a
Sotheby's auction on November 16, 1998.
Mr. Ryder said, "This collection means a great deal to all of us
at Reader's Digest, and is part of the heritage of our company.
However, we can put the value of these works to better and more
effective use for our shareholders by investing it in growth
opportunities for our business."
Real estate holdings. The company will also sell certain real
estate holdings as soon as possible. This includes the imminent
sale of the major building owned by the company in the Canary
Wharf complex in London, part of which the company will lease
back for its London operations.
In addition, the company plans to vacate and sublet one of its
facilities in New York City and relocate some staff to its
Pleasantville global headquarters, which the company will retain.
All asset sales combined are expected to yield approximately $200
million for the company.
Dividend. The company's Board of Directors expects to reduce the
quarterly dividend from $0.225 to $0.05, effective the company's
second fiscal quarter ending December 31, 1998. This reduction
will improve free cash flow of the company by $75 million on an
annualized basis.
Mr. Ryder said, "Reducing the dividend is not a step we take
lightly. However, we believe that a company should not pay out
in dividends more than it earns for very long, and that
dividends, given current tax laws, are not the most efficient way
to return money to shareholders. And we are convinced that
reinvesting in the business and in select growth opportunities
will produce a greater return for shareholders than will paying
our current dividend."
Company Acquires American Woodworker, Good Catalog
Mr. Ryder said, "I came to Reader's Digest not to reduce costs,
but to grow the business profitably and add value for
shareholders and customers alike. The acquisitions of American
Woodworker and Good Catalog are small illustrations of the kind
of growth we are looking for at Reader's Digest. These companies
fit well with our existing business and leverage our core skills,
and also help us to develop skills in complementary areas. And
we are looking forward to discussing additional details on our
growth strategy in January, as previously announced."
The company's acquisition of the American Woodworker business
includes the American Woodworker magazine, with a rate base of
325,000; a specialty woodworking book business; and a related
consumer trade show business.
Already Reader's Digest publishes The Family Handyman magazine,
with a rate base of
1.1 million. The acquisition of American Woodworker leverages
this positioning in the do-it-yourself market; the company
expects to have further opportunities to target sub-segments in
this market. The trade show business also provides the company
with skills that can be leveraged across other interest groups it
already serves.
The Good Catalog Company, of Portland, Oregon, markets
merchandise through nine different catalog brands and has $30
million in annual revenue. Good Catalog sells merchandise on
consignment or drop shipment from manufacturers, thus carrying
little inventory itself, and also sells advertising space for the
products in its catalogs.
Joint testing between Reader's Digest and Good Catalog shows that
there are large segments of the Reader's Digest customer database
to which it will be productive to sell the Good Catalog products.
Those segments include some elements of the company's customer
database that it is not currently reaching effectively.
Mr. Ryder concluded by commenting, "The actions we are announcing
today are essential precursors to growing the company profitably.
They help ensure that our business is a sound platform that can
realistically support and sustain profitable growth over the long
term."
The Reader's Digest Association, Inc. is a global publisher and
direct marketer of products that inform, enrich, entertain and
inspire people of all ages and all cultures around the world.
Global headquarters are located at Pleasantville, New York.
(Statements contained in this news release, if not historical,
are forward-looking statements, which involve risks and
uncertainties that could cause actual results to differ
materially from the results described in the forward-looking
statements. A discussion of factors that could affect the
company's results is included in the company's reports filed with
the Securities and Exchange Commission.)
