FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer
Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
As of December 31, 1997, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 84,733,370 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
Page 1 of 16 pages.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
Index to Form 10-Q
December 31, 1997
Part I - Financial Information Page No.
The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three and six-month periods ended December 31, 1997
and 1996 3
Consolidated Condensed Balance Sheets
as of December 31, 1997 and June 30, 1997 4
Consolidated Condensed Statements of Cash Flows
for the six-month periods ended December 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II - Other Information 14
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and six-month periods ended December 31, 1997 and 1996
(In millions, except per share data)
(unaudited)
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
Revenues $ 812.5 $ 874.6 $ 1,373.9 $ 1,518.6
Product,
distribution and 297.8 297.4 501.3 519.1
editorial expense
Promotion, marketing
and administrative 428.3 444.6 799.7 820.3
expense
Other operating --- --- 70.0 ---
items
Operating profit 86.4 132.6 2.9 179.2
Other income 0.4 (0.3) 6.6 7.7
(expense), net
Income before
provision 86.8 132.3 9.5 186.9
for income taxes
Provision for income
taxes 32.5 48.2 11.6 68.2
Net income (loss) $ 54.3 $ 84.1 $ (2.1) $ 118.7
Earnings (loss) per $ 0.51 $ 0.78 $ (0.03) $ 1.10
share
Average common
shares 106.3 106.6 106.3 107.0
outstanding
Dividends per common $ 0.225 $ 0.45 $ 0.45 $ 0.90
share
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of December 31, 1997 and June 30, 1997
(In millions)
(unaudited)
<TABLE>
December 31, June 30,
1997 1997
<C> <S> <S>
Assets
Cash and cash equivalents $ 62.5 $ 69.1
Receivables, net 610.6 426.3
Inventories 180.0 167.8
Prepaid expenses and other current assets 267.1 262.6
Total current assets 1,120.2 925.8
Property, plant and equipment, net 298.9 314.8
Other noncurrent assets 332.3 403.2
Total assets $ 1,751.4 $ 1,643.8
Liabilities and stockholders' equity
Accounts payable $ 190.9 $ 211.8
Accrued expenses 436.1 373.6
Short-term borrowings 88.1 30.3
Income taxes payable 30.5 22.1
Unearned revenue 407.5 356.5
Other current liabilities 18.1 18.8
Total current liabilities 1,171.2 1,013.1
Other noncurrent liabilities 295.5 284.7
Total liabilities 1,466.7 1,297.8
Capital stock 29.4 29.0
Paid-in capital 141.5 141.8
Retained earnings 873.6 924.2
Foreign currency translation adjustment (47.1) (33.4)
Net unrealized losses on certain (0.1) (0.3)
investments
Treasury stock, at cost (712.6) (715.3)
Total stockholders' equity 284.7 346.0
Total liabilities and stockholders' equity $ 1,751.4 $ 1,643.8
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six-month periods ended December 31, 1997 and 1996
(In millions)
(unaudited)
<TABLE>
Six-month period ended
December 31,
1997 1996
<C> <S> <S>
Cash flows from operating activities
Net (loss) income $ (2.1) $ 118.7
Depreciation and amortization 23.1 23.1
Other, net (82.7) (171.6)
Net change in cash due to operating (61.7) (29.8)
activities
Cash flows from investing activities
Proceeds from maturities and sales of
short-term investments and marketable 10.1 48.8
securities
Purchases of short-term investments and (1.0) (21.2)
marketable securities
Proceeds from other long-term investments, 46.6 1.0
net
Other, net (11.6) (16.4)
Net change in cash due to investing 44.1 12.2
activities
Cash flows from financing activities
Short-term borrowings, net 57.9 26.7
Dividends paid (48.5) (97.2)
Common stock repurchased --- (61.5)
Other, net 2.7 6.7
Net change in cash due to financing 12.1 (125.3)
activities
Effect of exchange rate changes on cash (1.1) (1.7)
Net change in cash and cash equivalents (6.6) (144.6)
Cash and cash equivalents at beginning of 69.1 258.1
period
Cash and cash equivalents at end of period $ 62.5 $ 113.5
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended December 31, 1997 and 1996 are the second fiscal
quarters of fiscal year 1998 and fiscal year 1997, respectively.
The accompanying consolidated condensed financial statements have
not been audited, but in the opinion of management, have been
prepared in conformity with generally accepted accounting principles
applying certain judgments and estimates which include all
adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly such information. Operating
results for any interim period are not necessarily indicative of the
results for an entire year due to the seasonality of the company's
business.
(2) Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing net income (loss),
less preferred stock dividend requirements of $0.3 in each of the
three-month periods ended December 31, 1997 and 1996, and $0.7 in
each of the six-month periods ended December 31, 1997 and 1996 by
the weighted average number of common shares outstanding during the
period.
(3) Inventories
December 31, June 30,
1997 1997
Raw materials $ 17.8 $ 17.4
Work-in-progress 21.1 26.5
Finished goods 141.1 123.9
$ 180.0 $ 167.8
(4) Revenues by Business Segments and Geographic Areas
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
1997 1996 1997 1996
<C> <S> <S> <S> <S>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 187.1 $ 187.6 $ 359.2 $ 362.5
Books and Home 476.5 549.0 828.5 988.2
Entertainment Products
Special Interest Magazines 25.0 22.0 46.3 37.7
Other Businesses 123.9 116.0 139.9 130.2
Total revenues $ 812.5 $ 874.6 $1,373.9 $1,518.6
GEOGRAPHIC AREAS
United States $ 387.2 $ 396.3 $ 635.7 $ 665.8
Europe 306.8 354.0 524.5 629.6
Pacific and Other Markets 118.5 124.3 213.7 223.2
Total revenues $ 812.5 $ 874.6 $1,373.9 $1,518.6
</TABLE>
(5) Other Operating Items
In the first quarter of 1998, the company recorded charges of $70.0
(the 1998 charges) ($51.8 after tax, or $0.49 per share) composed
primarily of severance costs associated with workforce reductions in
Europe, the United States and at the corporate level; and other costs
associated with the discontinuation of certain businesses and the
realignment of business processes and operations. Businesses that
were discontinued include a children's book club in the United States,
and the company's investment in LookSmart, a World Wide Web navigation
service. The realignment of business processes and operations also
relates to certain vendor contracts in the United States and Europe.
The components of these charges are reported in the table below.
As described in Note 2 to the company's consolidated financial
statements included in its 1997 Annual Report to Stockholders, the
company recorded charges of $35.0 in the fourth quarter of 1997, and
charges of $204.0 in the third quarter of 1996, relating primarily to
the realignment of the organization and operations and to the
streamlining of the company's organizational structure and the
strategic repositioning of certain businesses, respectively. The
components of these charges, as well as reserve balances remaining at
December 31, 1997, were:
<TABLE>
Balance at 1998 Current Balance
June 30, 1997 Charges Activity Remaining
<C> <S> <S> <S> <S>
Employee retirement & severance $ 56.7 $ 39.5 $ 17.1 $ 79.1
benefits
Other items 23.6 23.1 8.6 38.1
Business repositioning 0.7 7.4 2.1 6.0
Total $ 81.0 $ 70.0 $ 27.8 123.2
</TABLE>
(6) Debt
In September 1997, the company entered into an agreement with Morgan
Guaranty Trust Company of New York for an uncommitted line of credit
of $50.0 (the Morgan line of credit) to be used for general corporate
purposes. The loans under the Morgan 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. At December 31, 1997, no borrowings were
outstanding under the Morgan line of credit.
As described in Note 13 to the company's consolidated financial
statements included in its 1997 Annual Report to Stockholders, the
company is a party to an agreement with The Chase Manhattan Bank for a
line of credit of $75.0 (the Chase line of credit) and a Competitive
Advance and Revolving Credit Facility Agreement (the credit agreement)
of up to $400.0. Under the credit agreement, the company must comply
with certain financial covenants, including a calculation of
consolidated tangible net worth, which calculation was modified in the
first quarter of 1998. At December 31, 1997, no borrowings were
outstanding under the Chase line of credit and borrowings in the
amount of $50.0 were outstanding under the credit agreement at a
weighted average interest rate of 6.0%. In addition, various
international subsidiaries of the company have available lines of
credit totaling $88.7. At December 31, 1997, loans in the amount of
$35.3 were outstanding under international lines of credit at a
weighted average interest rate of 6.1%.
(7) Stock Option and Stock Appreciation Rights Repricing
On October 9, 1997, options and stock appreciation rights related to
2.1 million shares of Class A common stock were granted to eligible
employees pursuant to the 1989 and 1994 Key Employee Long Term
Incentive Plans (October grant). The October grant was never
distributed to over 800 employees. The exercise price of the October
grant was $27.03 per share, the fair market value of the company's
common stock at October 9, 1997. These options provided for vesting
ratably over four years and could be exercised over a period of ten
years from the date of grant. On November 18, 1997, the October grant
was canceled and options and stock appreciation rights related to 2.1
million shares of Class A common stock were reissued to eligible
employees at a price of $21.47 per share, the fair market value of the
company's stock at November 18, 1997 (November grant). This
reissuance was in connection with a significant revision of the
company's executive compensation structure, involving the elimination
of long-term cash performance awards, the reduction of annual cash
bonuses and the greater reliance on equity incentive awards. The
other terms of the November grant were not changed from the terms of
the October grant.
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Results of Operations
Three-Month Period Ended December 31, 1997 Compared With Three-Month
Period Ended December 31, 1996
Worldwide revenues for the second quarter of 1998 decreased to
$812.5, or by 7%, compared with $874.6 in the second quarter of
1997. Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 3%. Revenues declined primarily
in the company's European and, to a lesser extent, United States
operations. The decrease in revenues was due almost equally to
sales of a lower-priced product mix and lower unit sales in most
product lines within Books and Home Entertainment Products as a
result of a combination of lower mail quantities and lower customer
response to promotional mailings in major markets. The company
reported worldwide operating profit of $86.4 in the second quarter
of 1998, compared with $132.6 in the second quarter of 1997. These
operating results reflect lower revenues in major markets,
significant declines in revenues and operating profit in Germany,
higher proportionate promotional spending, and increased investment
in product development, testing, and list development initiatives.
The company reported net income of $54.3, or $0.51 per share, in
the second quarter of 1998, compared with $84.1, or $0.78 per share,
in the second quarter of 1997.
Other Income (Expense), Net
Other income (expense), net increased in the second quarter of 1998
to $0.4, compared with $(0.3) in the prior year. This increase was
primarily because of favorable effects of foreign exchange
transactions and hedging activity, and lower losses on certain
investments, which were partially offset by higher interest expense
in 1998.
Income Taxes
The overall effective tax rate was 37.5% for the second quarter of
1998, compared with 36.5% for the second quarter of 1997. The
higher effective tax rate in 1998 was primarily due to reduced
utilization of foreign tax credits.
Geographic Areas
United States
Revenues in the United States decreased from $396.3 in 1997 to
$387.2, or by 2%, in 1998. This decrease was primarily attributable
to lower unit sales as a result of lower customer response to
promotional mailings, reduced mail quantities and, to a lesser
extent, lower-priced product offerings and sales of a lower-priced
product mix across all product lines within Books and Home
Entertainment Products, particularly with respect to series books
and video products. These declines were partially offset by
increased revenues at QSP as well as in Reader's Digest Magazine and
Special Interest Magazines. The decrease in series books was
primarily a result of one fewer series mailing in 1998, and the
discontinuance of another book series. Revenues for video products
declined due to lower customer response to promotional mailings and
the effect of lower-priced video products. The increase in Reader's
Digest Magazine was primarily attributable to higher circulation
revenues and the increase in Special Interest Magazines was
primarily a result of the acquisition of Walking magazine in the
third quarter of 1997. Operating profit decreased in 1998, compared
with 1997, due to the revenue decrease, spending on investment
initiatives such as new product development, testing and list
development projects and higher promotional spending.
Europe
Revenues in Europe decreased from $354.0 in 1997 to $306.8, or by
13%, in 1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 5%. The revenue
decrease was primarily due to lower-priced product offerings and
sales of a lower-priced product mix, and, to a lesser extent, lower
unit sales of Books and Home Entertainment Products. Within this
segment revenues declined in all product lines except for general
books. Product expansion in Eastern European markets, particularly
in general books, music and video product lines, was offset by
continued lower sales in major markets, particularly in Germany,
where sales and operating profit have declined disproportionately to
other markets. Lower sales were as a result of lower paid shipments
due to fewer customers carried into 1998 for series product lines,
lower mail quantities and lower customer response to promotional
mailings. Operating profit decreased significantly in 1998,
compared with 1997, as a result of lower revenues, higher
proportionate promotional spending and higher proportionate product
carrying costs.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $124.3 in 1997
to $118.5, or by 5%, in 1998. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues increased 2%.
Revenues increased in both Reader's Digest Magazine and Books and
Home Entertainment Products. Within Books and Home Entertainment
Products, the increase in revenues was due to higher general books
and music products sales, which were partially offset by declines in
the video product line. Higher revenues in Latin America,
reflecting product expansion primarily in Brazil, were partially
offset by revenue declines in Canada, due in part to the effects of
a postal strike in November 1997, and, to a lesser extent, in
Australia and South Africa because of reduced mail quantities and
lower customer response to promotional mailings. Operating results
declined significantly in 1998, compared with 1997, primarily
because of lower revenues and higher promotional spending.
Corporate Expense
Corporate Expense in the second quarter of 1998 declined to $5.5,
compared with $13.7 in 1997, primarily as a result of savings in
employee benefit costs and the benefit of cost-containment
initiatives.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine remained almost even with the
prior year at $187.1. Excluding the adverse effect of changes in
foreign currency exchange rates, revenues increased 4%. The
increase in revenues was principally attributable to increased
circulation revenues. Increased circulation levels in Eastern
Europe, Brazil and Thailand were partially offset by circulation
declines in several major markets. Higher circulation revenues in
the United States were attributable to a higher-priced mix of
subscriptions and higher levels of renewals in 1998. Globally, a
lower number of advertising pages sold in 1998 was offset by a
higher average rate per page. A higher number of advertising pages
in Europe and in Pacific and Other Markets was more than offset by
lower pages in the United States. Rate per advertising page
increased primarily due to a higher negotiated rate per page in the
United States. Operating profit for Reader's Digest Magazine
improved in the second quarter of 1998 compared with the same period
a year ago. The increase reflects the benefit of cost-containment
initiatives and lower paper costs in the United States, offset by
higher promotional spending to acquire and renew subscribers who
purchase the company's other products. Consistent with industry
practice, the company periodically evaluates the financial
implications of the circulation rate base of Reader's Digest
Magazine. In order to increase the efficiency of its promotional
spending, the company is presently reviewing possible rate base
reductions in selected major markets.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$549.0 in 1997 to $476.5, or by 13%, in 1998. Excluding the adverse
effect of changes in foreign currency exchange rates, revenues
decreased 8%, principally attributable to the company's United
States and European operations. The decrease in revenues was almost
equally due to lower unit sales and sales of a lower-priced product
mix across most product lines. Lower revenues in series books and
video products were partially offset by an increase in general books
sales. The decline in series books was a result of lower shipments
in Europe due to fewer series customers carried into 1998. In the
United States, series revenues declined due to one fewer series
mailing as well as the discontinuance of another book series in
1998. Video sales declined due to lower customer response to
promotional mailings in the United States and certain other major
markets, as well as the effect of lower-priced video products in the
United States. Reduced revenues in certain major markets caused by
lower customer response to promotional mailings and the effect of
reduced mail quantities, were offset by expansion in Eastern Europe
and Latin America. Operating profit for Books and Home Entertainment
Products decreased significantly in 1998, compared with 1997. These
operating results were affected by lower revenues, higher
proportionate promotional spending and increased spending on
investment initiatives such as new product development, testing and
list development projects.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $22.0 in 1997
to $25.0, or by 14%, in 1998. This increase was primarily
attributable to the acquisition of Walking magazine in the third
quarter of 1997. Excluding Walking, revenues increased 5%,
principally due to a higher number of advertising pages sold in the
second quarter of 1998. Operating results declined in 1998 compared
with 1997 primarily due to increased promotional spending associated
with Walking.
Six-Month Period Ended December 31, 1997 Compared With Six-Month
Period Ended December 31, 1996
Other Operating Items
In the first quarter of 1998, the company recorded charges of $70.0
($51.8 after tax, or $0.49 per share) composed primarily of
severance costs of $39.5 associated with workforce reductions in
Europe, the United States, and at the corporate level; and other
costs associated with the discontinuation of certain businesses and
the realignment of business processes and operations. Businesses
that were discontinued include a children's book club in the United
States, and the company's investment in LookSmart, a World Wide Web
navigation service. The realignment of business processes and
operations also relates to certain vendor contracts in the United
States and Europe.
Management's discussion and analysis, as it pertains to geographic
and business segment information, has been written excluding the
effect of these charges.
Revenues/Operating Profit
Worldwide revenues for the six-month period ended December 31, 1997
decreased to $1,373.9, or by 10%, compared with $1,518.6 in the six-
month period ended December 31, 1996. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues decreased
5%. This decrease was due almost equally to lower unit sales and
lower-priced product offerings and sales of a lower-priced product
mix. Revenues declined primarily in the company's European and
United States operations. Within Books and Home Entertainment
Products, the decrease in revenues was predominantly due to lower
unit sales in certain product lines as a result of a combination of
lower mail quantities and lower customer response to promotional
mailings in major markets. The company reported worldwide operating
profit of $2.9 in the six-month period ended December 31, 1997,
compared with $179.2 in the six-month period ended December 31,
1996. Excluding the effect of other operating items, operating
profit was $72.9 in the six-month period ended December 31, 1997.
These operating results reflect lower revenues in major markets,
significant declines in revenues and operating profit in Germany,
higher proportionate promotional spending, and increased investment
in product development, testing and list development initiatives.
The company reported a net loss of $2.1, or $0.03 per share, in the
six-month period ended December 31, 1997, compared with net income
of $118.7, or $1.10 per share, in the six-month period ended
December 31, 1996. Excluding the effect of other operating items,
earnings per share was $0.46 per share in the six-month period
ended December 31, 1997.
Other Income, (Expense) Net
Other income, (expense) net decreased in the six-month period ended
December 31, 1997 to $6.6, compared with $7.7 in the prior year.
This decrease was primarily because of higher interest expense,
lower interest income and lower gains on sales of certain
investments in 1998, which were partially offset by favorable
effects of foreign exchange transactions and hedging activity.
Income Taxes
For the six-month period ended December 31, 1997, the reported tax
rate was 122%. Excluding the effect of other operating items, the
overall effective tax rate was 37.5% for the six-month period ended
December 31, 1997. For the six-month period ended December 31,
1996, the effective tax rate was 36.5%. The higher effective tax
rate in 1998 was primarily due to reduced utilization of foreign tax
credits.
Geographic Areas
United States
Revenues in the United States decreased from $665.8 in 1997 to
$635.7, or by 5%, in 1998. This decrease was primarily attributable
to lower unit sales in the general books and Condensed Books product
lines within Books and Home Entertainment Products, which were
partially offset by increased revenues in Special Interest
Magazines. The decrease in general books was primarily a result of
lower customer response to promotional mailings in 1998. The
decline in Condensed Books was a result of timing of promotional
mailings, as well as a reduction in paid shipments due to fewer
customers carried into 1998 who were participating in the series.
The increase in Special Interest Magazines was primarily a result of
the acquisition of Walking magazine in the third quarter of 1997.
Operating profit decreased significantly in 1998, compared with
1997, due to the revenue decrease, higher promotional spending and
spending on investment initiatives such as new product development,
testing and list development projects.
Europe
Revenues in Europe decreased from $629.6 in 1997 to $524.5, or by
17%, in 1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 7%. The revenue
decrease was primarily due to lower-priced product offerings and
sales of a lower-priced product mix, and, to a lesser extent, lower
unit sales of Books and Home Entertainment Products. Within this
segment revenues declined principally in the series books and
Condensed Books product lines. Product expansion in Eastern European
markets, particularly in general books, music and video product
lines, was offset by continued lower sales in major markets,
particularly in Germany, where sales and operating profit have
declined disproportionately to other markets. Lower sales were as a
result of lower paid shipments due to fewer customers carried into
1998 for series books and Condensed Books product lines, lower mail
quantities and lower customer response to promotional mailings.
Operating profit decreased significantly in 1998, compared with
1997, as a result of lower revenues, higher proportionate
promotional spending and higher proportionate product carrying
costs.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $223.2 in 1997
to $213.7, or by 4%, in 1998. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues increased 1%.
Lower Books and Home Entertainment Products revenues were more than
offset by increased Reader's Digest magazine circulation revenues.
Within Books and Home Entertainment Products, the decline in
revenues was due to lower unit sales of Condensed Books, and, to a
lesser extent, lower-priced product offerings and sales of a lower-
priced product mix in the general books product line. Higher
revenues in Latin America, reflecting product expansion primarily in
Brazil, were more than offset by significant revenue declines in
Canada and Australia because of lower customer response to
promotional mailings, and, to a lesser extent due to the effects of
a postal strike in Canada in November 1997. Operating results
declined significantly in 1998, compared with 1997, primarily
because of lower revenues and higher promotional and overhead
spending.
Corporate Expense
Corporate Expense in the six-month period ended December 31, 1997
declined to $16.4, compared with $24.4 a year ago, primarily as a
result of savings in employee benefit costs and the benefit of cost-
containment initiatives.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $362.5 in 1997
to $359.2, or by 1%, in 1998. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues increased 4%.
The increase in revenues was attributable to higher circulation
revenues, and, to a lesser extent, higher advertising revenues.
Increased circulation levels in Brazil, Eastern Europe and Thailand
were partially offset by circulation declines in several major
markets. In addition, higher circulation revenues in the United
States were attributable to a higher-priced mix of subscriptions. A
higher number of advertising pages sold in the Pacific and Other
Markets was partially offset by a lower number of pages sold in the
United States. Rate per advertising page increased due to a higher
negotiated rate in the United States. Operating profit for Reader's
Digest Magazine decreased in the six-month period ended December 31,
1997 compared with the same period a year ago. The decrease
reflects higher promotional spending to acquire and renew
subscribers who purchase the company's other products and spending
on investment initiatives such as list development projects.
Consistent with industry practice, the company periodically
evaluates the financial implications of the circulation rate base of
Reader's Digest Magazine. In order to increase the efficiency of
its promotional spending, the company is presently reviewing
possible rate base reductions in selected major markets.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$988.2 in 1997 to $828.5, or by 16%, in 1998. Excluding the adverse
effect of changes in foreign currency exchange rates, revenues
decreased 11%, principally attributable to the company's United
States and European operations. The lower revenues were
predominantly due to lower unit sales in the Condensed Books, series
books and general books product lines. The decline in Condensed
Books and series books revenues was caused by a combination of lower
customer response to promotional mailings in major markets, reduced
mail quantities in many markets and lower paid shipments due to
fewer customers carried into 1998. In addition, the timing of
Condensed Books mailings and the number of series mailings in the
United States also contributed to lower revenues. The decrease in
general books sales was primarily a result of lower customer
response to promotional mailings in the United States and certain
other major markets, which was partially offset by growth in Eastern
Europe and Latin America. Operating profit for Books and Home
Entertainment Products decreased significantly in 1998, compared
with 1997. These operating results were affected by lower revenues,
higher proportionate promotional spending and increased spending on
investment initiatives such as new product development, testing, and
list development projects.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $37.7 in 1997
to $46.3, or by 23%, in 1998. This increase was primarily
attributable to the acquisition of Walking magazine in the third
quarter of 1997. Excluding Walking, revenues increased 6%,
principally due to a higher number of advertising pages sold in the
six-month period ended December 31, 1997. Operating results
improved in 1998 compared with 1997 primarily as a result of the
higher advertising revenues, which were partially offset by
increased promotional spending associated with Walking.
Forward-Looking Information
The company continues to believe that 1998 is a year of stabilizing
and rebuilding its core business.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year,
with the result that date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, potentially
causing a system failure or miscalculations that could disrupt
operations.
The company has completed an assessment of the year 2000 issue with
respect to its computer systems and is currently executing a plan to
convert all affected systems. The company believes that its plan
will be completed in a timely manner and that the total cost of its
plan will not have a material effect on the results of operations of
the company. The company is in the process of formal communications
with its significant suppliers to determine the extent to which it
may be affected by those third parties' plans to remediate their own
year 2000 issue in a timely manner.
*****
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 effect of increased market
testing of the company's promotions and products, the effect of
modified and varied promotions, the ability to identify customer
trends, the ability to continue to create a broadly appealing mix of
new products, the ability to attract and retain new and younger
magazine subscribers and product customers in view of the maturing
of an important portion of the U.S. customer base, the effect of
selective adjustments in pricing, the ability to expand and more
effectively utilize the company's customer database, the ability to
expand into new international markets and to introduce new product
lines into new and existing markets, the ability to expand into new
channels of distribution, the ability to negotiate and implement
productive strategic alliances and joint ventures, the ability to
contain and reduce costs, especially through global efficiencies,
the cost and effectiveness of the realignment of business processes
and operations, the accuracy of management's assessment of the
current status of the company's business, the evolution of the
company's organizational and structural capabilities, including the
effect of the transition to a future chief executive officer, the
effect of privacy and other governmental regulation, the ability of
the company to respond to competitive pressures within and outside
of the direct mail industry, the effect of worldwide paper and
postage costs, the effect of postal disruptions on deliveries, the
effect of foreign currency fluctuations, the effect of the year 2000
issue, and general economic conditions.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and marketable
securities decreased from $102.4 at June 30, 1997, to $86.6 at
December 31, 1997. The decrease was primarily due to cash used by
operations of $61.7 and dividend payments of $48.5 which were
partially offset by net proceeds from short-term borrowings of $57.9
and proceeds from the sale of other long-term investments of $46.6.
In the second quarter of 1998, the company paid a $0.225 per share
dividend on its common stock, representing a 50% decrease compared
with $0.45 per share a year ago. At the current rate, the
annualized dividend is $0.90 per share in 1998 compared with $1.80
in 1997.
The company did not repurchase any shares of Class A nonvoting
common stock in the second quarter of 1998.
In September 1997, the company entered into an agreement with Morgan
Guaranty Trust Company of New York for an uncommitted line of credit
of $50.0 (the Morgan line of credit) to be used for general
corporate purposes. The loans under the Morgan 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. At December 31, 1997 there
were no borrowings outstanding under the Morgan line of credit.
The company is party to an agreement with The Chase Manhattan Bank
for a line of credit of $75.0 (the Chase line of credit) for a term
of one year to be used for general corporate purposes. The loans
under the Chase 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. At December 31, 1997 there were no borrowings
outstanding under the Chase line of credit. In addition, various
international subsidiaries of the company have available lines of
credit totaling $88.7. At December 31, 1997, loans in the amount of
$35.3 were outstanding under international lines of credit, at a
weighted average interest rate of 6.1%.
The company is also 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, which calculation
was modified in the first quarter of 1998. At December 31, 1997,
borrowings in the amount of $50.0 were outstanding under the credit
agreement at a weighted average interest rate of 6.0%.
The company believes that its liquidity, capital resources, cash
flow and borrowing capacity are sufficient to fund normal capital
expenditures, working capital requirements, the payment of
dividends, and present plans to expand existing product lines in
existing markets, to identify and develop new products and markets,
and to enter into strategic alliances.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1997 Annual Meeting of Stockholders of the Company, held on
December 12, 1997, the following matters were voted on by the
stockholders:
Proposal 1:Election of Directors to hold office until the next Annual
Meeting or until their successors are duly elected and qualified.
Each nominee was elected by the votes cast as follows:
For Withheld
George V. Grune 19,817,225 1,265,835
Melvin R. Laird 19,808,466 1,274,594
Lynne V. Cheney 19,809,340 1,273,720
M. Christine DeVita 19,813,719 1,269,341
James E. Preston 19,816,699 1,266,361
Robert G. Schwartz 19,814,771 1,268,289
C.J. Silas 19,812,399 1,270,661
William J. White 19,817,299 1,265,761
Proposal 2:Approval of amendment of the 1994 key employee long term
incentive plan to increase the number of shares available for awards.
The amendment was approved by the votes cast as follows:
Broker
For Against Abstain Non-Votes
17,660,549 2,679,480 195,086 547,945
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The company filed a report on Form 8-K on October 6, 1997 which
included a copy of a press release announcing expected earnings.
The company filed a report on Form 8-K on November 24, 1997 which
discussed the cancellation of a grant of stock options and stock
appreciation rights, and the granting of stock options and stock
appreciation rights in lieu of the canceled options and stock
appreciation rights.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
(Registrant)
Date: January 30, 1998 By: /s/George S. Scimone
George S. Scimone
Vice President and
Chief Financial Officer
(and authorized signatory)
EXHIBIT INDEX
Exhibit Page
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Registrant's Consolidated Condensed Statement of Income and Consolidated Condensed
Balance Sheet for the six-month period ended December 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 62,500
<SECURITIES> 23,000
<RECEIVABLES> 794,000
<ALLOWANCES> 184,300
<INVENTORY> 180,000
<CURRENT-ASSETS> 1,120,200
<PP&E> 660,700
<DEPRECIATION> 361,800
<TOTAL-ASSETS> 1,751,400
<CURRENT-LIABILITIES> 1,171,200
<BONDS> 0
<COMMON> 600
0
28,800
<OTHER-SE> 255,300
<TOTAL-LIABILITY-AND-EQUITY> 1,751,400
<SALES> 1,373,900
<TOTAL-REVENUES> 1,373,900
<CGS> 1,371,000
<TOTAL-COSTS> 1,371,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> 9,500
<INCOME-TAX> 11,600
<INCOME-CONTINUING> (2,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,100)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
