FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer
Identification
No.)
Pleasantville, New York 10570-7000
(Address of principal executive (Zip Code)
offices)
(914) 238-1000
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1999, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 85,716,573 shares
Class B Voting Common Stock, $0.01 par value: 21,716,057 shares
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
Index to Form 10-Q
March 31, 1999
Page No.
Part I - Financial Information
Item 1. The Reader's Digest Association, Inc. and Subsidiaries
Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three and nine-month periods ended March 31, 1999
and 1998 3
Consolidated Condensed Balance Sheets
as of March 31, 1999 and June 30, 1998 4
Consolidated Condensed Statements of Cash Flows
for the nine-month periods ended March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K. 20
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and nine-month periods ended March 31, 1999 and 1998
(In millions, except per share data)
(unaudited)
<TABLE>
Three-month period ended Nine-month period ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 591.8 $ 635.5 $ 1,947.8 $ 2,009.4
Product, distribution and editorial expenses 216.1 232.3 700.9 733.6
Promotion, marketing and administrative
expenses 341.4 381.5 1,097.1 1,181.2
Other operating items and impairment losses --- --- 31.0 70.0
Operating profit 34.3 21.7 118.8 24.6
Other income, net 5.8 1.6 69.0 8.2
Income before provision for income taxes 40.1 23.3 187.8 32.8
Provision for income taxes 15.1 8.7 73.8 20.3
Income before cumulative effect of
change in accounting principles 25.0 14.6 114.0 12.5
Cumulative effect of change in accounting
principles for pension assets --- --- 25.3 ---
Net income $ 25.0 $ 14.6 $ 139.3 $ 12.5
Basic and diluted earnings per share:
Before cumulative effect of change in
accounting principles $ 0.23 $ 0.13 $ 1.05 $ 0.11
Cumulative effect of change in accounting
principles --- --- 0.24 ---
Basic and diluted earnings per share $ 0.23 $ 0.13 $ 1.29 $ 0.11
Average common shares outstanding 107.3 106.5 107.2 106.4
Dividends per common share $ 0.05 $ 0.225 $ 0.325 $ 0.675
</TABLE>
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 1999 and June 30, 1998
(In millions)
(unaudited)
March 31, June 30,
1999 1998
Assets
Cash and cash equivalents $ 370.2 $ 122.8
Receivables, net 389.3 376.4
Inventories 119.6 162.2
Prepaid expenses and other current assets 311.7 311.2
Total current assets 1,190.8 972.6
Property, plant and equipment, net 186.1 285.4
Other noncurrent assets 306.0 306.0
Total assets $ 1,682.9 $ 1,564.0
Liabilities and stockholders' equity
Accounts payable $ 112.3 $ 172.1
Accrued expenses 393.9 377.4
Income taxes payable 50.5 21.0
Unearned revenue 376.5 355.4
Other current liabilities 59.4 90.0
Total current liabilities 992.6 1,015.9
Other noncurrent liabilities 317.2 289.5
Total liabilities 1,309.8 1,305.4
Capital stock 23.8 16.6
Paid-in capital 145.4 144.8
Retained earnings 948.5 845.0
Accumulated other comprehensive loss (52.1) (49.8)
Treasury stock, at cost (692.5) (698.0)
Total stockholders' equity 373.1 258.6
Total liabilities and stockholders' equity $ 1,682.9 $ 1,564.0
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine-month periods ended March 31, 1999 and 1998
(In millions)
(unaudited)
Nine-month period ended
March 31,
1999 1998
Cash flows from operating activities
Net income $ 139.3 $ 12.5
Depreciation and amortization 46.0 35.1
Other, net (18.6) 12.4
Net change in cash due to operating activities 166.7 60.0
Cash flows from investing activities
Proceeds from maturities and sales of
short-term investments and marketable securities, net 2.1 31.4
Proceeds from other long-term investments, net (0.8) 45.6
Proceeds from sales of property, plant and equipment 170.1 4.0
Payments for business acquisitions (32.7) ---
Other, net (16.7) (23.2)
Net change in cash due to investing activities 122.0 57.8
Cash flows from financing activities
Short-term borrowings, net (12.4) (13.1)
Dividends paid (35.8) (72.8)
Other, net 13.1 2.9
Net change in cash due to financing activities (35.1) (83.0)
Effect of exchange rate changes on cash (6.2) (3.9)
Net change in cash and cash equivalents 247.4 30.9
Cash and cash equivalents at beginning of period 122.8 69.1
Cash and cash equivalents at end of period $ 370.2 $ 100.0
See accompanying notes to consolidated condensed financial statements.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In millions, except per share data)
(unaudited)
(1) Basis of Presentation
The company reports on a fiscal year beginning July 1. The three-
month periods ended March 31, 1999 and 1998 are the third fiscal
quarters of fiscal year 1999 and fiscal year 1998, 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 because of the
seasonality of the company's business. These condensed financial
statements should be read in conjunction with the company's Form
10-K for the year ended June 30, 1998. Prior year's financial
statements have been reclassified to conform to the current
year's presentation.
(2) Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income, less
preferred stock dividend requirements of $0.3 in each of the
three-month periods ended March 31, 1999 and 1998, and $1.0 in
each of the nine-month periods ended March 31, 1999 and 1998 by
the weighted average number of common shares outstanding during
the period. Diluted 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
period, assuming exercise and conversion of stock options. A
weighted average number of common shares of 108.3 and 106.6 for
the three-month periods ended March 31, 1999 and 1998, and 107.7
and 106.6 for the nine-month periods ended March 31, 1999 and
1998, respectively, was used for the computation of diluted
earnings per share.
(3) Inventories
March 31, June 30,
1999 1998
Raw materials $ 16.0 $ 21.8
Work-in-progress 20.6 24.7
Finished goods 83.0 115.7
$119.6 $162.2
(4) Revenues by Business Segments and Geographic Areas
<TABLE>
Three-month period ended Nine-month period ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 161.6 $ 171.2 $ 504.9 $ 530.4
Books and Home Entertainment
Products 376.5 413.0 1,201.7 1,241.5
Special Interest Magazines 28.2 22.7 78.4 69.0
Other Businesses 25.5 28.6 162.8 168.5
Total revenues $ 591.8 $ 635.5 $ 1,947.8 $ 2,009.4
GEOGRAPHIC AREAS
United States $ 262.7 $ 296.1 $ 884.0 $ 931.8
Europe 238.1 243.4 757.6 767.9
Pacific and Other Markets 91.0 96.0 306.2 309.7
Total revenues $ 591.8 $ 635.5 $ 1,947.8 $ 2,009.4
</TABLE>
(5) Comprehensive Income
Effective July 1, 1998, the company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The company has determined that at June 30, 1999, it
will display comprehensive income in the Consolidated Statement
of Changes in Stockholders' Equity. Accumulated other
comprehensive loss as reported in the Consolidated Condensed
Balance Sheets as of March 31, 1999 and June 30, 1998, represents
foreign currency translation adjustments. The components of
comprehensive income, net of related tax, for the three and nine-
month periods ended March 31, 1999 and 1998 were as follows:
<TABLE>
Three-month period ended Nine-month period ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 25.0 $ 14.6 $ 139.3 $ 12.5
Change in:
Foreign currency translation adjustment (14.8) (0.9) (2.3) (14.6)
Net unrealized gains on certain
investments --- 0.1 --- 0.3
$ 10.2 $ 13.8 $ 137.0 $ (1.8)
</TABLE>
(6) Other Operating Items and Impairment Losses
In the second quarter of 1999, the company recorded other
operating items and impairment losses of $31.0 ($21.5 after tax,
or $0.20 per share) composed of the following:
1. The company recorded charges of $51.3 ($33.7 after tax, or
$0.32 per share) (second quarter 1999 charges) composed primarily
of severance costs associated with cost reduction and re-
engineering activities and costs related to the discontinuation
of certain unproductive businesses. These actions covered the
separation of more than 700 employees from the worldwide
workforce in substantially all functional areas of the company,
and are expected to be substantially completed by December 31,
1999. As of March 31, 1999, more than half of these employees
had been separated from the workforce.
2. The company adjusted the remaining accrual balances from
charges originally recorded in 1998, 1997 and 1996. Several
actions initiated by prior management and included in these prior
charges are not expected to be completed in connection with the
new long-term strategy of the company. This resulted in a
benefit of $35.0 ($22.2 after tax, or $0.21 per share)
(adjustments to prior balances) in the second quarter of 1999.
The accrual balances remaining from the 1998, 1997 and 1996
charges relate principally to ongoing severance payments and
contract termination costs.
3. The company also recorded impairment losses of $14.7 ($10.0
after tax, or $0.09 per share) relating principally to certain
computer hardware and software that will no longer be used in the
company's operations and, to a lesser extent, leasehold
improvements, furniture and fixtures that were written off as a
result of the headcount reduction and re-engineering activities.
In addition to finalizing further components of the re-
engineering plan discussed above and estimated costs associated
with those actions, the company is currently reviewing additional
potential re-engineering activities. As a result, the company
expects to record additional charges to other operating items and
impairment losses over the next nine to twelve months, beginning
in the fourth quarter of 1999, related to cost reduction and re-
engineering actions as further components of the strategic plan
and estimated costs associated with those actions are completed
and additional re-engineering activities are reviewed and
approved.
The following table summarizes the components of other operating
items and impairment losses for the second quarter of 1999. In
addition, the components of the second quarter 1999 charges,
current activity, as well as accrual balances remaining at March
31, 1999, were:
<TABLE>
Other
Operating
Items and
Impairment Current Balance
Losses Activity Remaining
<S> <C> <C> <C>
Employee severance benefits $ 44.9 $(14.5) $ 30.4
Contract terminations 4.8 (0.5) 4.3
Other 1.6 --- 1.6
Second quarter 1999 charges $ 51.3 $(15.0) 36.3
Impairment losses 14.7
Adjustments to prior balances (35.0)
Total other operating items and
impairment losses $ 31.0
</TABLE>
As described in Note TWO to the company's consolidated financial
statements included in its 1998 Annual Report to Stockholders,
the company recorded charges of $70.0 in the first quarter of
1998 relating to the discontinuation of certain businesses and
the realignment of business processes and operations, charges of
$35.0 in the fourth quarter of 1998 relating primarily to the
realignment of the organization and operations, and charges of
$204.0 in the third quarter of 1996 relating to the streamlining
of the company's organizational structure and the strategic
repositioning of certain businesses. The current activity,
adjustments to prior balances discussed above, as well as accrual
balances remaining at March 31, 1999, were:
<TABLE>
Balance at Current Balance
June 30, 1998 Activity Adjustments Remaining
<S> <C> <C> <C> <C>
Employee retirement and
severance benefits $ 59.6 $(15.2) $(27.1) $ 17.3
Other items 24.2 (7.2) (6.2) 10.8
Business repositioning 3.9 (1.1) (1.7) 1.1
Total $ 87.7 $(23.5) $(35.0) $ 29.2
</TABLE>
(7) Debt
As described in Note NINE to the company's consolidated financial
statements included in its 1998 Annual Report to Stockholders,
the company is a party to a Competitive Advance and Revolving
Credit Facility Agreement (the credit agreement) of up to $300.0.
Under the credit agreement, the company must comply with certain
financial covenants, including a minimum level of consolidated
tangible net worth. At March 31, 1999, no borrowings were
outstanding under the credit agreement. In addition, various
international subsidiaries of the company have available lines of
credit totaling $59.0. At March 31, 1999, loans in the amount of
$1.3 were outstanding under international lines of credit at a
weighted average interest rate of 10.7%.
(8) Change in Accounting for Pension Assets
Effective July 1, 1998, the company changed the method for
calculating the market-related value of pension plan assets used
in determining the return-on-asset component of annual pension
expense and the cumulative net unrecognized gain or loss subject
to amortization. The company believes that the new method is
more widely used in practice and preferable because it results in
pension plan asset values that more closely approximate fair
value, while still mitigating the effect of annual market value
fluctuations. In addition, the new method facilitates the global
management of the company's pension plans as it results in a
consistent methodology for all plans for this calculation. This
change resulted in a noncash benefit in fiscal 1999 of $40.5
($25.3 after tax, or $0.24 per share) representing the cumulative
effect of the change related to years prior to fiscal 1999 and
$4.8 and $14.3 in lower pension expense ($3.0 and $8.9 after tax,
or $0.03 and $0.08 per share) related to the three- and nine-
month periods ended March 31, 1999, respectively, as compared to
the previous accounting method. Had this change been applied
retroactively, pension expense would have been reduced by $3.9
and $11.8 ($2.5 and $7.4 after tax, or $0.02 and $0.07 per share)
in the three- and nine-month periods ended March 31, 1998,
respectively.
(9) Sale of Artwork
In November 1998, the company sold important works of art from
its collection, which resulted in a gain on the sale of property,
plant and equipment of $85.3 ($53.3 after tax, or $0.50 per
share) recorded in other income, net in the nine-month period
ended March 31, 1999.
(10) Sale of Operations in South Africa
On December 31, 1998 the company sold its operations in South
Africa, which resulted in a non-cash loss of $7.9, ($6.1 after
tax, or $0.06 per share) recorded in other income, net in the
nine-month period ended March 31, 1999. The net loss included a
write-off of $9.5 that was transferred from foreign currency
translation adjustments as a result of the sale.
(11) Sale and Leaseback
On January 29, 1999, the company entered into an agreement for
the sale and leaseback of its Canary Wharf office facility in the
United Kingdom, for a sale price of approximately $97.0. Of the
sale price, approximately $13.0 was placed into escrow at the
time of closing and approximately $4.0 was used for costs
incurred in connection with the sale. The gain is being
recognized on a straight-line basis over the term of the lease.
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Results of Operations
Three-Month Period Ended March 31, 1999 Compared With Three-Month
Period Ended March 31, 1998
Revenues/Operating Profit
Worldwide revenues for the third quarter of 1999 decreased to
$591.8, or by 7%, compared with $635.5 in the third quarter of
1998. Excluding the adverse impact of changes in foreign
currency exchange rates, revenues decreased 6%. This decline was
primarily attributable to lower unit sales within Books and Home
Entertainment Products, particularly in the United States,
principally caused by a strategic reduction both in mail
quantities and in certain types of marginally profitable mailing
activities. Revenues also declined, to a lesser extent, in
Russia, where operations have been scaled back in response to
adverse economic conditions. These revenue declines were
somewhat offset by growth in Brazil (excluding the devaluation of
the real) and higher revenues in Germany as a result of
significantly higher customer response to certain promotional
mailings.
The company reported worldwide operating profit of $34.3 for the
third quarter of 1999, compared with operating profit of $21.7
for the third quarter of 1998, a 58% improvement. The rise
occurred primarily because the decline in revenues was outpaced
by lower promotion and product costs. Promotion costs declined,
particularly in the United States and, to a lesser extent, in
certain developed European markets, primarily as a result of the
strategic reduction in mail quantities and in certain types of
marginally profitable mailing activities. The increase in
operating profit was somewhat offset by higher inventory reserves
required primarily in certain developing markets where historical
customer response rates have declined somewhat. Net overhead
expenses improved slightly compared with the year ago period,
principally resulting from a reduction in pension costs in the
United States and benefits derived from re-engineering
activities, which were somewhat offset by higher incentive
compensation expense.
Other Income, Net
Other income, net, was $5.8 in the third quarter of 1999,
compared with $1.6 in the prior year comparable period. The
increase was principally a result of gains on foreign exchange
transactions and hedging activity combined with higher interest
income earned on a higher level of invested funds. These
favorable variances were partly offset by a gain recognized on
the sale of certain assets in the prior year.
Income Taxes
For the third quarters of 1999 and 1998, the overall effective
tax rate was 37.5%.
Change in Accounting Principles
In the first quarter of fiscal 1999, the company adopted a
preferred method for calculating the market-related value of
pension plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net
unrecognized gain or loss subject to amortization. This change
reduced pension expense for the third quarter of 1999 by $4.8
($3.0 after tax, or $0.03 per share for both the basic and
diluted methods).
Basic and Diluted Earnings per Share
The company reported net income of $25.0, or $0.23 per share for
both the basic and diluted methods, in the third quarter of 1999,
compared with net income of $14.6, or $0.13 per share for both
the basic and diluted methods, in the third quarter of 1998.
Geographic Areas
United States
Revenues in the United States decreased from $296.1 in 1998 to
$262.7, or by 11%, in 1999. This decrease was primarily
attributable to lower unit sales within Books and Home
Entertainment Products, which was slightly offset by sales of a
higher-priced product mix. Also contributing to the revenue
decline was slightly lower revenue for Reader's Digest Magazine.
These declines were moderately offset by increases in revenues
from the acquisitions of the Good Catalog Company and American
Woodworker magazine, both of which were acquired in the second
quarter of fiscal 1999. Books and Home Entertainment Products
revenues declined in most product lines principally because of
lower unit sales from reductions in mail quantities and certain
types of marginally profitable mailing activities. Revenues
declined particularly in general books and, to a lesser extent,
in video and music products because of the aforementioned
reasons. Music products revenues were also unfavorably affected
by the timing of mailings. Revenues also declined in Condensed
Books as a result of the timing of shipments, lower membership
and lower mail quantities. Partly offsetting these volume
declines in Books and Home Entertainment Products were higher
average prices across most product lines, resulting from a
postage and handling price increase and a higher-priced mix of
products offered in 1999. Reader's Digest Magazine circulation
revenues decreased primarily from a reduction in the rate base,
which began in January 1999 and lower paid subscriptions during
the third quarter of 1999. Operating profit improved
significantly in the third quarter of 1999, compared with 1998,
primarily because of the reduction in the rate base of Reader's
Digest Magazine. Operating profit also increased, to a lesser
extent, from the elimination of certain strategic alliances.
Moderately offsetting the operating profit increase were higher
inventory reserves. In addition, overhead expenses were lower in
1999 principally because of a reduction in pension costs and
benefits from re-engineering activities, which were moderately
offset by higher incentive compensation expense.
Europe
Revenues in Europe decreased from $243.4 in 1998 to $238.1, or by
2%, in 1999. Excluding the positive effect of changes in foreign
currency exchange rates, revenues decreased 5%. This decrease
was attributable to lower revenues in Russia from the significant
scaling back of mailing activity and revenue declines in most
other developed European markets from reductions in mail
quantities. As expected, revenues declined as customer response
in the developing markets in Eastern Europe decreased somewhat in
comparison to the rapid growth in the earlier stages of these
markets. These declines were somewhat offset by higher revenues
in Germany, which experienced significantly higher customer
response to certain promotional mailings. The decrease in
revenues was principally in Books and Home Entertainment
Products. To a lesser extent, revenues declined for Reader's
Digest Magazine, primarily as a result of lower circulation
volume. Within Books and Home Entertainment Products, declines
in unit sales primarily within music products and, to a lesser
extent, in series books and Condensed Books, were moderately
offset by sales of a higher-priced product mix in most product
lines. The decline in music products was driven by the timing of
mailings compared with the prior year period and lower response
rates in Eastern European markets. In all European markets,
series and Condensed Books revenues were negatively affected by a
reduction in the number of mailings. Operating profit more than
doubled in the third quarter of 1999, compared with 1998, mainly
attributable to lower promotion and product costs. Contributing
to this improvement was Germany, which experienced a sharp rise
in operating profit as a result of higher customer response
rates. Partly offsetting the favorable variance in operating
profit were higher inventory reserves required in certain
developing markets where historical customer response rates have
declined somewhat.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $96.0 in
1998 to $91.0, or by 5%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, in particular the
devaluation of the Brazilian real, revenues increased 9%.
Revenues increased primarily as a result of growth in Brazil,
which was partly offset by the sale of the company's operations
in South Africa in the second quarter of 1999. Revenues
increased predominantly within Books and Home Entertainment
Products, principally because of sales of a higher-priced product
mix, primarily in music products, combined with higher unit sales
in video products and Condensed Books. These increases were
driven by growth in Brazil and the launch of Condensed Books in
Latin America. The timing of mailings in Australia contributed
to the increase in video products revenues. Excluding the
adverse effect of changes in foreign currency exchange rates,
operating profit decreased compared with the prior year period.
Improved results in several markets were more than offset by
higher inventory reserves, costs associated with the shutdown of
certain operations in Latin America and unusual operating items
in Brazil.
Corporate Expense
Corporate expense in the third quarter of 1999 remained
relatively flat at $8.4 compared with $8.5 in 1998. Lower
pension costs and other employee benefit costs were offset by
higher incentive compensation expense.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $171.2 in
1998 to $161.6, or by 6%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues decreased
4%. The decrease in revenues was attributable to lower
circulation and, to a lesser extent, lower advertising revenues.
Circulation declined as a result of the reduction in the rate
base and fewer paid subscriptions in the United States, a
reduction in business in Russia and lower circulation levels in
major markets such as the United Kingdom and Canada. These
declines were moderately offset by price increases in certain
international markets. Advertising revenues declined principally
as a result of a lower number of advertising pages sold in
certain international markets at a slightly higher average rate
per page. The higher average rate per page in international
markets was largely offset by a lower rate per advertising page
in the United States as a result of the reduction in the rate
base. Operating profit for Reader's Digest Magazine doubled in
the third quarter of 1999, compared with the prior year period.
The increase in operating profit reflected lower product,
promotion and, to a lesser extent, overhead costs resulting
primarily from the reduction in the rate base in the United
States.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$413.0 in 1998 to $376.5, or by 9%, in 1999. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues decreased 8%. Revenues decreased primarily because of
lower unit sales across most product lines, most notably general
books and music products, attributable principally to reductions
in mail quantities and in certain types of marginally profitable
mailing activities in many markets. Lower unit sales were
moderately offset by sales of a higher-priced product mix across
all product lines, notably in video and music products. The
decrease in general books unit sales was principally caused by
lower mail quantities in the United States and, to a lesser
extent, the significant scaling back of mailing activity in
Russia, partly offset by higher revenues in certain other
markets. The decline in music products was attributable to the
timing of mailings and lower mail quantities in certain European
markets and the United States, and lower customer response in
developing markets in Eastern Europe compared with the rapid
growth in the earlier stages of these markets. Operating profit
for Books and Home Entertainment Products increased slightly in
1999, compared with 1998, primarily as a result of lower
promotion and, to a lesser extent, product costs from reductions
in mailings. Partly offsetting operating profit increases were
higher inventory reserves required primarily in certain
developing markets where historical customer response rates have
declined somewhat. In addition, a decrease in overhead expenses
principally from benefits from re-engineering activities and a
reduction in pension costs in the United States also contributed
to the rise in operating profit.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $22.7 in
1998 to $28.2, or by 24%, in 1999, principally as a result of the
acquisition of American Woodworker magazine in the second quarter
of 1999. Excluding American Woodworker, revenues increased 8% in
1999, as higher circulation revenues combined with higher
advertising revenues. The favorable variance in circulation and
advertising was driven principally by one magazine, which
produced an additional issue in the third quarter of 1999 and
displayed a higher number of advertising pages sold. The rise in
circulation and advertising revenues outpaced an increase in
expenses and resulted in operating profit improving in 1999
compared with 1998.
Nine-Month Period Ended March 31, 1999 Compared With Nine-Month
Period Ended March 31, 1998
Items Affecting the Comparability of Reported Results
Other Operating Items and Impairment Losses
In the second quarter of 1999, the company recorded net other
operating items and impairment losses of $31.0 ($21.5 after tax,
or $0.20 per share). The other operating items and impairment
losses were composed of the following:
1. The company recorded charges of $51.3 ($33.7 after tax, or
$0.32 per share) composed primarily of severance costs associated
with cost reduction and re-engineering activities and costs
related to the discontinuation of certain unproductive
businesses. These actions covered the separation of more than
700 employees from the worldwide workforce in substantially all
functional areas of the company, and are expected to be
substantially completed by December 31, 1999.
2. The company adjusted the remaining accrual balances from
charges originally recorded in 1998, 1997 and 1996. Several
actions initiated by prior management and included in these prior
charges are not expected to be completed in connection with the
new long-term strategy of the company. This resulted in a
benefit of $35.0 ($22.2 after tax, or $0.21 per share) in the
second quarter of 1999. The accrual balances remaining from the
1998, 1997 and 1996 charges relate principally to ongoing
severance payments and contract termination costs.
3. The company also recorded impairment losses of $14.7 ($10.0
after tax, or $0.09 per share) relating principally to certain
computer hardware and software that will no longer be used in the
company's operations and, to a lesser extent, leasehold
improvements, furniture and fixtures that were written off as a
result of the headcount reduction and re-engineering activities.
In the first quarter of 1998, the company recorded other
operating items of $70.0 ($51.8 after tax, or $0.49 per share).
Management's discussion and analysis, as it pertains to
geographic and business segment information, has been written
excluding the effect of the second quarter 1999 other operating
items and impairment losses and the first quarter 1998 other
operating items in order to analyze the results on a comparable
basis.
Other Income, Net
In the second quarter of 1999, the company recorded a gain on the
sale of important works of art from the company's collection of
$85.3 ($53.3 after tax, or $0.50 per share). In addition, on
December 31, 1998, the company sold its operations in South
Africa, which resulted in a non-cash loss of $7.9 ($6.1 after
tax, or $0.06 per share).
Revenues/Operating Profit
Worldwide revenues for the nine-month period ended March 31, 1999
decreased to $1,947.8, or by 3%, compared with $2,009.4 in the
nine-month period ended March 31, 1998. Excluding the adverse
effect of changes in foreign currency exchange rates, revenues
decreased 2%. The decline was attributable to lower unit sales
within Books and Home Entertainment Products, in particular in
the United States, and lower circulation revenues for Reader's
Digest Magazine. These decreases were moderately offset by sales
of a higher-priced product mix within Books and Home
Entertainment Products. The decrease in unit sales was
principally caused by a strategic reduction in mail quantities,
fewer promotional mailings and a reduction of certain types of
marginally profitable mailing activities. Customer response to
promotional mailings improved in certain developed European
markets, especially Germany. Lower revenues in the United States
combined with lower revenues in the United Kingdom and a decline
in revenue in Russia, where the company has significantly scaled
back its operations, were moderately offset by higher revenues
from growth in Latin America, particularly Brazil (excluding the
devaluation of the real) and other major developed international
markets, such as Germany and France.
The company reported worldwide operating profit of $118.8 in the
nine-month period ended March 31, 1999, compared with operating
profit of $24.6 in the nine-month period ended March 31, 1998.
Excluding the items affecting the comparability of reported
results in fiscal 1999 and 1998, operating profit was $149.8 in
the nine-month period ended March 31, 1999, compared with $94.6
in the nine-month period ended March 31, 1998. This increase
occurred primarily because of the strategic decision to reduce
the number of mailings and mail quantities, which reduced
promotion and product costs. Promotion costs declined,
particularly in the United States, and to a lesser extent, in
certain developed European markets, because of this reduction in
mail quantities combined with fewer promotional mailings and a
reduction of certain types of marginally profitable mailing
activities. Operating profit also improved as a result of the
elimination of spending on certain unprofitable initiatives and
the termination of certain strategic alliances. Moderately
offsetting the operating profit improvement were higher inventory
reserves primarily in the United States because of the lower
volume associated with the reduction in mail quantities, and
losses in Russia from adverse economic conditions. Overhead
expenses also decreased because of a reduction in pension costs
and benefits from re-engineering activities principally in the
United States, which were partly offset by higher incentive
compensation expense.
Other Income, Net
Other income, net, increased in the nine-month period ended March
31, 1999 to $69.0, compared with $8.2 in the prior year.
Excluding the items affecting the comparability of reported
results, other income, net, in the nine-month period ended March
31, 1999 was a net expense of $8.4. This decrease was
principally a result of foreign exchange translation losses
resulting from the devaluation of the Russian ruble and losses on
foreign exchange transactions and hedging activity. In addition,
other income, net, in the nine-month period ended March 31, 1998
included gains from sales of certain investments.
Income Taxes
For the nine-month period ended March 31, 1999, the reported tax
rate was 39.3%, compared with 62.0% for the nine-month period
ended March 31, 1998. Excluding the items affecting the
comparability of reported results in fiscal 1999 and 1998, the
overall effective tax rate was 37.5% for both the nine-month
periods ended March 31, 1999 and March 31, 1998.
Change in Accounting Principles
In the first quarter of fiscal 1999, the company adopted a
preferred method for calculating the market-related value of
pension plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net
unrecognized gain or loss subject to amortization. The
cumulative effect of adopting this change, for years prior to
fiscal 1999, was a benefit of $40.5 ($25.3 after tax, or $0.24
per share). In addition, this change reduced pension expense for
the nine-month period ended March 31, 1999 by $14.3 ($8.9 after
tax, or $0.08 per share).
Basic and Diluted Earnings per Share
The company reported net income in the nine-month period ended
March 31, 1999 of $139.3, or $1.29 per share for both the basic
and diluted methods, compared with net income of $12.5, or $0.11
per share for both the basic and diluted methods, in the nine-
month period ended March 31, 1998. Excluding the cumulative
effect of change in accounting principles for pension assets and
the items affecting the comparability of reported results in
fiscal 1999 and 1998, basic and diluted earnings per share was
$0.81 in the nine-month period ended March 31, 1999, compared
with $0.60 per share in the nine-month period ended March 31,
1998.
Geographic Areas
United States
Revenues in the United States decreased from $931.8 in 1998 to
$884.0, or by 5%, in 1999. This decrease was primarily
attributable to lower unit sales within Books and Home
Entertainment Products, moderately offset by sales of a higher-
priced product mix and revenues from the Good Catalog Company and
American Woodworker magazine, both of which were acquired in the
second quarter of fiscal 1999. Within Reader's Digest Magazine,
slightly lower circulation revenues primarily resulting from a
reduction in the rate base, were moderately offset by higher
advertising revenues. Advertising revenues experienced a
significantly higher number of pages sold at a lower average rate
per page. Books and Home Entertainment Products revenues
declined in most product lines, in particular general books and
music products, principally because of a reduction in mail
quantities, lower customer response to promotional mailings in
certain product lines and a reduction in certain types of
marginally profitable mailing activities. These decreases were
moderately offset by sales of a higher-priced product mix across
all product lines as a result of postage and handling price
increases in response to postal rate increases, as well as a
higher-priced mix of products offered in 1999. Operating profit
improved significantly in 1999, compared with 1998, primarily
because the decline in revenues was more than offset by lower
promotion and product costs as a result of the reduction in mail
quantities, the elimination of spending on certain unprofitable
initiatives and the termination of certain strategic alliances.
Moderately offsetting the favorable variance for product costs
were higher inventory reserves because of the lower volume
associated with the reduced mail quantities. In addition,
overhead expenses were lower in 1999 principally because of a
reduction in pension costs and, to a lesser extent, benefits from
re-engineering activities, partly offset by higher incentive
compensation expense.
Europe
Revenues in Europe decreased from $767.9 in 1998 to $757.6, or by
1%, in 1999. Excluding the positive effect of changes in foreign
currency exchange rates, revenues decreased 4%. Revenue
increases in Germany and France were more than offset by lower
revenues in the United Kingdom, in Russia from the significant
scaling back of mailing activity, and in most other developed
markets. Improved customer response to promotional mailings in
certain developed markets in 1999 partially offset the decline in
revenues from the reduction in mail quantities in the current
year. Revenues declined principally in Books and Home
Entertainment Products and, to a lesser extent, in Reader's
Digest Magazine. Most product lines within Books and Home
Entertainment Products experienced lower unit sales, particularly
video products and series books. The decline in video products
was the result of a reduction in the number of mailings and lower
mail quantities within individual mailings. Series books
revenues declined primarily as a result of the aforementioned
factors and because of a series that is being phased out in
certain markets. These volume declines were mostly offset by
sales of a higher-priced product mix across all product lines.
Within Reader's Digest Magazine, revenues decreased primarily
because of circulation declines in major markets, particularly in
the United Kingdom and Germany, and a reduction of business in
Russia. Operating profit doubled in 1999, compared with 1998,
primarily as a result of improved performance in Germany, partly
offset by losses at the company's operations in Russia
principally caused by adverse economic conditions. In addition,
the decline in revenues was more than offset by lower promotion
and product costs resulting from the reduction in mail
quantities.
Pacific and Other Markets
Revenues in Pacific and Other Markets decreased from $309.7 in
1998 to $306.2, or by 1%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues increased
12%. Revenues increased principally as a result of expansion in
Latin America, particularly in Brazil. Revenues increased within
Books and Home Entertainment Products, because of higher unit
sales in most product lines, most notably music and video
products and, to a lesser extent, sales of a higher-priced
product mix across most product lines, principally within general
books. Higher unit sales were attributable to growth in music
and video product sales in Latin America, particularly in Brazil.
Revenues also increased within these product lines in Australia
because of the timing of mail dates and shipments as well as the
number of promotional mailings compared with the prior year and
improved customer response to promotional mailings. Operating
profit decreased slightly in 1999, compared with 1998, primarily
because of lower revenues and higher product costs, which were
offset by lower promotion costs. Excluding the adverse effect of
changes in foreign currency exchange rates, operating profit
increased significantly in 1999.
Corporate Expense
Corporate Expense in the nine-month period ended March 31, 1999
increased to $28.7, compared with $24.9 a year ago, primarily as
a result of higher incentive compensation expense which was
partly offset by lower levels of pension and other employee
benefits costs.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $530.4 in
1998 to $504.9, or by 5%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues decreased
3%. The decrease in revenues was primarily attributable to lower
circulation revenues slightly offset by a higher number of
advertising pages sold at a lower average rate per page in the
nine-month period ended March 31, 1999. Lower circulation
revenues were a result of the rate base reduction in the United
States and circulation declines in several major markets,
particularly the United Kingdom, Germany and Russia. In the
United States, the effect of a significantly higher number of
advertising pages sold was moderately offset by a lower average
rate per page. Operating profit for Reader's Digest Magazine
improved slightly in the nine-month period ended March 31, 1999
compared with the same period a year ago. The improvement
resulted primarily from the rate base reduction in the United
States, which contributed to a combination of lower promotion,
product and overhead costs, which outpaced the revenue decline.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$1,241.5 in 1998 to $1,201.7, or by 3%, in 1999. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues decreased 2%. The decrease was primarily attributable
to lower unit sales across most product lines, principally in
general books, video and music products and series books. These
declines were mostly offset by a higher-priced mix of products,
particularly in video products and general books, and the
acquisition of the Good Catalog Company in the United States in
October 1998. The decrease in general books was caused by lower
mail quantities within the United States and, to a much lesser
extent, in Russia from the significant scaling back of mailing
activity. The decline in video products was the result of lower
mail quantities and reduced activity in certain developed
European markets, as well as lower mail quantities and a
reduction in the number of mailings in the United States. Music
products also declined, principally in the United States, for the
aforementioned reasons, as well as because of the timing of
mailings, and in the developing Eastern European markets,
compared with the rapid growth in the earlier stages of these
markets. Partly offsetting these declines in video and music was
growth from the Pacific and Other Markets, particularly in Brazil
(excluding the devaluation of the real). Series books revenues
declined primarily as a result of lower mail quantities within
mailings and a reduction in the number of mailings, and because
of a series that is being phased out in certain markets.
Operating profit increased significantly in 1999, compared with
1998, because the declines in revenue were more than offset by
lower promotion and, to a lesser extent, lower product costs.
Promotion costs fell as a result of the reduction in mail
quantities within individual mailings and the number of
promotional mailings. Operating profit also improved as a result
of the elimination of spending on certain unprofitable
initiatives. Moderately offsetting the reduction in product
costs were higher inventory reserves, primarily in the United
States. In addition, overhead expenses were lower in 1999,
principally because of a reduction in pension costs and, to a
lesser extent, benefits from re-engineering activities, primarily
in the United States.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $69.0 in
1998 to $78.4, or by 14%, in 1999. This was principally as a
result of the acquisition of American Woodworker magazine in the
second quarter of 1999. Excluding American Woodworker, revenues
increased 5% in 1999, primarily because of higher advertising
revenues. This increase was principally attributable to a higher
average rate per advertising page sold in 1999 as a result of
rate base increases for several magazines. Operating profit
improved in 1999, compared with 1998, primarily as a result of
the higher advertising revenues, which more than offset an
increase in promotion and product costs.
Other Businesses
Revenues for Other Businesses decreased from $168.5 in 1998 to
$162.8, or by 3%, in 1999. The decrease primarily resulted from
a reduction in activity in the worldwide merchandise catalog
product line, primarily in the United Kingdom, and the
elimination of a strategic alliance, largely offset by growth at
QSP, the company's youth fund-raising organization, principally
because of higher unit sales of magazine subscriptions and music
products. Operating profit improved significantly in 1999,
compared with 1998, principally as a result of lower product,
promotion and overhead costs in the merchandise catalog line and
growth and cost savings at QSP.
Forward-Looking Information
Fiscal 1999 Results
The company expects its full year operating profit to show a
significant improvement over fiscal 1998, including the benefit
for the change in accounting for pension assets and before the
effects of other operating items and impairment losses. The
improvement reflects improved customer response which the company
has experienced and accelerated progress in implementing the
company's cost-reduction and re-engineering initiatives.
The company expects to record additional charges to other
operating items and impairment losses over the next nine to
twelve months, beginning in the fourth quarter of 1999, related
to cost reduction and re-engineering actions as further
components of the strategic plan and estimated costs associated
with those actions are completed and additional re-engineering
activities are reviewed and approved. As a result of this
strategy, the company expects a continued revenue decline but
operating profit improvements during the fourth quarter.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs which were
written using only two digits, rather than four, to represent a
year. Date-sensitive software or hardware may not be able to
distinguish between 1900 and 2000 and programs that perform
arithmetic operations, comparisons or sorting of date fields may
begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations.
The Company's State of Readiness. The company has developed a
remediation plan for its year 2000 issue that is currently
underway and that involves three overlapping phases:
1) Inventory - This phase includes the creation of an inventory
of three functional areas:
a) Applications and information technology (IT) equipment -
These include all mainframe, network and desktop hardware
and software, including custom and packaged applications,
and IT embedded systems.
b) Non-information technology (non-IT) embedded systems -
These include non-IT equipment and machinery. Non-IT
embedded systems, such as security, fire prevention and
climate control systems typically include embedded
technology, such as microcontrollers.
c) Vendor relationships - These include significant third
party vendors and suppliers of goods and services, as well
as vendor and supplier interfaces.
The United States and developed international markets have
fully completed the inventory phase. Also, the company's
operations in developing international markets, including
operations in Latin America, Eastern Europe and the Far East,
have completed the inventory and analysis phases.
2) Analysis - This phase includes the evaluation of the
inventoried items for year 2000 compliance, the determination
of the remediation method and resources required and the
development of an implementation plan. The analysis phase is
complete in the United States and developed international
markets.
3) Implementation - This phase includes executing the
implementation plan for all applicable hardware and software,
interfaces and systems. This involves testing the changes,
beginning to utilize the changed procedures in actual
operations, testing in a year 2000-simulated environment and
vendor interface testing. The implementation phase, including
testing for certain critical applications, is in process in
the United States and developed international markets, and is
expected to be substantially completed by June 1999 for
applications and IT equipment and non-IT embedded systems.
The company expects that its German operations will not be
completed with this aspect of the implementation phase until
August 1999. The implementation phase for the United States
and developed international markets with respect to vendor
relationships is expected to be completed by September 1999.
The implementation phase has commenced in all developing
international markets and is expected to be completed by June
1999 for applications and IT equipment and non-IT embedded
systems. The implementation phase with respect to vendor
relationships in these markets is expected to be completed by
September 1999.
The company's remediation plan for its year 2000 issue is an
ongoing process and the estimated completion dates above are
subject to change.
The Risk of the Company's Year 2000 Issue. Overall, at this time
the company believes that its systems will be year 2000 compliant
in a timely manner for several reasons. Several significant
marketing and fulfillment systems are already compliant. In
addition, the company extensively utilizes certain shared
applications that should be remediated once and then deployed to
all appropriate markets. Also, comprehensive testing of all
critical systems is planned to be conducted in a simulated year
2000 environment. Additionally, critical fulfillment systems in
the United States and several developed international markets use
a one-digit field to denote the year, therefore the date fields
for these systems are updated every 10 years and the year 2000 is
not an issue requiring separate attention.
The company believes that the risk of developing international
markets' not being year 2000 compliant on a timely basis is low,
primarily because the majority of their custom applications are
shared systems that were developed in the United States and
Canada and are currently year 2000 compliant. In addition, since
most of the equipment in these locations is relatively new there
is less likelihood that the equipment is not currently year 2000
compliant.
The company believes that the area of greatest risk to the
company surrounding the year 2000 issue relates to significant
suppliers' failing to remediate their year 2000 issues in a
timely manner. The company has relationships with certain
significant suppliers in most of the locations in which it
operates. These relationships may be material to some local
operations and, in the aggregate, may be material to the company.
The company relies on suppliers to deliver a broad range of goods
and services worldwide, including book and magazine printing
services, supplies of promotional materials and paper, warehouse
facilities, lettershops which assemble promotional mailings,
customer service facilities, postal delivery services, banking
services, telecommunications and electricity. The company is
conducting formal communications with its significant suppliers
in all locations 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 level of preparedness of
significant suppliers can vary greatly from country to country.
If a number of significant suppliers are not year 2000 compliant,
this could have a material adverse effect on the company's
results of operations, financial position or cash flow.
The Company's Contingency Plans. The company is in the process
of developing its country-by-country contingency plans and
expects to have preliminary plans completed by June 1999 with
subsequent revisions being made, as needed, for the remainder of
the year. To mitigate the effects of the company's or
significant suppliers' potential failure to remediate the year
2000 issue in a timely manner, the company would take appropriate
actions. Such actions may include having arrangements for
alternate suppliers, re-running processes if errors occur, using
manual intervention to ensure the continuation of operations
where necessary, and scheduling activity in December 1999 that
would normally occur at the beginning of January 2000. If it
becomes necessary for the company to take these corrective
actions, it is uncertain, until the contingency plans are
finalized, whether this would result in significant delays in
business operations or have a material adverse effect on the
company's results of operations, financial position or cash flow.
Costs to Address the Company's Year 2000 Issue. The total cost
of the company's remediation plan is estimated at approximately
$13.0 to $18.0 and is being funded through operating cash flows.
To manage the cash flow effects of these incremental costs, the
company has deferred certain IT development activities and system
enhancements. Of the total cost, approximately $2.0 is
attributable to new hardware and software that will be
capitalized. The remainder will be expensed as incurred. To
date, approximately $10.0 of the total cost of the remediation
plan has been spent, of which approximately $1.0 was capitalized.
Impact of the Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union established fixed conversion rates between their existing
sovereign currencies ("legacy currencies") and a single currency
called the euro. The legacy currencies are scheduled to remain
legal tender as denominations of the euro during the transition
period from January 1, 1999 to December 31, 2001. Beginning
January 1, 2002, euro-denominated bills and coins will be
introduced and by July 1, 2002, legacy currencies will no longer
be legal tender.
The company has initiated an internal analysis regarding the
business and systems issues related to the euro conversion and
has developed a preliminary strategic plan to ensure that all
necessary modifications are made on a timely basis. As the first
step, to accommodate the introduction of the euro on January 1,
1999, the company's operations in markets that are adopting the
euro are currently, upon request, able to accept payments and pay
suppliers in euros, and are able to indicate the euro equivalent
of pricing on invoices. During the transition period, the
company will be monitoring customer and competitor reaction to
the euro and will update the strategic plan as needed.
The company believes that the conversion to the euro will not
have a significant impact on the marketing strategy for the
company's European operations. The euro is not expected to have
a significant competitive impact, including the resulting need to
synchronize prices between markets, primarily because, for the
most part, the editorial content of the company's publishing
products varies, the products are published in local languages
and they are sold principally through direct mail rather than
retail channels. These factors result in products that tend to
be unique to each market that do not easily lend themselves to
price comparisons across borders. The estimated costs to convert
all affected systems to the euro are not expected to have a
material adverse effect on the company's results of operations,
financial position, or cash flow.
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 potentially
more restrictive privacy and other governmental regulation
relating to the company's marketing methods; 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
ability to attract and retain subscribers and customers in an
economically efficient manner; 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 re-
engineering 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; the ability of the company to respond to
competitive pressures within and outside the direct marketing
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; the
effect of the transition to the euro; and general economic
conditions, particularly those in Russia.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and marketable
securities increased $246.9 to $373.0 at March 31, 1999 compared
with June 30, 1998. The increase was primarily a result of cash
flow provided from operating activities, the sale of the
company's principal operating facility in the United Kingdom and
the sale of important works of art from the company's collection,
slightly offset by the acquisitions of the Good Catalog Company
and American Woodworker and dividend payments.
In the third quarter of 1999, the company paid a $0.05 per share
dividend on its common stock, compared with $0.225 per share a
year ago. At the current rate, the annualized dividend is $0.375
per share in 1999 compared with $0.90 in 1998.
The company did not repurchase any shares of Class A nonvoting
common stock in the third quarter of 1999.
The company is a party to a Competitive Advance and Revolving
Credit Facility Agreement amended as of June 2, 1998, with a
syndicate of domestic and foreign banks (the credit agreement).
The credit agreement, which expires in November 2001, permits
competitive advance and revolving credit borrowings of up to
$300.0 by the company and its designated subsidiaries. Interest
rates can be based on several pricing options that can vary based
upon operating results of the company. The proceeds of the
borrowings may 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 minimum
level of consolidated tangible net worth. At March 31, 1999,
there were no borrowings outstanding under the credit agreement.
In addition, various international subsidiaries of the company
have available lines of credit totaling $59.0. At March 31,
1999, loans in the amount of $1.3 were outstanding under
international lines of credit at a weighted average interest rate
of 10.7%.
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 implementation of the company's strategic
initiatives.
PART II. OTHER INFORMATION
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 dated January 8, 1999
which included a copy of a press release relating to the
election of a director to the company's Board of Directors.
The company filed a report on Form 8-K dated February 4,
1999 which included a copy of a press release relating to
the sale of its United Kingdom headquarters building.
The company filed a report on Form 8-K dated February 25,
1999 which included a copy of a press release relating to
the company's growth strategy.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Reader's Digest Association, Inc.
(Registrant)
Date: May 12, 1999 By: /s/GEORGE S. SCIMONE
George S. Scimone
Senior 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 nine-month period ended March 31, 1999,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 370,200
<SECURITIES> 1,800
<RECEIVABLES> 572,700
<ALLOWANCES> 183,400
<INVENTORY> 119,600
<CURRENT-ASSETS> 1,190,800
<PP&E> 544,800
<DEPRECIATION> 358,700
<TOTAL-ASSETS> 1,682,900
<CURRENT-LIABILITIES> 992,600
<BONDS> 0
<COMMON> (5,000)
0
28,800
<OTHER-SE> 349,200
<TOTAL-LIABILITY-AND-EQUITY> 1,682,900
<SALES> 1,947,800
<TOTAL-REVENUES> 1,947,800
<CGS> 1,829,000
<TOTAL-COSTS> 1,829,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,700
<INCOME-PRETAX> 187,800
<INCOME-TAX> 73,800
<INCOME-CONTINUING> 114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 25,300
<NET-INCOME> 139,300
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
