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, 1998
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 January 29, 1999, the following shares of the
registrant's common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 85,594,496 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
December 31, 1998
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, 1998
and 1997 3
Consolidated Condensed Balance Sheets
as of December 31, 1998 and June 30, 1998 4
Consolidated Condensed Statements of Cash Flows
for the six-month periods ended December 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Part II - Other Information 21
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three and six-month periods ended December 31, 1998 and 1997
(In millions, except per share data)
(unaudited)
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $781.0 $812.5 $1,356.0 $1,373.9
Product, distribution and editorial expenses 272.3 297.8 484.8 501.3
Promotion, marketing and administrative
expenses 409.8 428.3 755.7 799.7
Other operating items and impairment losses 31.0 --- 31.0 70.0
Operating profit 67.9 86.4 84.5 2.9
Other income, net 75.8 0.4 63.2 6.6
Income before provision for income taxes 143.7 86.8 147.7 9.5
Provision for income taxes 57.2 32.5 58.7 11.6
Income (loss) before cumulative effect of
change in accounting principles 86.5 54.3 89.0 (2.1)
Cumulative effect of change in accounting
principles for pension assets --- --- 25.3 ---
Net income (loss) $ 86.5 $ 54.3 $ 114.3 $ (2.1)
Basic and diluted earnings (loss) per share:
Before cumulative effect of change in
accounting principles $ 0.80 $ 0.51 $ 0.82 $ (0.03)
Cumulative effect of change in accounting
principles --- --- 0.24 ---
Basic and diluted earnings (loss) per share $ 0.80 $ 0.51 $ 1.06 $ (0.03)
Average common shares outstanding 107.2 106.3 107.2 106.3
Dividends per common share $ 0.05 $0.225 $ 0.275 $ 0.45
</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, 1998 and June 30, 1998
(In millions)
(unaudited)
December 31, June 30,
1998 1998
Assets
Cash and cash equivalents $ 185.3 $ 122.8
Receivables, net 546.4 376.4
Inventories 144.3 162.2
Prepaid expenses and other current assets 329.3 311.2
Total current assets 1,205.3 972.6
Property, plant and equipment, net 267.8 285.4
Other noncurrent assets 330.9 306.0
Total assets $1,804.0 $1,564.0
Liabilities and stockholders' equity
Accounts payable $ 162.5 $ 172.1
Accrued expenses 417.7 377.4
Income taxes payable 67.3 21.0
Unearned revenue 412.2 355.4
Other current liabilities 69.3 90.0
Total current liabilities 1,129.0 1,015.9
Other noncurrent liabilities 311.5 289.5
Total liabilities 1,440.5 1,305.4
Capital stock 22.3 16.6
Paid-in capital 144.6 144.8
Retained earnings 929.2 845.0
Accumulated other comprehensive loss (37.3) (49.8)
Treasury stock, at cost (695.3) (698.0)
Total stockholders' equity 363.5 258.6
Total liabilities and stockholders' equity $1,804.0 $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
Six-month periods ended December 31, 1998 and 1997
(In millions)
(unaudited)
Six-month period ended
December 31,
1998 1997
Cash flows from operating activities
Net income (loss) $ 114.3 $ (2.1)
Depreciation and amortization 33.5 23.1
Other, net (93.3) (82.7)
Net change in cash due to operating activities 54.5 (61.7)
Cash flows from investing activities
Proceeds from maturities and sales of short-term
investments and marketable securities, net (4.1) 9.1
Proceeds from other long-term investments, net 1.0 46.6
Proceeds from sales of property, plant and equipment 79.0 3.8
Payments for business acquisitions (32.7) ---
Other, net (13.1) (15.4)
Net change in cash due to investing activities 30.1 44.1
Cash flows from financing activities
Short-term borrowings, net (0.1) 57.9
Dividends paid (30.1) (48.5)
Other, net 8.2 2.7
Net change in cash due to financing activities (22.0) 12.1
Effect of exchange rate changes on cash (0.1) (1.1)
Net change in cash and cash equivalents 62.5 (6.6)
Cash and cash equivalents at beginning of period 122.8 69.1
Cash and cash equivalents at end of period $ 185.3 $ 62.5
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 December 31, 1998 and 1997 are the second
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.
(2) Basic and Diluted Earnings (Loss) Per Share
Basic 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, 1998 and
1997, and $0.7 in each of the six-month periods ended December
31, 1998 and 1997 by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share
is computed by dividing net income (loss), 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 107.5 and 106.5 for the three-month periods ended
December 31, 1998 and 1997, and 107.5 and 106.6 for the six-month
periods ended December 31, 1998 and 1997, respectively was used
for the computation of diluted earnings (loss) per share.
(3) Inventories
December 31, June 30,
1998 1998
Raw materials $ 13.9 $ 21.8
Work-in-progress 24.6 24.7
Finished goods 105.8 115.7
$144.3 $162.2
(4) Revenues by Business Segments and Geographic Areas
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
BUSINESS SEGMENTS
Reader's Digest Magazine $ 175.7 $ 187.1 $ 343.3 $ 359.2
Books and Home Entertainment
Products 452.9 476.5 825.2 828.5
Special Interest Magazines 27.3 25.0 50.2 46.3
Other Businesses 125.1 123.9 137.3 139.9
Total revenues $ 781.0 $ 812.5 $1,356.0 $1,373.9
GEOGRAPHIC AREAS
United States $ 364.8 $ 387.2 $ 621.3 $ 635.7
Europe 297.5 306.8 519.5 524.5
Pacific and Other Markets 118.7 118.5 215.2 213.7
Total revenues $ 781.0 $ 812.5 $1,356.0 $1,373.9
</TABLE>
(5) Comprehensive Income (Loss)
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 (loss) in the Consolidated
Statement of Changes in Stockholders' Equity. Accumulated other
comprehensive loss as reported in the Consolidated Condensed
Balance Sheets as of December 31, 1998 and June 30, 1998,
represents foreign currency translation adjustments. The
components of comprehensive income (loss), net of related tax,
for the three-month periods ended December 31, 1998 and 1997, and
for the six-month periods ended December 31, 1998 and 1997 were
as follows:
<TABLE>
Three-month period ended Six-month period ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income (loss) $ 86.5 $ 54.3 $114.3 $ (2.1)
Change in:
Foreign currency translation adjustment 7.4 (7.2) 12.5 (13.7)
Net unrealized gains on certain investments --- --- --- 0.2
$ 93.9 $ 47.1 $126.8 $(15.6)
</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 cover 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 December 31, 1998, approximately one-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 other operating items and impairment
losses during the next 12 months.
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
December 31, 1998, were:
Other
Operating
Items and Current Balance
Impairment Activity Remaining
Losses
Employee severance benefits $44.9 $ (6.5) $ 38.4
Contract terminations 4.8 --- 4.8
Other 1.6 --- 1.6
Second quarter 1999 charges $51.3 $ (6.5) $ 44.8
Impairment losses 14.7
Adjustments to prior balances (35.0)
Total other operating items and
impairment losses $31.0
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 1997 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 December 31, 1998, were:
Balance at Current Balance
June 30, 1998 Activity Adjustments Remaining
Employee retirement and
severance benefits $ 59.6 $(10.8) $ (27.1) $ 21.7
Other items 24.2 (6.1) (6.2) 11.9
Business repositioning 3.9 (1.1) (1.7) 1.1
Total $ 87.7 $(18.0) $(35.0) $ 34.7
(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 December 31, 1998, no borrowings were
outstanding under the credit agreement. In addition, various
international subsidiaries of the company have available lines of
credit totaling $59.8. At December 31, 1998, loans in the amount
of $3.4 were outstanding under international lines of credit at a
weighted average interest rate of 8.8%.
(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 $9.5 in lower pension expense ($3.0 and $5.9 after tax,
or $0.03 and $0.06 per share) related to the three- and six-month
periods ended December 31, 1998, respectively as compared to the
previous accounting method. Had this change been applied
retroactively, pension expense would have been reduced by $3.9
and $7.9 ($2.5 and $4.9 after tax, or $0.02 and $0.05 per share)
in the three- and six-month periods ended December 31, 1997,
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 three- and six-month
periods ended December 31, 1998.
(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
three- and six-month periods ended December 31, 1998. The net
loss included a write-off of $9.5 which was transferred from
foreign currency translation adjustments as a result of the sale.
(11) Subsequent Event
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 sales price of 59.2 pounds sterling
(approximately $100.0). This transaction will be recorded in the
third quarter of fiscal 1999.
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, 1998 Compared With Three-
Month Period Ended December 31, 1997
Items Affecting the Comparability of Reported Results
Other Operating Items and Impairment Losses
Management's discussion and analysis, as it pertains to
geographic and business segment information, has been presented
excluding the net effect of the second quarter 1999 other
operating items and impairment losses of $31.0 ($21.5 after tax,
or $0.20 per share) in order to analyze the results on a
comparable basis. The other operating items and impairment
losses recorded in the second quarter of 1999 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 cover 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 addition to completing 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 other operating items and impairment
losses during the next 12 months. In the long-term, the combined
effect of these actions is expected to reduce annual revenues by
at least $200.0 and reduce the company's annual expense base,
excluding other operating items and impairment losses, by at
least $300.0 to $350.0 by the end of fiscal 2001.
Other Income, Net
In the second quarter of 1999, the company recorded a gain of
$85.3 ($53.3 after tax, or $0.50 per share) on the sale of
important works of art from the company's collection. 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 second quarter of 1999 decreased to
$781.0, or by 4%, compared with $812.5 in the second quarter of
1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 3%. This decline was
primarily attributable to lower unit sales within Books and Home
Entertainment Products, in particular in the United States,
principally caused by lower mail quantities within individual
mailings, as well as a reduction in the number of promotional
mailings during the quarter. Customer response to promotional
mailings improved in certain developed European markets; however,
customer response levels in certain product lines in the United
States were lower. Lower revenues in the United States and, to a
much lesser extent, in the United Kingdom and in Russia, where
operations were scaled back in response to the devaluation of the
ruble, were moderately offset by higher revenues in Germany and
growth in Brazil.
The company reported worldwide operating profit of $67.9 in the
second quarter of 1999, compared with operating profit of $86.4
in the second quarter of 1998. Excluding the items affecting the
comparability of reported results, second quarter 1999 operating
profit was $98.9, a 14% improvement over the same period a year
ago. This increase occurred primarily because the decline in
revenues was more than offset by lower product costs resulting in
part from sales of a higher-priced product mix and lower product
development costs, and lower promotional expenses as a result of
the reduction in the mail quantities within individual mailings
and the number of promotional mailings. To a lesser extent, the
company benefited from the termination of certain strategic
alliances and the elimination of spending on certain unprofitable
initiatives. This benefit was partially offset by one-time costs
relating to inventory write-offs associated with product lines
that are being discontinued. Overhead expenses increased
slightly compared with a year ago, principally resulting from
higher incentive compensation expenses which were largely offset
by a reduction in pension costs and, to a lesser extent, benefits
from re-engineering activities principally in the United States.
Other Income, Net
Other income, net, increased in the second quarter of 1999 to
$75.8, compared with $0.4 in the prior year. Excluding the items
affecting the comparability of reported results, other income,
net in the second quarter of 1999 was a net expense of $1.6.
This decrease was principally a result of losses on foreign
exchange transactions and hedging activity, as well as foreign
exchange translation losses resulting from the devaluation of the
Russian ruble, which were partially offset by lower interest
expense in the second quarter of 1999.
Income Taxes
For the second quarter of 1999, the reported tax rate was 39.8%.
Excluding the items affecting the comparability of reported
results in 1999, the overall effective tax rate was 37.5% for the
second quarter of 1999 and 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. This change
reduced pension expense for the second quarter of 1999 by $4.8
($3.0 after tax, or $0.03 per share).
Basic and Diluted Earnings per Share
The company reported net income of $86.5, or $0.80 per share, in
the second quarter of 1999, compared with net income of $54.3, or
$0.51 per share, in the second quarter of 1998. Excluding the
items affecting the comparability of reported results in 1999,
basic and diluted earnings per share was $0.56 in the second
quarter of 1999.
Geographic Areas
United States
Revenues in the United States decreased from $387.2 in 1998 to
$364.8, or by 6%, 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,
which was acquired in October 1998. Books and Home Entertainment
Products revenues declined in most product lines principally
because of the timing of promotional mailings, lower customer
response to promotional mailings in certain product lines, lower
mail quantities within mailings and, to a lesser extent, a
reduction in certain types of mailing activities. Although the
company has returned to traditional promotional formats in the
United States, customer response rates appear to have been
unfavorably affected by negative publicity concerning sweepstakes
marketing methods employed by other companies in the United
States. In addition, certain products offered in certain product
lines in 1999 did not have as broad an appeal as those offered in
the prior year. In 1999, the company reduced mail quantities
within mailings based on expected product strength and the desire
to reduce marginally profitable mailing activities. Revenues
declined particularly in general books and, to a lesser extent,
music products. Revenues in both product lines decreased because
of lower mail quantities within individual promotional mailings
in 1999. In addition, a general books mailing was sent earlier
than in the prior year which caused the revenues to be recognized
in the first quarter of 1999, and a music products mailing was
sent later than in the prior year which will cause the revenues
to be recognized in the third quarter of 1999. Higher average
prices in Books and Home Entertainment Products were the result
of postage and handling price increases across several product
lines, in anticipation of postal rate increases, and a higher-
priced mix of products offered in 1999. Operating profit
improved in 1999, compared with 1998, primarily because the
decline in revenues was offset by lower promotional expenses and
product costs as a result of the reduction in mail quantities
within individual mailings and, to a lesser extent, the number of
promotional mailings, the termination of certain strategic
alliances and the elimination of spending on certain unprofitable
initiatives. In addition, overhead expenses were lower in 1999
principally because of a reduction in pension costs and benefits
from re-engineering activities.
Europe
Revenues in Europe decreased from $306.8 in 1998 to $297.5, or by
3%, in 1999. Excluding the positive effect of changes in foreign
currency exchange rates, revenues decreased 6%. Lower revenues
in the United Kingdom, Russia and most other developed markets
were moderately offset by higher revenues in Germany. Improved
customer response to promotional mailings in certain developed
markets in 1999, which was attributable largely to a return to
traditional promotional formats and the elimination of the least
profitable names from mailings, partially offset the decline in
revenues from the strategic reduction in mail quantities in the
current year. Revenues declined principally in Books and Home
Entertainment Products and, to a lesser extent, because of lower
circulation revenues for Reader's Digest Magazine in developed
markets, particularly in the United Kingdom and Germany. Within
Books and Home Entertainment Products, lower unit sales primarily
within video products, general books and series books were
moderately offset by sales of a higher-priced product mix in most
product lines, most notably video products. The decline in video
products was the result of a reduction in the number of mailings
and lower mail quantities within individual mailings, moderately
offset by sales of a higher-priced product mix in 1999. General
books revenues declined as a result of the same factors and the
scaling back of operations in Russia in response to the
devaluation of the ruble, moderately offset by higher customer
response to mailings and an additional promotional mailing within
the quarter as compared to a year ago in Germany. The reduction
in series books revenues was caused by a series that is being
phased out as well as a reduction in the number of mailings.
Operating profit improved significantly in 1999, compared with
1998, as a result of improved performance in Germany because of
higher customer response to promotional mailings containing lower
mail quantities. In addition, the decline in revenues was more
than offset by lower product costs resulting in part from sales
of a higher-priced product mix and lower product development
costs, and lower promotional expenses from the strategic
reduction in the number of promotional mailings and the mail
quantities within individual mailings.
Pacific and Other Markets
Revenues in Pacific and Other Markets remained level with a year
ago at $118.7. Excluding the adverse effect of changes in
foreign currency exchange rates, revenues increased 10%.
Revenues increased primarily as a result of expansion in Brazil
and, to a lesser extent, from improved sales in Canada compared
to the prior year when a postal strike was in effect. Revenues
increased predominantly within Books and Home Entertainment
Products, principally because of higher unit sales in music
products and, to a lesser extent, sales of a higher-priced
product mix within general books. Higher sales in music products
were attributable primarily to growth in Brazil. General books
revenues increased because of sales of a higher-priced mix of
products sold in 1999 predominantly in Canada and Australia.
Operating profit improved in 1999, compared with 1998, primarily
because of growth in Brazil, the timing of promotional expenses
compared with the prior year and a reduction in mail quantities
within individual mailings in certain markets.
Corporate Expense
Corporate Expense in the second quarter of 1999 increased to
$11.9 compared with $5.5 in 1998, primarily as a result of higher
incentive compensation expenses.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $187.1 in
1998 to $175.7, or by 6%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues decreased
5%. The decrease in revenues was primarily attributable to lower
circulation revenues caused by a lower number of copies sold,
moderately offset by a higher average price per copy. A higher
number of advertising pages sold in 1999 was offset by a lower
average rate per page. Lower circulation revenues were
principally caused by lower circulation levels in the United
States and circulation declines in several major markets,
particularly the United Kingdom and Germany. A higher average
price per copy, predominantly in European markets, resulted from
selective price increases as well as the mix of subscriptions
sold. A higher number of advertising pages sold in the United
States at a lower average rate per page caused by the lower
circulation levels, was offset by a lower number of advertising
pages sold in European and Pacific markets. Operating profit for
Reader's Digest Magazine declined in the second quarter of 1999
compared with the same period a year ago. The decrease primarily
reflects the effect of lower circulation revenues, partially
offset by the timing of promotional expenses in certain markets
as well as lower promotional expenses in the United States and a
reduction in pension costs. In order to improve the relative
profitability of Reader's Digest Magazine, on October 1, 1998,
the company announced that it will reduce the rate base for
Reader's Digest Magazine in the United States from 15 million
copies per issue to 13.3 million for the January through June
1999 issues, then to 12.5 million copies with the July 1999
issue.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products decreased from
$476.5 in 1998 to $452.9, or by 5%, in 1999. Changes in foreign
currency exchange rates had no effect on the decline in revenues,
which occurred predominantly in the United States, and which was
partially offset by the acquisition of the Good Catalog Company
in the United States. Revenues decreased primarily because of
lower unit sales in general books and, to a lesser extent, series
books and video products. Lower unit sales were moderately
offset by sales of a higher-priced product mix across all product
lines, notably in video products and general books. The decrease
in general books unit sales was caused by lower mail quantities
within individual mailings and a reduction in the number of
mailings in the United States and Europe, as well as a
promotional mailing in the United States that was sent earlier
than in the prior year which caused the revenues to be recognized
in the first quarter of 1999. Higher average prices for general
books were attributable to the mix of products sold in many
markets, and postage and handling increases in the United States.
Series books revenues declined because of a series that is being
phased out in certain markets as well as a reduction in the
number of mailings. The decline in video products was the result
of lower mail quantities within individual mailings and a
reduction in the number of mailings, largely offset by sales of a
higher-priced mix of products in 1999. Operating profit for
Books and Home Entertainment Products increased significantly in
1999, compared with 1998. This increase occurred primarily
because the decline in revenues was more than offset by lower
product costs resulting in part from sales of a higher-priced
product mix and lower product development costs, lower
promotional expenses as a result of the reduction in the mail
quantities within individual mailings and the number of
promotional mailings, the termination of certain strategic
alliances and the elimination of spending on certain unprofitable
initiatives. In addition, overhead expenses were lower in 1999
principally from a reduction in pension costs and benefits from
re-engineering activities in the United States.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $25.0 in
1998 to $27.3, or by 9%, in 1999, principally as a result of the
acquisition of American Woodworker magazine in the second quarter
of 1999. Excluding American Woodworker, revenues increased 1% in
1999, as higher advertising revenues were largely offset by lower
circulation revenues. Within advertising revenues, higher
advertising rates in 1999 were moderately offset by a lower
number of advertising pages sold. The decline in circulation
revenues was principally in one magazine because of the shifting
of an issue from the second quarter into the third quarter in
1999. Operating results improved in 1999 compared with 1998
primarily as a result of higher advertising revenues, the timing
of expenses, and a reduction in pension costs.
Other Businesses
Revenues for Other Businesses increased from $123.9 in 1998 to
$125.1, or by 1%, in 1999, primarily resulting from growth at
QSP, the company's youth fund-raising organization, principally
because of higher unit sales of music products. Growth at QSP
was partially offset by a reduction in activity in the
merchandise catalog product line worldwide. Operating results
improved in 1999 compared with 1998 primarily as a result of the
growth at QSP and lower product costs and promotional expenses in
the merchandise catalog product line.
Six-Month Period Ended December 31, 1998 Compared With Six-Month
Period Ended December 31, 1997
Items Affecting the Comparability of Reported Results
Other Operating Items and Impairment Losses
As discussed in the three-month period ended December 31, 1998
compared with the three-month period ended December 31, 1997
above, 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). 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 six-month period ended December 31,
1998 decreased to $1,356.0, or by 1%, compared with $1,373.9 in
the six-month period ended December 31, 1997. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues remained level with a year ago. Lower unit sales within
Books and Home Entertainment Products and lower circulation
revenues for Reader's Digest Magazine were offset by sales of a
higher-priced product mix within Books and Home Entertainment
Products. The decrease in unit sales was principally caused by
lower mail quantities within individual mailings as well as a
reduction in the number of promotional mailings in fiscal 1999.
Customer response to promotional mailings improved in certain
developed European markets; however, customer response levels in
certain product lines in the United States were lower. Lower
revenues in the United States, the United Kingdom and other
developed European markets were offset by higher revenues in
other major developed international markets and growth in Latin
America.
The company reported worldwide operating profit of $84.5 in the
six-month period ended December 31, 1998, compared with operating
profit of $2.9 in the six-month period ended December 31, 1997.
Excluding the items affecting the comparability of reported
results in fiscal 1999 and 1998, operating profit was $115.5 in
the six-month period ended December 31, 1998, compared with $72.9
in the six-month period ended December 31, 1997. This increase
occurred primarily because the decline in revenues was more than
offset by lower promotional expenses as a result of the reduction
in the mail quantities within individual mailings and the number
of promotional mailings, lower product costs resulting in part
from sales of a higher-priced product mix and lower product
development costs, and, to a lesser extent, the termination of
certain strategic alliances and the elimination of spending on
certain unprofitable initiatives. Overhead expenses decreased
because of a reduction in pension costs and, to a lesser extent,
benefits from re-engineering activities principally in the United
States and the benefits of cost-containment initiatives in
developed markets resulting from actions taken in prior years,
which were partially offset by higher incentive compensation
expenses. The improvement in operating profit was slightly
offset by losses at the company's operations in Russia stemming
primarily from the economic turmoil that resulted in the
devaluation of the ruble.
Other Income, Net
Other income, net, increased in the six-month period ended
December 31, 1998 to $63.2, compared with $6.6 in the prior year.
Excluding the items affecting the comparability of reported
results, other income, net in the six-month period ended December
31, 1998 was a net expense of $14.2. 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 six-month period ended December 31,
1997 included gains from sales of certain investments.
Income Taxes
For the six-month period ended December 31, 1998, the reported
tax rate was 39.8%. For the six-month period ended December 31,
1997, the reported tax rate was 122%. Excluding the items
affecting the comparability of reported results in fiscal 1999
and 1998, the overall effective tax rate was 37.5% for the six-
month periods ended December 31, 1998 and December 31, 1997.
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 six-month period ended December 31, 1998 by $9.5 ($5.9 after
tax, or $0.06 per share).
Basic and Diluted Earnings (Loss) per Share
The company reported net income of $114.3, or $1.06 per share, in
the six-month period ended December 31, 1998, compared with a net
loss of $2.1, or $0.03 per share, in the six-month period ended
December 31, 1997. 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 $0.58 in the six-month
period ended December 31, 1998, compared with $0.46 per share in
the six-month period ended December 31, 1997.
The company's operations in Russia were significantly affected by
the general economic turmoil and resulting devaluation of the
ruble in the six-month period ended December 31, 1999. In
response to the Russian economic situation, the company took
actions to scale back its operations in Russia. The company's
operations in Russia generated a net loss of $15.8, or $0.15 per
share in the six-month period ended December 31, 1998, primarily
as a result of the economic turmoil.
Geographic Areas
United States
Revenues in the United States decreased from $635.7 in 1998 to
$621.3, or by 2%, 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,
which was acquired in October 1998. Lower circulation revenues
for Reader's Digest Magazine were largely offset by higher
advertising revenues. Books and Home Entertainment Products
revenues declined in most product lines principally because of
lower customer response to promotional mailings in certain
product lines, lower mail quantities within individual mailings
and, to a lesser extent, a reduction in certain types of mailing
activities. Although the company has returned to traditional
promotional formats in the United States, customer response rates
appear to have been unfavorably affected by negative publicity
concerning sweepstakes marketing methods employed by other
companies in the United States. In addition, certain products
offered in certain product lines in 1999 did not have as broad an
appeal as those offered in the prior year. In 1999, the company
reduced mail quantities within mailings based on expected product
strength and the desire to reduce marginally profitable mailing
activities. Lower revenues from unit sales of music products and
general books were moderately offset by a higher-priced product
mix across all product lines. The decrease in music products was
caused by lower customer response to mailings, lower mail
quantities within the mailings and a mailing that was sent later
than in the prior year which will cause the revenues to be
recognized in the third quarter of 1999. General books revenues
decreased primarily because of lower mail quantities within
individual promotional mailings in 1999. Higher average prices
in Books and Home Entertainment Products were the result of
postage and handling price increases across several product
lines, in anticipation of postal rate increases, and a higher-
priced mix of products offered in 1999. Lower circulation levels
for Reader's Digest Magazine in 1999 caused a decline in
circulation revenues, as well as a decrease in the average rate
per advertising page sold. The effect of this lower rate per
advertising page was more than offset by a higher number of
advertising pages sold. Operating profit improved significantly
in 1999, compared with 1998, primarily because the decline in
revenues was more than offset by lower promotional expenses and
product costs as a result of the reduction in mail quantities
within individual mailings and, to a lesser extent, the number of
promotional mailings, the termination of certain strategic
alliances and the elimination of spending on certain unprofitable
initiatives. 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.
Europe
Revenues in Europe decreased from $524.5 in 1998 to $519.5, or by
1%, in 1999. Excluding the positive effect of changes in foreign
currency exchange rates, revenues decreased 3%. Lower revenues
in the United Kingdom, most other developed markets and Russia,
where operations were scaled back in response to the devaluation
of the ruble, were largely offset by higher revenues in Germany
and France. Improved customer response to promotional mailings
in certain developed markets in 1999, which was attributable
largely to a return to traditional promotional formats and the
elimination of the least profitable names from mailings,
partially offset the decline in revenues from the strategic
reduction in mail quantities in the current year. Revenues
decreased within Books and Home Entertainment Products and for
Reader's Digest Magazine. Within Books and Home Entertainment
Products, lower unit sales principally of video products and
series books, were moderately offset by a higher-priced product
mix, predominantly in video products and general books. The
decline in video products was the result of a reduction in the
number of mailings and lower mail quantities within individual
mailings, moderately offset by sales of a higher-priced product
mix in 1999. Series books revenues declined primarily as a
result of the same factors and because of a series that is being
phased out in certain markets. Revenues for general books
benefited from a significantly higher-priced mix of products
offered in 1999. Within Reader's Digest Magazine, revenues
decreased primarily because of circulation declines in major
markets, particularly in the United Kingdom and Germany.
Operating profit improved significantly in 1999, compared with
1998, as a result of improved performance in Germany because of
higher customer response to promotional mailings containing lower
mail quantities. In addition, the decline in revenues was more
than offset by lower product costs resulting in part from sales
of a higher-priced product mix and lower product development
costs, and lower promotional expenses from the strategic
reduction in the number of promotional mailings and the mail
quantities within individual mailings. These improvements were
partially offset by losses at the company's operations in Russia
stemming primarily from the economic turmoil that resulted in the
devaluation of the ruble.
Pacific and Other Markets
Revenues in Pacific and Other Markets increased from $213.7 in
1998 to $215.2, or by 1%, in 1999. Excluding the adverse effect
of changes in foreign currency exchange rates, revenues increased
13%. Revenues increased principally as a result of expansion in
Latin America, particularly in Brazil. Revenues increased
primarily 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 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. General books revenues benefited from a
higher-priced mix of products sold in 1999. Operating profit
improved in 1999, compared with 1998, primarily because of higher
revenues, lower promotional expenses as a result of higher
customer response rates and the benefits of cost-containment
initiatives in developed markets resulting from actions taken in
prior years.
Corporate Expense
Corporate Expense in the six-month period ended December 31, 1998
increased to $20.3, compared with $16.4 a year ago, primarily as
a result of higher incentive compensation expenses.
Business Segments
Reader's Digest Magazine
Revenues for Reader's Digest Magazine decreased from $359.2 in
1998 to $343.3, or by 4%, 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
six-month period ended December 31, 1998. Lower circulation
revenues were principally caused by lower circulation levels in
the United States and circulation declines in several major
markets, particularly the United Kingdom and Germany. In the
United States, the effect of a significantly higher number of ad
pages sold was moderately offset by a lower average rate per page
because of the lower circulation levels in 1999. Operating
profit for Reader's Digest Magazine decreased slightly in the six-
month period ended December 31, 1998 compared with the same
period a year ago. The decrease primarily reflects the effect of
lower circulation revenues, which was largely offset by a
corresponding decrease in promotional expenses and a reduction in
pension costs. In order to improve the relative profitability of
Reader's Digest Magazine, on October 1, 1998, the company
announced that it will reduce the rate base for Reader's Digest
Magazine in the United States from 15 million copies per issue to
13.3 million for the January through June 1999 issues, then to
12.5 million copies with the July 1999 issue.
Books and Home Entertainment Products
Revenues for Books and Home Entertainment Products remained level
with a year ago at $825.2. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues increased
1%, principally attributable to growth in the company's Pacific
and Other Markets, which was largely offset by declines in the
United States. Sales of a higher-priced product mix,
particularly in general books and video products, and the
acquisition of the Good Catalog Company in the United States in
October 1998, were largely offset by lower unit sales within
general books, series books and video products. The decrease in
general books was caused primarily by lower mail quantities
within individual promotional mailings in 1999 in the United
States, largely offset by a significantly higher-priced mix of
products offered in the six-month period ended December 31, 1998,
as well as by postage and handling increases in the United
States. The decline in video products was the result of lower
mail quantities within individual mailings and a reduction in the
number of mailings, as well as lower customer response to
mailings in the United States, largely offset by sales of a
higher-priced product mix in 1999. 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 for Books and Home Entertainment Products
increased significantly in 1999, compared with 1998. These
operating results increased primarily because of lower
promotional expenses as a result of the reduction in mail
quantities within individual mailings and the number of
promotional mailings, lower product costs resulting in part from
sales of a higher-priced product mix and lower product
development costs, the termination of certain strategic alliances
and the elimination of spending on certain unprofitable
initiatives. 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 in the
United States.
Special Interest Magazines
Revenues for Special Interest Magazines increased from $46.3 in
1998 to $50.2, or by 8%, in 1999 principally as a result of the
acquisition of American Woodworker magazine in the second quarter
of 1999. Excluding American Woodworker, revenues increased 4% 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 and a reduction in pension costs.
Other Businesses
Revenues for Other Businesses decreased from $139.9 in 1998 to
$137.3, or by 2%, in 1999, primarily resulting from a reduction
in activity in the merchandise catalog product line worldwide,
largely offset by growth at QSP, the company's youth fund-raising
organization, principally because of higher unit sales of music
products. Operating profit improved significantly in 1999
compared with 1998 principally as a result of growth and cost
savings at QSP and lower product costs and promotional expenses
in the merchandise catalog product line.
Forward-Looking Information
Strategic Initiatives
The company is undertaking a three-phase strategy to build on its
fundamental strengths and create growth opportunities over the
next three years.
In July 1998, the company announced as the first step in this
strategy a global reorganization that included the organization
of operations into four business groups, the restructuring of
editorial organizations, the establishment of new reporting
relationships and the reassignment of certain executives. The
second phase of the strategy, announced in September 1998,
targeted the restructuring of costs and the conversion of
underproductive assets to cash. The main components of the
second phase of the strategy were the elimination or
rationalization of unproductive businesses, activity-based cost
reductions and re-engineering, and maximizing the value of the
asset base of the company.
The second phase of the strategy is currently underway, and the
elimination or rationalization of unproductive businesses is
still on track to be completed within the next 18 months. The
company has decided to maintain its operations in Scandinavia,
Finland and Benelux and to consider re-engineering alternatives,
rather than sale or joint venturing alternatives, with respect to
those operations. The company expects to record additional
charges to other operating items and impairment losses in 1999
related to cost reduction and re-engineering actions as further
components of the plan and estimated costs associated with those
actions are completed and additional potential re-engineering
activities are reviewed.
The third phase of the strategy is expected to be announced in
February 1999 and will focus on plans to expand the business.
Year 2000 Readiness Disclosure
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, except for packaged
applications in the United Kingdom, which are expected to be
completed by February 1999.
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. A significant portion
of the analysis phase is complete in the United States and
developed international markets. The analysis phase for the
United States and developed international markets is expected
to be completed by March 1999. The United States and major
developed markets substantially completed this phase with
respect to non-IT embedded systems by December 1998.
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, has commenced in
the United States and developed international markets, and is
expected to be completed by June 1999 for applications and IT
equipment and non-IT embedded systems. 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 company's operations in developing international markets,
including operations in Latin America, Eastern Europe and the Far
East, have substantially completed the inventory and analysis
phases and plan to be fully complete with these phases by March
1999. The implementation phase has commenced in most 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 developing its
country-by-country contingency plans and expects to have them
completed by June 1999. 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 $8.0 of the total cost of the remediation
plan has been spent, the majority of which was expensed.
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 is
in the process of developing a 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 will not be finalized until the
company has completed a strategic plan; therefore, it is
uncertain whether the costs of conversion will 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 $66.7 to $192.8 at December 31, 1998
compared with June 30, 1998. The increase was primarily a result
of proceeds from the sale of important works of art from the
company's collection and cash flow provided from operating
activities, partially offset by payments made for the acquisition
of The Good Catalog Company and American Woodworker and dividend
payments.
In the second quarter of 1998, 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 second 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 December 31, 1998,
there were no borrowings outstanding under the credit agreement.
In addition, various international subsidiaries of the company
have available lines of credit totaling $59.8. At December 31,
1998, loans in the amount of $3.4 were outstanding under
international lines of credit at a weighted average interest rate
of 8.8%.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1998 Annual Meeting of Stockholders of the company, held
on November 13, 1998, 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
Thomas O. Ryder 20,973,954 186,557
Lynne V. Cheney 20,927,669 232,842
M. Christine DeVita 20,910,188 250,323
George V. Grune 20,856,241 304,270
James E. Preston 20,926,086 234,425
Lawrence R. Ricciardi 20,968,871 191,640
C.J. Silas 20,935,078 225,433
William J. White 20,961,646 198,865
Proposal 2: Approval of amendment of the 1994 key employee
long term incentive plan to increase the number of shares
awardable to a participant in any fiscal year and to provide for
transferability of stock options. The amendment was approved by
the votes cast as follows:
Broker
For Against Abstain Non-Votes
19,898,682 1,204,451 57,378 ---
Proposal 3:Stockholder proposal to limit to two the number of
Directors affiliated with the foundations which control the
company. The proposal was rejected by the votes cast as follows:
Broker
For Against Abstain Non-Votes
2,144,744 18,290,423 85,097 640,247
Proposal 4:Stockholder proposal to retain an investment banker to
develop a plan for recapitalization of voting rights. The
proposal was rejected by the votes cast as follows:
Broker
For Against Abstain Non-Votes
1,942,598 16,836,766 24,843 2,356,304
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.
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: February 5, 1999 By: 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 six-month period ended December 31, 1998,
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-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 185,300
<SECURITIES> 6,400
<RECEIVABLES> 735,100
<ALLOWANCES> 188,700
<INVENTORY> 144,300
<CURRENT-ASSETS> 1,205,300
<PP&E> 629,600
<DEPRECIATION> 361,800
<TOTAL-ASSETS> 1,804,000
<CURRENT-LIABILITIES> 1,129,000
<BONDS> 0
<COMMON> (6,500)
0
28,800
<OTHER-SE> 341,200
<TOTAL-LIABILITY-AND-EQUITY> 1,804,000
<SALES> 1,356,000
<TOTAL-REVENUES> 1,356,000
<CGS> 1,271,500
<TOTAL-COSTS> 1,271,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,300
<INCOME-PRETAX> 147,700
<INCOME-TAX> 58,700
<INCOME-CONTINUING> 89,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 25,300
<NET-INCOME> 114,300
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
