SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998Commission 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. Employer
incorporation or organization) Identification
No.)
Pleasantville, New York 10570
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (914) 238-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Nonvoting Common Stock
par value $.01 per share New York Stock Exchange
Class B Voting Common Stock New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
______________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of registrant, at August 31, 1998, was
approximately $113,194,989 based on the closing price of
registrant's Class B Voting Stock on the New York Stock Exchange-
- -Composite Transactions on such date.
As of August 31, 1998, 85,462,667 shares of the registrant's
Class A Nonvoting Common Stock and 21,716,057 shares of the
registrant's Class B Voting Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders of
registrant to be held on November 13, 1998. Certain information
therein is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
Reader's Digest Magazine 3
Circulation 3
Advertising 4
Editorial 4
Production and Fulfillment 4
Books and Home Entertainment Products 5
Condensed Books 5
Series Books 5
General Books 6
Music 6
Television and Video 6
Production and Fulfillment 7
Direct Marketing Operations 7
Management Information Systems and Customer List 8
Enhancement
Special Interest Magazines 9
QSP, Inc. 9
Competition and Trademarks 10
Employees 10
Executive Officers of the Company 10
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 13
HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 14
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 15
SIGNATURES 19
FINANCIAL INFORMATION 20
CORPORATE AND SHAREHOLDER INFORMATION 48
"Reader's Digest" is a registered trademark of The Reader's
Digest Association, Inc.
PART I
ITEM 1.BUSINESS
The Reader's Digest Association, Inc. (the "Company") is a
preeminent global leader in publishing and direct marketing,
creating and delivering products, including magazines, books,
recorded music collections, home videos and other products, that
inform, enrich, entertain and inspire.
The Company is a Delaware corporation that was originally
incorporated in New York in 1926 and was reincorporated in
Delaware in 1951. The mailing address of its principal executive
offices is Pleasantville, New York 10570 and its telephone
number is (914) 238-1000.
In response to a decline in recent years in the Company's
financial performance, on August 11, 1997, the Board of Directors
of the Company asked George V. Grune to return as Chairman and
Chief Executive Officer. Mr. Grune had served as Chief Executive
Officer of the Company from 1984 to 1994 and retired as its
Chairman in 1995.
After reassuming his position, Mr. Grune rebuilt the
Company's management team with strong experience in direct mail
marketing at the Company. In addition, in September 1997, the
Company reorganized its businesses into two operating groups,
Reader's Digest U.S.A. and Reader's Digest International. The
Company's businesses had been organized in four operating groups
- --Reader's Digest Europe, Reader's Digest U.S.A. and Reader's
Digest Pacific, and a fourth operating group that operated the
Company's school and youth group fundraising business and focused
on developing new products and entering new marketing channels.
Mr. Grune implemented a strategy of stabilizing and
strengthening the Company's core business by investment and
expansion. This strategy involved: refocusing on disciplined
direct marketing; refocusing on core product offerings; enhancing
utilization of the Company's worldwide customer databases;
revitalizing growth through investment in new products, new
markets and new direct marketing channels; and enhancing global
efficiency.
Simultaneously with Mr. Grune's return to the Company, the
Board of Directors designated a Search Committee to find a new
Chief Executive Officer. On April 28, 1998, that search
culminated with the election of Thomas O. Ryder as Chairman and
Chief Executive Officer.
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 includes the following
key elements:
The organization of operations into four business groups
(Global Books and Home Entertainment, United States Magazine
Publishing, International Magazine Publishing and QSP, Inc.) to
make greater use of global scale.
The restructuring of editorial organizations to ensure
editorial quality and integrity worldwide.
The establishment of new reporting relationships to sharpen
focus and accountability.
The reassignment of certain executives as well as the hiring
of new people with key skill sets.
The second phase of the strategy, announced in September
1998, targets the restructuring of costs and the raising of
capital. The main components of the restructuring are:
The elimination or rationalization of unproductive
businesses.
Cost reductions and re-engineering.
Leveraging the asset base of the Company.
The elimination or rationalization of unproductive
businesses, which is expected to be completed within the next 18
months, will generally involve the following actions:
The sale or joint venturing of proprietary publishing
operations in Scandinavia, Finland, Benelux, Italy and South
Africa.
The elimination or redirection of certain product lines,
including adult and children's retail book publishing, the
Today's Best Nonfiction (registered trademark) book series,
and video or music businesses in selected international markets.
Cost reduction and re-engineering activities will involve
the following:
A 20-25% reduction in the number of individual promotional
mailings globally, including the elimination of related product
development and overhead costs. The Company anticipates that
this will increase response rates on continuing mailings.
A 10-20% reduction in the circulation rate base for Reader's
Digest magazine in the United States to improve the efficiency of
promotional spending. This action is also expected to reduce
circulation and advertising revenue in the short term.
The outsourcing of support functions in areas where it is
cost-effective and the consolidation of suppliers and combination
of purchasing efforts for greater negotiating leverage.
Implementation of the second phase of the strategy is
expected to reduce the Company's annual expense base, excluding
other operating items, by $300.0 million to $350.0 million and
reduce annual revenues by approximately $200.0 million by the end
of fiscal 2001. As a result, the Company believes that annual
operating profit will increase by $100.0 million to $150.0
million in three years. The Company expects to record charges to
other operating items in a range of $30.0 million to $50.0
million in fiscal 1999 related to these actions as components of
the plan are finalized.
Leveraging the asset base of the Company will include the
following actions:
The sale of important works from the art collection.
The sale of international real estate holdings including its
U.K. Canary Wharf facility.
An expected reduction in the quarterly dividend for the
second quarter of 1999 from $0.225 per share to $0.05 per share.
The actions to leverage the asset base of the Company are
expected to convert approximately $200.0 million of under-
productive assets to cash in the next year and improve annual pre-
tax cash flow by $150.0 million to $200.0 million by fiscal 2001.
The announcement of the second phase of the strategy also
focused on broadening the Company's customer base to include more
younger customers and more products for older customers.
The third phase of the strategy is expected to be announced
in January 1999 and will focus on plans to grow the business.
This will include investing in internal opportunities, as well as
targeting acquisitions that leverage the Company's core
strengths, expanding geographically, introducing new products and
engaging in at least one completely new business.
The following is a discussion of the operations of the
Company based upon the four business segments through which the
Company reports its results of operations: (1) Reader's Digest
magazine, (2) books and home entertainment products, (3) special
interest magazines and (4) other businesses. Financial
information by business segment and by geographic area appears at
Note 12 to the Company's consolidated financial statements in the
Financial Information section of this report.
Reader's Digest Magazine
Reader's Digest magazine is a monthly, general interest
magazine consisting of original articles and previously published
articles in condensed form, a condensed version of a previously
published or soon-to-be published full-length book, monthly humor
columns, such as "Laughter, The Best Medicine" (registered trademark),
"Life In These United States" (registered trademark),
"Humor In Uniform" (registered trademark), and "All In A Day's
Work(registered trademark)," and other regular features, including
"Heroes For Today (registered trademark)," "It Pays To Enrich Your
Word Power (registered trademark)," "News From The
World Of Medicine (registered mark)," "Tales Out of School (registered
trademark)," "Virtual Hilarity (registered trademark),"
"Personal Glimpses," and "Campus Comedy." DeWitt and Lila
Wallace founded Reader's Digest magazine in 1922. Today,
Reader's Digest has a worldwide circulation of about 28 million
and over 100 million readers each month, generating revenues of
$712.3 million in fiscal 1998, as compared with $729.2 million in
fiscal 1997 and $739.8 million in fiscal 1996. Reader's Digest
is published in 48 editions and 19 languages, including a Slovak
language edition that began publication in July 1997. In
addition, a Korean edition, an Indian edition, a braille edition
and a recorded edition are published by third parties pursuant to
licenses.
In September 1997, the Company introduced the Reader's
Digest Large Edition for Easier Reading in the United States,
offering most of the articles from Reader's Digest and all of the
humor departments. Unlike the Company's previous Large Type
Edition, the new edition is complete with advertising and greatly
enhanced color graphics.
In May 1998, Reader's Digest magazine launched a major
redesign of its editions worldwide, taking the familiar table of
contents off the cover and replacing it with bold photography and
enhanced graphics. The redesign is intended to better serve the
readers of Reader's Digest magazine by making it easier to read
and more contemporary.
Circulation
Based on the most recent audit report issued by the Audit
Bureau of Circulation, Inc. ("ABC"), a not-for-profit
organization that monitors circulation in the United States and
Canada, the Company has determined that the United States English
language edition of Reader's Digest has the largest paid
circulation of any United States magazine, other than those
automatically distributed to all members of the American
Association of Retired Persons. Approximately 95% of the United
States paid circulation of Reader's Digest consists of
subscriptions. The balance consists of single copy sales at
newsstands and in supermarkets and similar establishments.
Reader's Digest is truly a global magazine. Many of its
international editions have the largest paid circulation for
monthly magazines both in the individual countries and in the
regions in which they are published. For most international
editions of Reader's Digest, subscriptions comprise about 90% of
circulation. The balance is attributable to newsstand and other
retail sales.
The Company maintains its circulation rate base through
annual subscription renewals and new subscriptions. The global
circulation rate base for Reader's Digest of 27.8 million
includes a circulation rate base of 15 million for the United
States--English language edition. In the United States, the
Company sells approximately five million new subscriptions each
year in order to maintain its circulation rate base. New
subscriptions are sold primarily by direct mail, with extensive
use of sweepstakes entries. The largest percentage of
subscriptions is sold between July and December of each year.
Subscriptions to Reader's Digest may be canceled at any time and
the unused subscription price is refunded. In September 1998,
the Company announced its intention to reduce the circulation
rate base for the United States--English language edition of
Reader's Digest by 10-20%. See "Strategic Intitiatives."
Worldwide revenues from circulation accounted for $549.4
million, or 77% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1998.
Advertising
In fiscal 1998, Reader's Digest carried 12,715 advertising
pages: 1,050 advertising pages in its United States--English
language edition and 11,665 advertising pages in its other
editions. The United States and the larger international
editions of Reader's Digest offer advertisers different regional
editions, major market editions and demographic editions. These
editions, usually containing the same editorial material, permit
advertisers to concentrate their advertising in specific markets
or to target specific audiences. Reader's Digest sells
advertising in both the United States and international editions
principally through an internal advertising sales force. The
Company sells advertisements in multiple editions worldwide, and
offers advertisers discounts for placing advertisements in more
than one edition.
Worldwide revenues from advertising accounted for $162.9
million, or 23% of the total revenues of Reader's Digest
magazine, in the fiscal year ended June 30, 1998.
Editorial
Reader's Digest is a reader-driven, family magazine.
Editorial content is, therefore, crucial to the loyal subscriber
base that constitutes the cornerstone of the Company's
operations. The editorial mission of Reader's Digest is to
inform, enrich, entertain and inspire. The articles, book
section and features included in Reader's Digest cover a broad
range of contemporary issues and reflect an awareness of
traditional values.
A substantial portion of the selections in Reader's Digest
are original articles written by staff writers or free-lance
writers. The balance is selected from existing published
sources. All material is condensed by Reader's Digest editors.
The Company employs a professional staff to research and fact-
check all published pieces.
Each international edition has a local editorial staff
responsible for the editorial content of the edition. The mix of
locally generated editorial material, material taken from the
United States edition and material taken from other international
editions varies greatly among editions. In general, the
Company's larger international editions, for example, those in
Canada, France, Germany and the United Kingdom, carry more
original or locally adapted material than do smaller editions.
Production and Fulfillment
All editions of Reader's Digest are printed by independent
third parties. The United States edition is printed exclusively
by one printer in Pennsylvania under a 10-year contract that
commenced in fiscal 1997 and there are also exclusive printing
arrangements in other countries. The Company believes that
generally there is an adequate supply of alternative printing
services available to the Company at competitive prices, should
the need arise, although significant short-term disruption could
occur in certain markets. The Company has developed plans to
minimize recovery time in the event of a disaster with current
contract parties.
The principal raw materials used in the publication of
Reader's Digest are coated and uncoated paper. The Company has
supply contracts with a number of global suppliers of paper and
believes that those supply contracts provide an adequate supply
of paper for its needs and that, in any event, alternative
sources are available at competitive prices. Paper prices are
affected by a variety of factors, including demand, capacity,
pulp supply, and by general economic conditions.
Subscription copies of the United States edition of Reader's
Digest are delivered through the United States Postal Service as
"periodicals" class mail. Subscription copies of international
editions are also delivered through the postal service in each
country. For additional information about postal rates and
service, see "Direct Marketing Operations."
Newsstand and other retail distribution is accomplished
through a distribution network. The Company has contracted in
each country with a magazine distributor for the distribution of
Reader's Digest.
Books and Home Entertainment Products
The Company publishes and markets, principally by direct
mail, Reader's Digest Condensed Books, series books, general
books, recorded music collections and series and home video
products and series. See "Direct Marketing Operations."
Condensed Books
Reader's Digest Condensed Books (called "Select Editions" in
certain markets) is a continuing series of condensed versions of
current popular fiction. Condensation reduces the length of an
existing text, while retaining the author's style, integrity and
purpose. Today, Condensed Books are published in 13 languages,
and are marketed in 24 countries. In fiscal 1998, Condensed
Books generated worldwide revenues of $261.9 million, as compared
with $305.0 million in fiscal 1997 and $370.4 million in fiscal
1996.
International editions of Condensed Books generally include
some material from the United States edition or from other
international editions, translated and edited as appropriate, and
some condensations of locally published works. Each local
editorial staff determines whether existing Condensed Books
selections are appropriate for their local market.
The Company publishes six volumes of Condensed Books a year
in the United States. Some of the Company's international
subsidiaries also publish six volumes a year, while others
publish four or five.
Series Books
The Company markets two types of series books: reading
series and illustrated series. These book series may be open-
ended continuing series, or may be closed-ended, consisting of a
limited number of volumes. Series books are published in eight
languages and marketed in 16 countries. In fiscal 1998, series
books generated worldwide revenues of $162.1 million, as compared
with $209.5 million in fiscal 1997 and $264.3 million in fiscal
1996.
In fiscal 1998, reading series included Today's Best
Nonfictionr, which consists of five volumes per year each
generally containing condensed versions of four contemporary
works of nonfiction and The World's Best Reading, consisting of
full-length editions of classic works of literature, of which six
volumes are published each year. Today's Best Nonfiction is
published in 7 countries in three languages and The World's Best
Reading is published in four countries in three languages. The
Company announced in September 1998 that it will discontinue the
Today's Best Nonfiction series. See "Strategic Intitiatives."
The Company markets illustrated series, which are generally
closed-ended, in 16 countries and publishes in nine languages.
General Books
The Company's general books consist primarily of reference
books, cookbooks, "how-to" and "do-it-yourself" books, children's
books and books on subjects such as history, travel, religion,
health, nature and the home. General books are published in 18
languages and are marketed in 40 countries. In fiscal 1998,
general books generated worldwide revenues of $608.5 million, as
compared with $675.9 million in fiscal 1997 and $753.5 million in
fiscal 1996.
New general books are generally original Reader's Digest
books, but may also be books acquired from other publishers.
During the development period for an original Reader's Digest
book, the Company conducts extensive research and prepares an
appropriate marketing strategy for the book.
Although most sales of a general book will result from the
initial bulk promotional mailing, substantial additional sales
occur through subsequent promotions, catalog sales and the use of
sales inserts in mailings for other Reader's Digest products.
The Company also distributes its books for retail sale in stores,
through third-party distributors.
Music
The Company publishes recorded music packages on cassettes
and compact discs, which it sells principally by direct mail.
The music packages are generally collections of previously
recorded and newly commissioned material by a variety of artists,
although they may include selections from the Company's almost
18,000-selection library. The collections span a broad range of
musical styles. In certain markets, the Company also sells music
series, which are marketed in the same manner as Condensed Books
and series books. The marketing strategy for music packages is
similar to that for general books. The Company markets music
products in 37 countries, offering different music products in
the various international markets because of diverse tastes. In
fiscal 1998, music products generated worldwide revenues of
$377.6 million, as compared with $404.2 million in fiscal 1997
and $460.1 million in fiscal 1996.
In the United States, the Company became a member of the
Recording Industry Association of America in fiscal 1998, and was
recognized with 47 gold, platinum and multi-platinum
certificates.
Television and Video
The Company's television and home video products are in
genres similar to its general books. Several original programs
have won awards of excellence, including five Emmy awards, and
have appeared on the Disney Channel and the Discovery Channel.
The Company continues to expand its video operations in the
United States and in international markets and is presently
marketing video products principally by direct mail in the United
States and 32 other countries. Most of the Company's original
programs have been licensed to cable television networks. The
Company also sells its home video products through retail
establishments. In fiscal 1998, home video products generated
worldwide revenues of $215.8 million, as compared with $243.5
million in fiscal 1997 and $241.3 million in fiscal 1996.
Production and Fulfillment
The various editions of Condensed Books are printed and
bound by third-party contractors. The Company is a party to an
exclusive agreement through 2002 for printing English language
Condensed Books distributed in the United States and Canada. The
Company solicits bids for the printing and binding of each
general book or book series. Production and manufacture of music
and video products is typically accomplished through third
parties.
The principal raw material necessary for the publication of
Condensed Books, series books and general books is paper. The
Company has a number of paper supply arrangements relating to
paper for Condensed Books. Paper for series books and general
books is purchased for each printing. The Company believes that
existing contractual and other available sources of paper provide
an adequate supply at competitive prices. Third parties arrange
for the acquisition of some of the necessary raw materials for
the manufacture of music and video products.
Fulfillment, warehousing, customer service and payment
processing are conducted principally by independent contractors.
Most of the Company's products are packaged and delivered to the
Postal Service directly by the printer or supplier. For
information about postal rates and service, see "Direct Marketing
Operations."
In all of the Company's direct marketing sales, a customer
may return any book or home entertainment product to the Company
either prior to payment or after payment for a refund. The
Company believes that its returned goods policy is essential to
its reputation and also elicits a greater number of orders, many
of which are not returned because of the generally high
satisfaction rate of consumers with the Company's products. This
policy and a "first book free" policy for Condensed Books and
series books result in a significant amount of returned goods.
Sales of the Company's books and home entertainment products
are seasonal to some extent. In the direct marketing industry as
a whole, the winter months have traditionally had higher consumer
response than other times of the year. Sales are also higher
during the pre-Christmas season than in spring and summer.
Direct Marketing Operations
The sale of magazine subscriptions, Condensed Books, series
books, general books, music and video products, as well as
certain other products, is accomplished principally through
direct mail solicitations to households on the Company's customer
lists, usually accompanied by sweepstakes entries and, in some
cases, premium merchandise offers. For many years the Company
has been acknowledged as a pioneer and innovator in the direct
mail industry.
As part of its growth strategy, the Company has begun to
pursue increased distribution of its products through direct
response channels other than direct mail, such as direct response
television, telemarketing and the Internet, as well as expanded
direct marketing channels, such as catalogs and clubs.
The Company is adapting the editorial content and the
marketing methods of its magazines and books and home
entertainment products to new technologies, such as computer on-
line services. In 1997, the Company launched Reader's Digest
World, a World Wide Web site (www.readersdigest.com) that links
the Company's 13 local and international Web sites, for shopping
and information about the Company's products. In 1998, Reader's
Digest World had over 2 million visitors from seventy different
countries around the world.
To promote the sale of its products in the United States,
the Company usually offers a sweepstakes in its promotional
mailings. Prizes totaled about $8 million for the 1998 edition
of the sweepstakes. Generally, each of the Company's
international subsidiaries sponsors its own sweepstakes, the
mechanics of which vary from jurisdiction to jurisdiction,
depending upon local law.
From time to time, the Company is involved in legal,
regulatory and investigative proceedings concerning its
sweepstakes and other direct marketing practices. Also from time
to time, more restrictive laws or regulations governing
sweepstakes or direct marketing are considered in jurisdictions
in which the Company does business. The Company does not believe
that such proceedings and proposed laws and regulations will have
a material adverse effect on the Company's direct marketing
business.
The Company is subject to postal rate increases, which
affect its product deliveries, promotional mailings and billings.
Postage is one of the Company's largest expenses in its
promotional and billing activities. In the past, the Company has
had sufficient advance notice of most increases in postal rates
so that the higher rates could be factored into the Company's
pricing strategies and operating plans. Because increased prices
(or increased delivery charges paid by customers) may have a
negative effect on sales, the Company may strategically determine
from time to time the extent, if any, to which these cost
increases are passed on to its customers.
The Company relies on postal delivery service in the
jurisdictions in which it operates for timely delivery of its
products and promotional mailings. In the United States and most
international markets, delivery service is generally
satisfactory. Some international jurisdictions, however,
experience periodic work stoppages in postal delivery service or
less than adequate postal efficiency.
In some states in the United States and in some foreign
jurisdictions, some or all of the Company's products are subject
to sales tax or value added tax. Tax, like delivery, is
generally stated separately on bills where permitted by
applicable law. Nonetheless, tax increases or imposition of new
taxes increases the total cost to the customer and thus may have
a negative effect on sales. Moreover, in jurisdictions where
applicable tax must be included in the purchase price, the
Company may be unable to fully recover from customers the amount
of any tax increase or new tax.
Management Information Systems and Customer List Enhancement
The size and quality of the Company's computerized customer
list of current and prospective customers in each country in
which it operates contribute significantly to its business and
the Company is constantly striving to improve its lists. The
Company believes that its United States list of over 60 million
households--over half the total number of households in the
country--is one of the largest direct response lists in the
United States. The Company's international lists include
approximately 50 million households, in the aggregate.
The Company is making and will continue to make significant
investments in management information systems in order to improve
its operating efficiencies, increase the level of service
provided to its customer base and facilitate globalization of the
Company.
List management activity is limited in some international
subsidiaries because local jurisdictions, particularly in Europe,
have data protection laws or regulations prohibiting or limiting
the exchange of such information. Certain jurisdictions also
prohibit the retention of information, other than certain basic
facts, about noncurrent customers. Although data protection laws
in effect from time to time may hinder the Company's list
enhancement capacity, the Company believes that current laws and
regulations do not prevent the Company from engaging in
activities necessary to its business.
Special Interest Magazines
The Company publishes several special interest magazines
that it deems consistent with its image, editorial philosophy and
market expertise. The Family Handymanr magazine provides
instructions and guidance for "do-it-yourself" home improvement
projects. New Choices: Living Even Better After 50r magazine is
aimed at active, mature readers and provides information on
entertainment, travel, health and leisure time activities.
American Health for Womenr magazine provides helpful information
on medicine, nutrition, psychology and fitness as those issues
relate to women. Walkingr magazine provides information on
health and fitness for walking enthusiasts. These magazines are
sold by subscription and on the newsstand. Like most magazines,
the Company's special interest magazines are highly dependent on
advertising revenue. Each of these magazines publishes 10 issues
per year, except Walking, which publishes six times per year.
The Company also publishes Moneywise magazine, a magazine devoted
to helping families manage their finances, in the United Kingdom.
The following table sets forth the circulation rate base of
each of the Company's United States special interest magazines at
June 30, 1998, as well as the number of advertising pages carried
for the fiscal year ended June 30, 1998. Circulation rate base
data is as reported to ABC.
Number of
Circulation Advertising
Rate Base Pages
Carried
The Family Handyman 1,100,000 608
American Health for Women 1,000,000 535
New Choices: Living Even Better 600,000 483
After 50
Walking. 650,000 364
Moneywise had a circulation rate base of 101,700 as of the
end of fiscal 1998 and carried 522 pages of advertising.
Of total revenues of $97.0 million for the Company's special
interest magazines in fiscal 1998, 59% was generated by
circulation revenues and 41% by advertising revenues.
The U.S. magazines are promoted to the Company's U.S.
customer list and the Company's other products are promoted to
each magazine's customer list, as appropriate. This strategy
helps to expand the Company's customer base for all of its
products.
QSP, Inc.
The Company's wholly owned subsidiaries, QSP, Inc. in the
United States and Quality Service Plan, Inc. in Canada ("QSP"),
are in the business of assisting schools and youth groups in the
United States and Canada in their fundraising efforts. QSP's
staff helps schools and youth groups prepare fundraising
campaigns in which participants sell magazine subscriptions,
music and video products, books, food and gifts. QSP derives its
revenue from a portion of the proceeds of each sale. Several
hundred publishers (including the Company) make magazine
subscriptions available to QSP at competitive, discounted prices.
QSP also obtains discounted music products from a large music
publisher. Processing of magazine and music orders is performed
for QSP by an independent contractor. Processing of video, book,
gift and food orders is performed by QSP Distribution Services,
Inc., a wholly owned subsidiary of QSP, Inc. located in Conyers,
Georgia.
Competition and Trademarks
Although Reader's Digest magazine is a unique and well-
established institution in the magazine publishing industry, it
competes with other magazines for subscribers and with magazines
and all other media, including television, radio and the
Internet, for advertising. The Company believes that the
extensive and longstanding international operations of Reader's
Digest provide the Company with a significant advantage over
competitors seeking to establish a global publication.
The Company owns numerous trademarks that it uses in its
business worldwide. Its two most important trademarks are
"Reader's Digest" and the "Pegasus" logo. The Company believes
that the name recognition, reputation and image that it has
developed in each of its markets significantly enhance customer
response to the Company's direct marketing sales promotions.
Accordingly, trademarks are important to the Company's business
and the Company aggressively defends its trademarks.
The Company believes that its name, image and reputation, as
well as the quality of its customer lists, provide a significant
competitive advantage over many other direct marketers. However,
the Company's books and home entertainment products business is
in competition with companies selling similar products at retail
as well as by direct marketing. Because tests show that
consumers' responses to direct marketing promotions can be
adversely affected by the overall volume of direct marketing
promotions, the Company is also in competition with all other
direct marketers, regardless of whether the products being
offered are similar to the Company's products.
Each of the Company's special interest magazines is in
competition with other magazines of the same genre for readers
and advertising. Nearly all of the Company's products compete
with other products and services that utilize leisure activity
time or disposable income.
Employees
As of June 30, 1998, the Company employed approximately
5,500 persons worldwide; approximately 2,100 were employed in the
United States and 3,400 were employed by the Company's
international subsidiaries. The Company's relationship with its
employees is generally satisfactory.
Executive Officers of the Company
The following paragraphs set forth the name, age and offices
with the Company of each present executive officer of the
Company, the period during which each executive officer has
served as such and each executive officer's business experience
during the past five years:
Name and Age Positions and Offices With the Company
Thomas O. Ryder (54) Mr. Ryder has been Chairman of the Board
and Chief Executive Officer of the Company
since April 28, 1998. Mr. Ryder was
President, American Express Travel Related
Services International, a division of
American Express Company, from October
1995 to April 1998. Prior thereto, he
served as President, Establishment
Services - Worldwide of American Express
Travel Related Services.
Melvin R. Laird (76) Mr. Laird has been a member of the Board
of Directors of the Company since 1990.
He has served as Senior Counsellor for
national and international affairs since
1974 and was elected to the additional
position of Vice President in 1989. Mr.
Laird joined the Company in 1974.
Thomas A. Belli (51) Mr. Belli has been President of QSP, Inc.
since November 1997, a position he also
held prior to July 1995. He first joined
the Company in August 1977.
M. John Bohane (62) Mr. Bohane has been Senior Vice President
of the Company and President, Global Books
and Home Entertainment since July 27,
1998. Prior thereto, he was Senior Vice
President of the Company and President
International Operations, a position he
held since rejoining the Company on
September 8, 1997. He first joined the
Company in 1964 and served in a number of
executive capacities, including President,
Direct Marketing, until leaving the
Company in July, 1991. Mr. Bohane served
as President and Chief Executive Officer
of Newfield Publications from April, 1994
to July, 1995 and as Vice President of
Corporate Database Marketing of Time-
Warner, Inc., from April, 1992 to
December, 1993.
Michael A. Brizel (41) Mr. Brizel was appointed Vice President
and General Counsel on July 27, 1998.
Prior thereto, he was Vice President,
Legal U.S. and Associate General Counsel,
a position he held since September 1996.
Prior thereto, he was Associate General
Counsel of the Company. Mr. Brizel joined
the Company in July 1989.
Elizabeth G. Chambers (35) Ms. Chambers has been Vice President,
Business Redesign since August 10, 1998.
Prior to joining the company, she was a
partner at the management consulting firm
of McKinsey & Company, a position she held
from June 1995 to August 1998 and an
associate from October 1989 to June 1995.
Gregory G. Coleman (44) Mr. Coleman has been Senior Vice President
and President, U.S. Magazine Publishing
since July 27, 1998. Prior thereto, he
was Senior Vice President, Worldwide
Publisher, Reader's Digest Magazine, a
position he held since October 1997. Mr.
Coleman also served as Vice President and
General Manager, U.S. Magazines and
Publisher, U.S. Reader's Digest from
December 1995 until October 1997, Vice
President, Publisher, U.S. Reader's Digest
from November 1991 until December 1995.
Clifford H.R. DuPree (48) Mr. DuPree was appointed Vice President,
Corporate Secretary and Associate General
Counsel on July 27, 1998. He joined the
company in May 1992 as Associate General
Counsel, became Assistant Secretary in
March 1995 and Vice President in September
1996.
Thomas D. Gardner (40) Mr. Gardner has been Senior Vice
President, Business Planning and
Development since July 27, 1998. He was
Vice President, Marketing, Reader's Digest
U.S.A. from November 1995 to July 1998,
Vice President, Business Development from
April 1995 to November 1995, and a
Director of Marketing prior thereto. Mr.
Gardner joined the Company in February
1992.
Robert J. Krefting (54) Mr. Krefting has been Senior Vice
President and President, International
Magazine Publishing since July 27, 1998.
Prior to joining the Company, Mr. Krefting
was sole proprietor of Holly Hill
Publishing, a management services
corporation serving the publishing and
venture capital industries, from January
1993 to July 1998.
Gary S. Rich (37) Mr. Rich has been Senior Vice President,
Human Resources, since August 3, 1998.
Prior to joining the Company, he was
Senior Vice President, Global Human
Resources for A.C. Nielsen Corporation, a
position he held from June 1996 to July
1998. Prior thereto, Mr. Rich was Vice
President, Human Resources--Europe, Middle
East and Africa at American Express
Company (travel, financial and network
services).
George S. Scimone (51) Mr. Scimone was appointed Senior Vice
President and Chief Financial Officer of
the Company on July 27, 1998. Prior
thereto, Mr. Scimone served as Vice
President and Chief Financial Officer from
September 1997, Vice President and
President, Reader's Digest U.S.A. from
November 1996 and Vice President and
Corporate Controller from September 1995.
Prior to joining the Company, Mr. Scimone
was Business Chief Financial Officer,
Electrical Distribution and Control of
General Electric Company.
Christopher P. Willcox (51) Mr. Willcox has been Senior Vice President
and Editor-in-Chief of Reader's Digest
magazine since March 1996. He served as
Worldwide Executive Editor from June 1994
to March 1996 and Executive Editor,
International from October 1991 to June
1994. He joined the Company in 1988.
Pursuant to the By-Laws of the Company, officers serve at
the pleasure of the Board of Directors. Officers of the Company
are elected annually to serve until their respective successors
are elected and qualified.
ITEM 2.PROPERTIES
The Company's headquarters and principal operating
facilities are situated on approximately 120 acres in Westchester
County, New York, much of which the Company acquired in 1940.
The site includes five principal buildings aggregating
approximately 703,000 square feet that house executive,
administrative, editorial and operational offices, and data
processing and other facilities. In New York City, the Company
leases approximately 167,000 square feet of office space in a
total of two buildings, portions of which are used as editorial
offices for its books and home entertainment products business,
as advertising sales offices for Reader's Digest magazine and as
offices for the Company's special interest magazines. The
Company leases space totaling approximately 51,000 square feet
for an editorial bureau, advertising sales offices and other
purposes in various cities in the United States. QSP leases
approximately 163,000 square feet in Conyers, Georgia.
The Company owns approximately 1,459,100 square feet and
leases approximately 467,300 square feet of space outside the
United States that is utilized by the Company's international
operating subsidiaries principally as headquarters,
administrative and editorial offices and warehouse space. The
foregoing properties owned by the Company include 207,000 square
feet of space in Swindon, England, in a building owned by the
Company on land leased by the Company through 2076.
The Company believes that its current facilities, together
with expansions and upgrading of facilities presently underway or
planned, are adequate to meet its present and reasonably
foreseeable needs. The Company also believes that adequate space
will be available to replace any leased facilities for which the
leases expire in the near future.
ITEM 3.LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various
lawsuits and claims arising in the regular course of business.
Based on the opinions of management and counsel for such matters,
recoveries, if any, by plaintiffs and claimants would not
materially affect the financial position of the Company or its
results of operations.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended June
30, 1998.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required under this Item is contained under
the caption "Selected Quarterly Financial Data and Dividend and
Market Information" in the section entitled "Financial
Information."
ITEM 6.SELECTED FINANCIAL DATA
The information required under this Item is contained under
the caption "Selected Quarterly Financial Data and Dividend and
Market Information" and "Selected Financial Data" in the section
entitled "Financial Information."
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The information required under this Item is contained under
the caption "Management's Discussion and Analysis" in the section
entitled "Financial Information."
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item is contained in the
section entitled "Financial Information."
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company under
the caption "Proposal 1: Election of Directors" in the Proxy
Statement for the Annual Meeting of Stockholders of the Company
to be held on November 13, 1998 is incorporated herein by
reference. Information with respect to executive officers of the
Company appears under the caption "Executive Officers of the
Company" in Item 1 of Part I hereof and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation under the
captions "Executive Compensation," "Report of the Compensation
and Nominating Committee" and "Performance Graph" in the Proxy
Statement for the Annual Meeting of Stockholders of the Company
to be held on November 13, 1998 is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain
beneficial owners and management under the caption "Equity
Security Ownership" in the Proxy Statement for the Annual Meeting
of Stockholders of the Company to be held on November 13, 1998 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The information required by this Item is contained in the
section entitled "Financial Information."
(2) Financial Statement Schedules
All schedules have been omitted since the information
required to be submitted has been included in the
Consolidated Financial Statements or Notes thereto or has
been omitted as not applicable or not required.
(3) Exhibits
3.1.1 Restated Certificate of Incorporation of The Reader's
Digest Association, Inc. filed with the State of Delaware on
February 7, 1990 filed as Exhibit 3.1.1 to the registrant's
Form 10-K for the year ended June 30, 1993, is incorporated
herein by reference.
3.1.2 Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc. filed
with the State of Delaware on February 22, 1991 filed as
Exhibit 3.1.2 to the registrant's Form 10-K for the year
ended June 30, 1993, is incorporated herein by reference.
3.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 filed as
Exhibit 3.2 to the registrant's Form 10-K for the year ended
June 30, 1993, is incorporated herein by reference.
10.1 The Reader's Digest Association, Inc. Management Incentive
Compensation Plan (Amendment and Restatement as of July 1,
1994) filed as Exhibit 10.1 to the registrant's Form 10-K
for the year ended June 30, 1994, is incorporated herein by
reference.*
10.2 The Reader's Digest Association, Inc. 1989 Key Employee Long
Term Incentive Plan filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (Registration No. 33-
32566) filed by registrant on December 19, 1989, is
incorporated herein by reference.*
10.3 The Reader's Digest Association, Inc. Deferred Compensation
Plan (Amendment and Restatement as of July 8, 1994) filed as
Exhibit 10.4 to the registrant's Form 10-K for the year
ended June 30, 1994, is incorporated herein by reference.*
10.4 The Reader's Digest Association, Inc. Severance Plan for
Senior Management (Amendment and Restatement as of July 8,
1994) filed as Exhibit 10.5 to the registrant's Form 10-K
for the year ended June 30, 1994, is incorporated herein by
reference.*
10.5 The Reader's Digest Association, Inc. Income Continuation
Plan for Senior Management (amended and restated) filed as
Exhibit 10.5 to the registrant's Form 10-K for the year
ended June 30, 1993, is incorporated herein by reference.*
10.6 Excess Benefit Retirement Plan of The Reader's Digest
Association, Inc. (Amendment and Restatement as of July 1,
1994) filed as Exhibit 10.7 to the registrant's Form 10-K
for the year ended June 30, 1994, is incorporated herein by
reference.*
10.7 Supplemental Retirement Benefit Agreement dated as of
September 13, 1991 between the registrant and James P.
Schadt filed as Exhibit 10.16 to the registrant's Form 10-K
for the year ended June 30, 1993, is incorporated herein by
reference.*
10.8 Supplemental Retirement Benefit Agreement dated as of June
8, 1994 between the registrant and Martin J. Pearson filed
as Exhibit 10.15 to the registrant's Form 10-K for the year
ended June 30, 1995 is incorporated herein by reference.*
10.9 The Reader's Digest 1992 Executive Retirement Plan
(Amendment and Restatement as of October 10, 1996) filed as
Exhibit 10.12 to the registrant's Form 10-K for the year
ended June 30, 1997, is incorporated herein by reference.*
10.10 The Reader's Digest Association, Inc. Executive
Financial Counseling Plan, amended and restated as of July
1, 1998.*
10.11 Amendment No. 1 to The Reader's Digest Association,
Inc. Management Incentive Compensation
Plan (effective as of April 11, 1996) filed as Exhibit
10.1.1 to the registrant's Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by reference.*
10.12 Termination Agreement dated as of
April 1, 1996 between the registrant and James P. Schadt,
filed as Exhibit 10.23 to the registrant's Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by
reference.*
10.13 Termination Agreement dated as of
April 1, 1996 between the registrant and Paul A. Soden,
filed as Exhibit 10.25 to the registrant's Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by
reference.*
10.14 Termination Agreement dated as of
April 1, 1996 between the registrant and Stephen R. Wilson,
filed as Exhibit 10.26 to the registrant's Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by
reference.*
10.15 Termination Agreement dated as of
April 1, 1996 between the registrant and Martin J. Pearson,
filed as Exhibit 10.24 to the registrant's Form 10-Q for the
quarter ended December 31, 1996, is incorporated herein by
reference.*
10.16 Agreement dated June 18, 1997
between the registrant and James P. Schadt filed as Exhibit
10.24 to the registrant's Form 10-K for the year ended June
30, 1997, is incorporated by reference.*
10.17 Agreement dated as of August 1,
1997 between the registrant and Martin J. Pearson filed as
Exhibit 10.25 to the registrant's Form 10-K for the year
ended June 30, 1997, is incorporated by reference.
10.18 Agreement dated August 10, 1997 between the registrant
and James P. Schadt filed as Exhibit 10.26 to the
registrant's Form 10-K for the year ended June 30, 1997, is
incorporated by reference.*
10.19 US$400,000,000 Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 between the
registrant, the Borrowing Subsidiaries, The Chase Manhattan
Bank and J.P. Morgan Securities Inc., filed as Exhibit 10.23
to the registrant's Form 10-Q for the quarter ended December
31, 1996, is incorporated herein by reference.
10.20 Agreement dated as of August 11, 1997 between the
registrant and George V. Grune, filed as Exhibit 10.28 to
the registrant's Form 10-Q for the quarter ended September
30, 1997, is incorporated herein by reference.*
10.21 First Amendment dated as of September 17, 1997 to the
$400,000,000 Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 among the
registrant, the Borrowing Subsidiaries, The Chase Manhattan
Bank and J.P. Morgan Securities Inc., filed as Exhibit 10.29
to the registrant's Form 10-Q for the quarter ended
September 30, 1997, is incorporated herein by reference.
10.22 The Reader's Digest Association, Inc. Director
Compensation Program, filed as Exhibit 10.31 to the
registrant's Form 10-Q for the quarter ended March 31, 1998,
is incorporated herein by reference.*
10.23 The Reader's Digest Association, Inc. Deferred
Compensation Plan for Directors, amended and restated as of
March 13, 1998, filed as Exhibit 10.31 to the registrant's
Form 10-Q for the quarter ended March 31, 1998, is
incorporated herein by reference.*
10.24 Employment Agreement dated as of April 28, 1998 between
the registrant and Thomas O. Ryder, filed as Exhibit 10.33
to the registrant's Form 10-Q for the quarter ended March
31, 1998, is incorporated herein by reference.*
10.25 First Amendment Agreement dated as of April 28, 1998
between the registrant and George V. Grune, filed as Exhibit
10.34 to the registrant's Form 10-Q for the quarter ended
March 31, 1998, is incorporated herein by reference.*
10.26 The Reader's Digest Association, Inc. 1994 Key Employee
Long Term Incentive Plan, as amended and restated effective
as of April 28, 1998, filed as Exhibit 10.35 to the
registrant's Form 10-Q for the quarter ended March 31, 1998,
is incorporated herein by reference.*
10.27 Second Amendment dated as of June 2, 1998 to the
$400,000,000 Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996 among the
registrant, the Borrowing Subsidiaries, The Chase Manhattan
Bank and J.P. Morgan Securities Inc.
10.28 Termination Agreement dated as of April 10, 1997
between the registrant and George S. Scimone.*
10.29 Termination Agreement dated as of April 10, 1998
between the registrant and Gregory G. Coleman.*
10.30 Termination Agreement dated as of September 8, 1997
between the registrant and M. John Bohane.*
10.31 Termination Agreement dated as of September 8, 1997
between the registrant and Marcia M. Lefkowitz.*
10.32 Supplemental Retirement Benefit Agreement dated as of
November 15, 1991 between the registrant and Gregory G.
Coleman.*
10.33 Supplemental Retirement Benefit Agreement dated as of
August 17, 1998 between the registrant and Marcia M.
Lefkowitz.*
10.34 Agreement dated as of November 14, 1997 between the
registrant and Thomas A. Belli.*
10.35 Supplemental Retirement Benefit Agreement dated as of
August 22, 1988 between the registrant and George V. Grune
filed as Exhibit 10.7 to the Registration Statement on Form
S-1 (Registration No. 33-32566) filed by registrant on
December 19, 1989, is incorporated herein by reference.*
10.36 Supplemental Retirement Benefit Agreement dated as of
August 25, 1988 between the registrant and M. John Bohane
filed as Exhibit 10.11 to the Registration Statement on Form
S-1 (Registration No. 33-32566) filed by registrant on
December 19, 1989, is incorporated herein by reference.*
10.37 Supplemental Retirement Agreement dated as of May 15,
1985 between the registrant and George V. Grune filed as
Exhibit 10.12 to the Registration Statement on Form S-1
(Registration No. 33-32566) filed by registrant on December
19, 1989, is incorporated herein by reference.*
13 Financial information contained in the section "Financial
Information."
21 Subsidiaries of the registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the three months ended June 30, 1998, the Company
filed the following report on Form 8-K:
Form 8-K dated April 28, 1998, which included a copy of a
press release relating to senior management changes.
*Denotes a management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE READER'S DIGEST ASSOCIATION, INC.
By: Thomas O. Ryder
(Thomas O. Ryder)
Chairman and Chief Executive Officer
Date: September 24, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
Thomas O. Ryder Chairman and Chief September 24, 1998
(Thomas O. Ryder) Executive Officer and
a Director
Melvin R. Laird Vice President and September 24, 1998
(Melvin R. Laird) Senior Counsellor and
a Director
George S. Scimone Senior Vice President September 24, 1998
(George S. Scimone) and Chief
Financial Officer
(chief accounting
officer)
Lynne V. Cheney Director September 24, 1998
(Lynne V. Cheney)
M. Christine DeVita Director September 24, 1998
(M. Christine DeVita)
George V. Grune Director September 24, 1998
(George V. Grune)
James E. Preston Director September 24, 1998
(James E. Preston)
Lawrence R. Ricciardi Director September 24, 1998
(Lawrence R. Ricciardi)
Robert G. Schwartz Director September 24, 1998
(Robert G. Schwartz)
C.J. Silas Director September 24, 1998
(C.J. Silas)
William J. White Director September 24, 1998
(William J. White)
THE READER'S DIGEST ASSOCIATION, INC.
FINANCIAL INFORMATION
Page
Business Segment Financial Information 21
Geographic Financial Information 22
Management's Discussion and Analysis 23
Financial Statements:
Consolidated Statements of Income--For the Years Ended June 31
30, 1998, 1997and 1996
Consolidated Balance Sheets--June 30, 1998 and 1997 32
Consolidated Statements of Cash Flows--For the Years Ended 33
June 30, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity-- 34
For the Years Ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 35
Independent Auditors' Report 45
Report of Management 45
Selected Financial Data 46
Selected Quarterly Financial Data and Dividend and Market 46
Information (Unaudited)
Management Information 47
Corporate and Shareholder Information 48
The Reader's Digest Association, Inc. and Subsidiaries
BUSINESS SEGMENT FINANCIAL INFORMATION
Years ended June 30,
In millions 1998 1997 1996
Revenues
Reader's Digest Magazine $ 712.3 $ 729.2 $ 739.8
Books and Home Entertainment Products 1,635.0 1,850.5 2,099.4
Special Interest Magazines 97.0 81.9 91.9
Other Businesses 193.1 181.0 170.6
Intersegment (3.7) (3.6) (3.6)
$ 2,633.7 $ 2,839.0 $ 3,098.1
Operating profit F1
Reader's Digest Magazine $ 16.7 $ 42.7 $ 11.2
Books and Home Entertainment Products 37.9 175.6 192.0
Special Interest Magazines 1.7 0.4 (21.1)
Other Businesses 19.9 22.5 (9.9)
Corporate Expense (46.0) (48.4) (62.9)
$ 30.2 $ 192.8 $ 109.3
Identifiable assets
Reader's Digest Magazine $ 380.4 $ 410.4 $ 358.3
Books and Home Entertainment Products 853.6 881.8 981.1
Special Interest Magazines 75.0 76.4 66.4
Other Businesses 70.8 75.1 76.9
Corporate 184.2 200.1 421.4
$ 1,564.0 $ 1,643.8 $ 1,904.1
Depreciation and amortization
Reader's Digest Magazine $ 10.5 $ 11.2 $ 11.8
Books and Home Entertainment Products 27.2 27.8 30.4
Special Interest Magazines 3.3 2.0 1.6
All other 5.2 5.7 5.0
$ 46.2 $ 46.7 $ 48.8
Capital expenditures
Reader's Digest Magazine $ 9.2 $ 22.9 $ 14.7
Books and Home Entertainment Products 20.3 75.9 36.8
All other 4.6 11.8 8.1
$ 34.1 $ 110.6 $ 59.6
F1 Operating profit for 1998, 1997 and 1996 reflects the
allocation of other operating items of $70.0, $35.0 and $235.0,
respectively, to the business segment financial information as
follows (refer to note TWO in Notes to Consolidated Financial
Statements for further information): Reader's Digest Magazine
$7.7, $5.6 and $37.6, Books and Home Entertainment Products
$45.6, $25.5 and $130.1, Special Interest Magazines $1.0, $---
and $21.4, Other Businesses $4.5, $0.5 and $42.1, and Corporate
Expense $11.2, $3.4 and $3.8, respectively.
The Reader's Digest Association, Inc. and Subsidiaries
GEOGRAPHIC FINANCIAL INFORMATION
Years ended June 30,
In millions 1998 1997 1996
Revenues
United States $ 1,181.4 $ 1,236.4 $1,278.9
Europe 1,035.3 1,172.2 1,379.7
Pacific and Other Markets 424.1 439.8 445.6
Interarea (7.1) (9.4) (6.1)
$ 2,633.7 $ 2,839.0 $3,098.1
Revenues interarea
United States $ 2.7 $ 2.9 $ 3.2
Europe 3.5 5.3 2.4
Pacific and Other Markets 0.9 1.2 0.5
$ 7.1 $ 9.4 $ 6.1
Operating profit F1
United States $ 47.3 $ 133.8 $ 16.6
Europe 11.1 94.1 110.0
Pacific and Other Markets 17.8 13.3 45.6
Corporate Expense (46.0) (48.4) (62.9)
$ 30.2 $ 192.8 $ 109.3
Identifiable assets
United States $ 642.8 $ 661.0 $ 664.9
Europe 510.9 542.2 563.4
Pacific and Other Markets 226.1 240.5 254.4
Corporate 184.2 200.1 421.4
$ 1,564.0 $ 1,643.8 $1,904.1
F1 Operating profit for 1998, 1997 and 1996 reflects the
allocation of other operating items of $70.0, $35.0 and $235.0,
respectively, to the geographic financial information as follows
(refer to note TWO in Notes to Consolidated Financial Statements
for further information): United States $36.7, $15.3 and
$151.0, Europe $22.1, $7.4 and $63.5, Pacific and Other Markets
$---, $8.9 and $16.7, and Corporate Expense $11.2, $3.4 and
$3.8, respectively.
The Reader's Digest Association, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Dollars in million, except per share data
Management's discussion and analysis as it pertains to geographic
and business segment information has been written excluding the
effect of the 1998 first quarter charges of $70.0, the 1997
fourth quarter charges of $35.0 and the 1996 third quarter
charges of $245.0 (referred to as the operating charges) in order
to analyze the results on a comparable basis. In addition, in
1996 reported results included $10.0 of savings recognized as a
result of the finalization of the company's lease termination
program in the United Kingdom.
The 1998 first quarter charges were composed primarily of
severance costs of $39.5 associated with workforce reductions in
Europe, the United States, and at the corporate level; and other
costs associated with the discontinuation of certain businesses
and the realignment of business processes and operations.
Businesses that were discontinued include a children's book club
in the United States, and the company's investment in a World
Wide Web navigation service. The realignment of business
processes and operations also related to certain vendor contracts
in the United States and Europe.
Results of Operations
1998 v. 1997 Worldwide revenues for 1998 decreased to $2,633.7,
or by 7%, compared with $2,839.0 for 1997. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues decreased 3%. This decline was because of lower unit
sales, lower-priced product offerings and sales of a lower-
priced product mix within Books and Home Entertainment
Products. The decrease in unit sales was predominantly a
result of lower mail quantities, fewer profitably promotable
customers and lower customer response to promotional mailings
primarily in most developed markets. Revenues declined
principally in the United States, Germany, Canada and other
developed markets. This decrease was largely offset by growth
in developing markets in Eastern Europe and Latin America.
The company reported worldwide operating profit of $30.2 in
1998, compared with $192.8 in 1997. The 1998 and 1997 results
reflect operating charges of $70.0 ($51.8 after tax, or $0.49
per share) and $35.0 ($22.2 after tax, or $0.21 per share),
respectively. Excluding the effect of the operating charges,
worldwide operating profit decreased by 56% in 1998 compared
with 1997. These operating results reflect lower revenues in
most developed markets, significant declines in operating
results in the United States and Germany and higher
proportionate product costs and promotional spending, slightly
offset by the benefits of cost-containment initiatives in most
developed markets.
The company reported net income of $17.9, or $0.16 per share
in 1998, compared with net income of $133.5, or $1.24 per share
in 1997. Excluding the effect of the operating charges, basic
and diluted earnings per share decreased 56% to $0.64 in 1998,
compared with $1.45 in 1997.
1997 v. 1996 Worldwide revenues for 1997 decreased to $2,839.0,
or by 8%, compared with $3,098.1 for 1996. Excluding the adverse
effect of changes in foreign currency exchange rates, revenues
decreased 7%. Revenues declined in all geographic areas,
particularly in the company's European operations. The decrease
in revenues was principally because of lower unit sales and, to a
lesser extent, lower-priced product offerings and sales of a
lower-priced product mix in Books and Home Entertainment
Products. External factors, including weak European economies
and increased competitive pressures globally, affected revenues.
Tactical implementation of many simultaneous strategic
initiatives, including varying the quantity and frequency of
promotional mailings, moderating product pricing and introducing
greater promotion variety and less aggressive sweepstakes, also
contributed to lower worldwide revenues in 1997.
Worldwide operating profit increased to $192.8 in 1997, compared
with $109.3 in 1996. The 1997 and 1996 results reflect operating
charges of $35.0 ($22.2 after tax, or $0.21 per share) and $245.0
($169.8 after tax, or $1.57 per share), respectively. Excluding
the effect of the operating charges, worldwide operating profit
decreased by 36% in 1997, compared with 1996. These operating
results reflect the impact of lower revenues and higher inventory
write-offs as a result of lower customer response to third and
fourth quarter 1997 promotional mailings, partially offset by the
benefits of cost-containment initiatives.
The company reported net income of $133.5, or $1.24 per share in
1997, compared with $80.6, or $0.73 per share in 1996. Excluding
the effect of the operating charges, basic and diluted earnings
per share decreased 37% to $1.45 in 1997, compared with $2.30 in
1996, which includes the benefit of $0.09 per share from the
savings recognized as a result of the finalization of the
company's lease termination program in the United Kingdom.
Other Income, Net
1998 v. 1997 Other income, net for 1998
decreased to $11.3, compared with $17.4 in the prior year.
This decrease was primarily because of lower gains on foreign
exchange transactions and hedging activity ($1.3 in 1998,
compared with $8.5 in 1997), lower interest income ($6.9 in
1998, compared with $11.4 in 1997), and higher interest expense
($9.4 in 1998, compared with $7.0 in 1997), which were
partially offset by gains on the sales of certain assets ($10.2
in 1998, compared with $1.4 in 1997).
1997 v. 1996 Other income, net for 1997 decreased to $17.4,
compared with $28.4 in 1996. This decrease was primarily because
of lower interest income ($11.4 in 1997, compared with $21.5 in
1996), lower gains on the sales of certain investments ($7.0 in
1997, compared with $15.8 in 1996), and higher interest expense
($7.0 in 1997, compared with $2.4 in 1996), which were partially
offset by higher gains on foreign exchange transactions and
hedging activity ($8.5 in 1997, compared with a loss of $6.1 in
1996).
Income Taxes
1998 v. 1997 The reported tax rate for 1998
was 56.9%, compared with a reported rate of 36.5% for 1997.
Excluding the effect of the operating charges, the overall
effective tax rate was 37.5% and 36.5% in 1998 and 1997,
respectively. The higher effective tax rate in 1998 was
primarily because of a reduced amount of foreign tax credits
available.
1997 v. 1996 The reported tax rate for 1997 was 36.5%, compared
with a reported rate of 41.5% for 1996. Excluding the effect of
the operating charges, the overall effective tax rate was 36.5%
and 35.5% in 1997 and 1996, respectively. The lower effective
rate in 1996 was primarily attributable to favorable settlements
relating to prior years.
Geographic Areas
Operating Profit by Geographic Area
Other
As operating As
1998 reported items adjusted
United States $ 47.3 $ 36.7 $ 84.0
Europe 11.1 22.1 33.2
Pacific and Other Markets 17.8 --- 17.8
Corporate Expense (46.0) 11.2 (34.8)
$ 30.2 $ 70.0 $ 100.2
1997
United States $ 133.8 $ 15.3 $ 149.1
Europe 94.1 7.4 101.5
Pacific and Other Markets 13.3 8.9 22.2
Corporate Expense (48.4) 3.4 (45.0)
$ 192.8 $ 35.0 $ 227.8
United States
1998 v. 1997 Revenues in the United States
decreased from $1,236.4 in 1997 to $1,181.4, or by 4%, in 1998.
Revenues declined across all product lines within Books and
Home Entertainment Products, but most significantly as a result
of lower unit sales in general books and, to a lesser extent,
video products. These declines were moderately offset by
increased revenues in Special Interest Magazines and at QSP,
the company's youth fund-raising organization. The decrease in
general books revenues was primarily a result of lower customer
response to promotional mailings, lower mail quantities, and
fewer profitably promotable customers in 1998. Video revenues
declined primarily because of lower mail quantities, lower
customer response to promotional mailings and, to a lesser
extent, a lower-priced mix of products sold in 1998. The
increase in Special Interest Magazines was primarily a result
of the acquisition of Walking magazine in the third quarter of
1997. QSP revenues increased primarily resulting from growth
in magazine subscription sales. Operating profit decreased 44%
to $84.0 in 1998 compared with $149.1 in 1997, because of the
revenue decrease, higher promotional spending in order to
acquire and renew subscribers to Reader's Digest Magazine and
higher inventory reserve levels as a result of the lower
customer response rates, slightly offset by lower paper costs.
1997 v. 1996 Revenues in the United States
decreased from $1,278.9 in 1996 to $1,236.4, or by 3%, in 1997.
This decrease was primarily attributable to lower unit sales in
Books and Home Entertainment Products. Revenues were also
adversely affected by the absence of revenues resulting from the
sale of Travel Holiday magazine in the third quarter of 1996.
Within Books and Home Entertainment Products, lower unit sales
were principally caused by declines in Condensed Books and music
products. The decrease in Condensed Books and music products
sales was caused by lower customer response to promotional
mailings. Operating profit decreased 11% to $149.1 in 1997
compared with $167.6 in 1996 because of lower revenues and lower
customer response to promotional mailings, partially offset by
lower paper costs and the benefit of cost-containment
initiatives.
Europe
1998 v. 1997 Revenues in Europe decreased from
$1,172.2 in 1997 to $1,035.3, or by 12%, in 1998. Excluding
the adverse effect of changes in foreign currency exchange
rates, revenues decreased 3%. The revenue decrease was
primarily because of lower Books and Home Entertainment
Products revenues resulting from lower-priced product offerings
and sales of a lower-priced product mix in most product lines,
as well as lower unit sales of series books and Condensed
Books. Lower average prices were a result of the reduction of
prices in certain markets coupled with a lower-priced mix of
products offered in 1998, principally in music and video
products. Product expansion in Eastern European markets,
principally in general books, music and video products, was
more than offset by lower sales in most other markets,
including major markets. This was particularly evident in
Germany, where sales and operating profit have declined more
significantly than in other markets. Lower unit sales were a
result of a reduction in shipments caused by fewer customers
carried into 1998 for series books and Condensed Books, lower
mail quantities, fewer profitably promotable customers, and
lower customer response to promotional mailings. Operating
profit decreased 67% to $33.2 in 1998, compared with $101.5 in
1997, as a result of lower revenues and higher proportionate
product costs and promotional spending, slightly offset by the
benefits of cost-containment initiatives in most developed
markets.
1997 v. 1996 Revenues in Europe decreased from $1,379.7 in 1996
to $1,172.2, or by 15%, in 1997. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased
12%. The decrease in revenues was primarily attributable to
lower unit sales and, to a lesser extent, lower-priced product
offerings and sales of a lower-priced product mix within Books
and Home Entertainment Products. Revenues declined in all
product lines within Books and Home Entertainment Products,
except for video products. Operating profit decreased from
$173.5 in 1996 to $101.5, or by 41%, in 1997. Results in 1997
were unfavorably affected by the continuing general weakness in
European economies, increased competitive pressures and the
company's ongoing actions to restore long-term growth in this
region. These actions included the selective modification of the
number of promotional mailings and mail quantity in a given
mailing, variation of promotional formats and moderation of
product prices. The impact of these items was partially offset
by the benefit of lower product returns and bad debts and the
implementation of cost-containment initiatives.
Pacific and Other Markets
1998 v. 1997 Revenues in Pacific and Other Markets decreased from
$439.8 in 1997 to $424.1, or by 4%, in 1998. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues increased 4%. Revenues increased primarily as a result
of higher unit sales of Books and Home Entertainment Products, as
well as higher circulation revenues for Reader's Digest Magazine.
Within Books and Home Entertainment Products, higher unit sales
of general books and, to a lesser extent, music products were
moderately offset by lower unit sales of Condensed Books and
video products. Higher revenues in Latin America, reflecting
product expansion and increased circulation levels, primarily in
Brazil, were largely offset by significant revenue declines in
Canada and, to a lesser extent, in Australia because of lower
mail quantities and lower customer response to promotional
mailings in 1998. In addition, revenues declined in Canada
because of the effects of a postal strike in November 1997 and
severe ice storms that forced closure of the business and
adversely affected postal service during the critical January
mailing period. Operating profit decreased 20% to $17.8 in 1998,
compared with $22.2 in 1997, primarily because of the declines in
Canada and the negative impact of currency devaluation in the Far
East. Excluding the devaluation, operating profit increased 20%,
principally as a result of improved performance in Mexico and
Brazil.
1997 v. 1996 Revenues in Pacific and Other Markets decreased
from $445.6 in 1996 to $439.8, or by 1%, in 1997. This decrease
was caused by lower Books and Home Entertainment Products
revenues; however, increased Reader's Digest Magazine circulation
revenues in new countries offset almost three-quarters of this
decline. Within Books and Home Entertainment Products, the
decline in revenues resulted from lower-priced product offerings
and sales of a lower-priced product mix, as well as lower unit
sales in 1997, primarily in Condensed Books and general books.
Higher revenues in Latin America, reflecting product expansion in
Brazil and Argentina, were offset primarily by significant
revenue declines in South Africa and in Australia. In South
Africa, substantially lower mail quantities and customer response
rates and the country's economic climate reduced unit sales. In
Australia, lower customer response to promotional mailings,
including the effect of promotional mailing variations and
increased competitive pressures reduced unit sales. Operating
profit decreased 64% in 1997 to $22.2, primarily because of
higher proportionate promotional spending, continuing investments
in new country expansion, and higher inventory write-offs as a
result of the lower customer response rates.
Business Segments
Operating Profit by Business Segment
Other
As operating As
1998 reported items adjusted
Reader's Digest Magazine $ 16.7 $ 7.7 $ 24.4
Books and Home Entertainment Products 37.9 45.6 83.5
Special Interest Magazines 1.7 1.0 2.7
Other Businesses 19.9 4.5 24.4
Corporate Expense (46.0) 11.2 (34.8)
$ 30.2 $ 70.0 $100.2
1997
Reader's Digest Magazine $ 42.7 $ 5.6 $48.3
Books and Home Entertainment Products 175.6 25.5 201.1
Special Interest Magazines 0.4 --- 0.4
Other Businesses 22.5 0.5 23.0
Corporate Expense (48.4) 3.4 (45.0)
$192.8 $ 35.0 $227.8
Reader's Digest Magazine
1998 v. 1997 Revenues for Reader's Digest Magazine decreased from
$729.2 in 1997 to $712.3, or by 2%, in 1998. Excluding the
adverse effect of changes in foreign currency exchange rates,
revenues increased 2%. The increase in revenues was attributable
to higher circulation revenues, slightly offset by lower
advertising revenues. Increased circulation levels, primarily in
Russia and Brazil, were moderately offset by circulation declines
in several major markets, particularly in Germany. In addition,
slightly higher circulation revenues in the United States were
attributable to a higher-priced mix of subscriptions, largely
offset by a lower number of subscriptions sold in 1998. A
decline in the number of advertising pages sold in the United
States and Germany was slightly offset by a higher number of
pages sold in Pacific and Other Markets. The decrease in
advertising pages was slightly offset by a higher average rate
per page, primarily in Europe. Operating profit for Reader's
Digest Magazine decreased 50% to $24.4 in 1998, compared with
$48.3 in 1997. The decrease reflected significantly higher
promotional spending in the United States and other major markets
to acquire and renew subscribers, partially offset by the
benefits of cost-containment initiatives in most developed
markets. Consistent with industry practice, the company
periodically evaluates the financial implications of the
circulation rate base of Reader's Digest Magazine worldwide. In
order to increase the efficiency of its promotional spending, the
company announced in September 1998 that it will reduce the rate
base for Reader's Digest Magazine in the United States by 10% to
20%.
1997 v. 1996 Revenues for Reader's Digest Magazine decreased
from $739.8 in 1996 to $729.2, or by 1%, in 1997. Excluding the
adverse effect of changes in foreign currency exchange rates,
circulation revenues were about even year-over-year and
advertising revenues increased slightly from the prior year.
Increased circulation levels in Latin America, Eastern Europe and
Thailand were offset by lower paid copies in several European
countries and the United States. The increase in advertising
revenues was attributable to a higher number of advertising pages
sold in Pacific and Other Markets and the United States, offset
by a lower number of pages in Europe and, to a lesser extent, a
higher average price per page in the United States offset by a
lower average price per page in Pacific and Other Markets.
Operating profit for Reader's Digest Magazine decreased in 1997
to $48.3 compared with $48.8 in 1996. The decrease reflects
lower revenues, increased promotional spending and investments in
new countries, partially offset by lower paper costs and the
benefit of cost-containment initiatives.
Books and Home Entertainment Products
1998 v. 1997 Revenues for Books and Home Entertainment Products
decreased from $1,850.5 in 1997 to $1,635.0, or by 12%, in 1998.
Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 7%. This decrease was
principally attributable to the company's United States and
European operations. The lower revenues were predominantly a
result of significantly lower unit sales in series books,
Condensed Books and general books and, to a lesser extent, lower-
priced product offerings and sales of a lower-priced product mix
in all product lines, principally in music and video products.
The decline in series books and Condensed Books revenues was
caused by a combination of a reduction in shipments caused by
fewer customers carried into 1998, lower mail quantities and
fewer profitably promotable customers, as well as lower customer
response to promotional mailings in developed markets. In
addition, in the United States, the frequency of Condensed Books
shipments, a reduced number of series mailings and the scaling
back of a book series also contributed to lower revenues.
General books revenue declines, most notably in the United States
but also in most other developed markets, were offset by growth
in Eastern Europe and Latin America, principally in Russia and
Brazil. The substantial decrease in general books sales in the
United States was primarily a result of lower customer response
to promotional mailings, lower mail quantities and fewer
profitably promotable customers in 1998. Operating profit for
Books and Home Entertainment Products decreased 58% to $83.5 in
1998, compared with $201.1 in 1997. These operating results were
affected by lower revenues, higher proportionate product costs in
part because of higher inventory reserve levels in the United
States and higher proportionate promotional spending.
1997 v. 1996 Revenues for Books and Home Entertainment Products
decreased from $2,099.4 in 1996 to $1,850.5, or by 12%, in 1997,
principally attributable to the company's European operations.
Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 10%. Most product lines
reported significantly lower revenues, primarily because of lower
unit sales and, to a lesser extent, lower-priced product
offerings and sales of a lower-priced product mix. External
factors, including weak European economies and increased
competitive pressures globally, affected revenues. Tactical
implementation of many simultaneous strategic initiatives,
including varying the quantity and frequency of promotional
mailings, moderating product pricing and introducing greater
promotion variety and less aggressive sweepstakes, contributed to
lower revenues in 1997. Operating profit for Books and Home
Entertainment Products decreased in 1997 to $201.1 compared with
$322.1 in 1996. These operating results were affected by the
impact of the company's strategic actions to restore long-term
growth in Europe, lower than anticipated responses to promotional
mailings in Pacific and Other Markets, higher inventory write-
offs as a result of lower customer response to promotional
mailings in the third and fourth quarter of 1997, and lower
customer response to Condensed Books promotional mailings.
Special Interest Magazines
1998 v. 1997 Revenues for Special Interest Magazines increased
from $81.9 in 1997 to $97.0, or by 18%, in 1998. This increase
was primarily attributable to the acquisition of Walking magazine
in the third quarter of 1997. Excluding Walking, revenues
increased 5%, principally resulting from a higher number of
advertising pages sold and, to a lesser extent, higher
circulation levels in 1998. Operating profit for Special
Interest Magazines improved to $2.7 in 1998, compared with $0.4
in 1997, primarily as a result of the higher revenues, which were
partially offset by increased promotional spending associated
with Walking.
1997 v. 1996 Revenues for Special Interest Magazines decreased
from $91.9 in 1996 to $81.9, or by 11%, in 1997. This decrease
was primarily attributable to the absence of revenues resulting
from the sale of Travel Holiday magazine in the third quarter of
1996. Excluding prior year revenues from Travel Holiday,
revenues increased 8% in 1997 compared with 1996. The
acquisition of Walking magazine in the third quarter of 1997
accounted for 3% of the increase in revenues. Revenues also
increased almost equally because of higher circulation levels and
advertising pages sold in 1997. Operating performance improved
in 1997 compared with 1996 primarily reflecting the increases in
circulation and advertising revenues.
Other Businesses
1998 v. 1997 Revenues for Other Businesses, net of intersegment
sales, increased in 1998 to $189.4, or by 7%, compared with the
prior year, primarily as a result of growth in magazine
subscription sales at QSP in the United States. Operating profit
improved primarily because of the disposal of the company's
investment in a World Wide Web navigation service, largely offset
by higher inventory reserve levels in the merchandise catalog
business in the United Kingdom and higher promotional costs at
QSP.
1997 v. 1996 Revenues for Other Businesses, net of intersegment
sales, increased in 1997 to $177.4, or by 6%, compared with the
prior year, primarily because of growth in the merchandise
catalog business in the United Kingdom, higher sales at
QSP in the United States and the introduction of a merchandise
catalog business in the United States. Operating profit
decreased because of costs associated with the company's
investment in a World Wide Web navigation service in 1997 and
higher proportionate promotional costs associated with the launch
of the catalog business in the United States, which were
partially offset by increased profits at QSP.
Corporate Expense
Corporate Expense in 1998 declined 23% to $34.8 compared with
$45.0 in 1997, primarily as a result of the benefit of cost-
containment initiatives and, to a lesser extent, savings in
employee benefits costs. Corporate Expense in 1997 decreased 24%
to $45.0 compared with $59.1 in 1996 principally because of lower
recruiting and relocation expenses and the benefit of cost-
containment initiatives.
Fourth Quarter Results
Worldwide revenues for the fourth quarter of 1998 decreased to
$624.3, or by 2%, compared with $636.1 in the fourth quarter of
1997. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues increased 2%. Growth in
revenues in Eastern Europe and Latin America was largely offset
by declines in the United States and other developed markets.
The increase in revenues was attributable primarily to higher
unit sales in Condensed Books and series books within Books and
Home Entertainment Products. The company reported worldwide
operating profit of $5.6 in the fourth quarter of 1998, compared
with an operating loss of $37.9 in the fourth quarter of 1997.
Excluding the effect of the operating charges, the operating loss
was $2.9 in the fourth quarter of 1997. The operating loss in
1997 primarily reflects higher levels of inventory write-offs
than in 1998 as a result of lower than anticipated customer
response to promotional mailings that occurred in the third and
fourth quarter of 1997. Operating performance improved in the
fourth quarter of 1998 compared with the fourth quarter of 1997
primarily as a result of the lower levels of inventory write-
offs, moderately offset by higher promotional spending to acquire
and renew subscribers to Reader's Digest Magazine.
The company reported net income of $5.4, or $0.05 per share in
the fourth quarter of 1998, compared with a net loss of $22.8, or
$0.22 per share in the fourth quarter of 1997. Excluding the
effect of the operating charges, the loss per share was $0.01 in
the fourth quarter of 1997.
Currency Risk Management
The company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of its foreign
subsidiaries' income. The company purchases foreign currency
option contracts to minimize the effect of fluctuating foreign
currencies on its earnings and specifically identifiable
anticipated transactions. In addition, the company enters into
forward contracts to minimize the effect of fluctuating foreign
currency exchange rates on certain foreign currency denominated
assets and liabilities. The company's primary foreign currency
market exposures include the British pound, the German mark and
the French franc. In addition, the company anticipates that its
operations in Russia will be negatively affected by the
devaluation of the ruble. This may have a material adverse
effect on the company's results of operations for fiscal 1999.
At June 30, 1998, the company estimated that the results of a
uniform 10% weakening in the value of the dollar relative to the
currencies in which the options and forwards are denominated
would result in a net decrease in the fair value of these
instruments of approximately $4.0. This estimate, however,
includes changes in the fair value of forward contracts which
would be substantially offset by the related impact on the assets
and liabilities being hedged. This calculation assumes that each
exchange rate would change in the same direction relative to the
U.S. dollar. Changes in exchange rates not only affect the
dollar value of the fair value, but also impact the underlying
foreign subsidiaries' income. The company's sensitivity analysis
as described above does not factor in a potential change in sales
levels, local currency prices, or amounts of options or forwards
to cover these changes. Additional information concerning
derivative financial instruments is available in notes ONE and
FIVE in Notes to Consolidated Financial Statements.
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 includes the following key
elements:
The organization of operations into four business groups
(Global Books and Home Entertainment, United States Magazine
Publishing, International Magazine Publishing and QSP, Inc.) to
make greater use of global scale.
The restructuring of editorial organizations to ensure
editorial quality and integrity worldwide.
The establishment of new reporting relationships to sharpen
focus and accountability.
The reassignment of certain executives as well as the hiring
of new people with key skill sets.
The second phase of the strategy, announced in September 1998,
targets the restructuring of costs and the raising of capital.
The main components of the restructuring are:
The elimination or rationalization of unproductive
businesses.
Cost reductions and re-engineering.
Leveraging the asset base of the company.
The elimination or rationalization of unproductive businesses,
which is expected to be completed within the next 18 months, will
generally involve the following actions:
The sale or joint venturing of proprietary publishing
operations in Scandinavia, Finland, Benelux, Italy and South
Africa.
The elimination or redirection of certain product lines,
including adult and children's retail book publishing, the
Today's Best Nonfiction book series, and video or music
businesses in selected international markets.
Cost reduction and re-engineering activities will involve the
following:
A 20-25% reduction in the number of individual promotional
mailings globally, including the elimination of related product
development and overhead costs. The company anticipates that
this will increase response rates on continuing mailings.
A 10-20% reduction in the circulation rate base for Reader's
Digest Magazine in the United States to improve the efficiency of
promotional spending. This action is also expected to reduce
circulation and advertising revenue in the short term.
The outsourcing of support functions in areas where it is
cost-effective and the consolidation of suppliers and combination
of purchasing efforts for greater negotiating leverage.
Implementation of the second phase of the strategy is expected
to reduce the company's annual expense base, excluding other
operating items, by $300.0 to $350.0 and reduce annual revenues
by approximately $200.0 by the end of fiscal 2001. As a result,
the company believes that annual operating profit will increase
by $100.0 to $150.0 in three years. The company expects to
record charges to other operating items in a range of $30.0 to
$50.0 in fiscal 1999 related to these actions as components of
the plan are finalized.
Leveraging the asset base of the company will include the
following actions:
The sale of important works from the art collection.
The sale of international real estate holdings including its
U.K. Canary Wharf facility.
An expected reduction in the quarterly dividend for the
second quarter of 1999 from $0.225 per share to $0.05 per share.
The actions to leverage the asset base of the company are
expected to convert approximately $200.0 of under-productive
assets to cash in the next year and improve annual pre-tax cash
flow by $150.0 to $200.0 by fiscal 2001.
The announcement of the second phase of the strategy also
focused on broadening the company's customer base to include more
younger customers and more products for older customers.
The third phase of the strategy is expected to be announced in
January 1999 and will focus on plans to grow the business. This
will include investing in internal opportunities, as well as
targeting acquisitions that leverage the company's core
strengths, expanding geographically, introducing new products and
engaging in at least one completely new business.
Fiscal 1999 Results
The company anticipates that its operations in Russia will be
negatively affected by the devaluation of the ruble. This may
have a material adverse effect on the company's results of
operations for fiscal 1999.
Notwithstanding the events in Russia, results for fiscal 1999
are expected to show a modest improvement over fiscal 1998 before
the effects of the above-mentioned actions and other operating
items; however, as the strategy is executed worldwide, results
are expected to show additional improvement in 1999 and more
significant benefits are anticipated over the next two to three
years.
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 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
substantially completed the inventory phase and plan to be
fully completed by December 1998.
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 United States and major
developed international markets expect to complete the
analysis phase for non-IT embedded systems by December 1998.
All other components of the analysis phase for the United
States and developed international markets are expected to be
completed by March 1999.
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. Subsequent to implementation, the
company will conduct live testing on January 1 and 2, 2000,
before business commences on January 3, 2000. The
implementation phase, including testing for certain critical
applications, has commenced in the United States and major
developed international markets, and is expected to be
completed by June 1999 for applications and IT equipment and
non-IT embedded systems. All other components of the
implementation phase for the United States and developed
international markets are 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, are in the preliminary stages of assessing exposure with
respect to their local year 2000 issues.
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, or are expected to
be by December 31, 1998. 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 costs 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 $4.0 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 are scheduled to establish 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 January 1,
2002. 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 plan
to be able to accept payments and pay suppliers in euros at that
time, as well as have the ability 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 developed 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 $23.7 to $126.1 at June 30, 1998, compared
with $102.4 at June 30, 1997. This increase was primarily a
result of cash provided by operations ($93.9), net proceeds from
other long-term investments ($45.7) and proceeds from sales of
property, plant and equipment ($25.0), partially offset by
dividend payments ($97.1) and capital expenditures ($34.1).
In 1998, the company reduced its quarterly dividend on common
stock to $0.225 per share. The 1998 full-year dividend payment
decreased to $0.90 per share, or by 50% compared with 1997. On
September 16, 1998, the company announced an expected reduction
in its quarterly dividend for the second quarter of 1999 to $0.05
per share.
Capital expenditures in 1998 amounted to $34.1 and were
primarily for information technology.
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 June 30, 1998,
there were no borrowings outstanding under the credit agreement.
Various international subsidiaries of the company have available
lines of credit totaling $62.6. At June 30, 1998, loans in the
amount of $8.5 were outstanding under international lines of
credit at a weighted average interest rate of 7.9%.
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.
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30,
In millions, except per share data 1998 1997 1996
Revenues $ 2,633.7 $ 2,839.0 $ 3,098.1
Product, distribution and editorial
expenses 989.0 1,026.7 1,079.8
Promotion, marketing and administrative
expenses 1,544.5 1,584.5 1,674.0
Other operating items 70.0 35.0 235.0
Operating profit 30.2 192.8 109.3
Other income, net 11.3 17.4 28.4
Income before provision for income taxes 41.5 210.2 137.7
Provision for income taxes 23.6 76.7 57.1
Net income $ 17.9 $ 133.5 $ 80.6
Basic and diluted earnings per share $0.16 $1.24 $0.73
Average common shares outstanding 106.5 106.7 107.9
See accompanying notes to consolidated financial statements.
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
In millions 1998 1997
Assets
Current assets:
Cash and cash equivalents $ 122.8 $ 69.1
Receivables, net 376.4 398.3
Inventories 162.2 167.8
Prepaid expenses and other current assets 311.2 290.6
Total current assets 972.6 925.8
Property, plant and equipment, net 285.4 314.8
Intangible assets, net 41.8 59.1
Other noncurrent assets 264.2 344.1
Total assets $ 1,564.0 $ 1,643.8
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 172.1 $ 193.0
Accrued expenses 377.4 373.6
Income taxes payable 21.0 22.1
Unearned revenue 355.4 356.5
Other current liabilities 90.0 67.9
Total current liabilities 1,015.9 1,013.1
Postretirement and postemployment benefits other
than pensions 157.6 153.3
Other noncurrent liabilities 131.9 131.4
Total liabilities 1,305.4 1,297.8
Stockholders' equity:
Capital stock 16.6 29.0
Paid-in capital 144.8 141.8
Retained earnings 845.0 924.2
Foreign currency translation adjustment (49.8) (33.4)
Net unrealized losses on certain investments --- (0.3)
Treasury stock, at cost (698.0) (715.3)
Total stockholders' equity 258.6 346.0
Total liabilities and stockholders' equity $ 1,564.0 $ 1,643.8
See accompanying notes to consolidated financial statements.
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
In millions 1998 1997 1996
Cash flows from operating activities
Net income $ 17.9 $ 133.5 $ 80.6
Depreciation and amortization 46.2 46.7 48.8
Gains on the sales of certain investments (5.2) (7.0) (15.8)
Gains on the sales of certain assets (10.2) (1.4) (2.1)
Changes in assets and liabilities:
Receivables, net 10.9 (33.3) (15.8)
Inventories (1.9) 20.2 (25.7)
Unearned revenue 7.6 7.7 5.3
Accounts payable and accrued expenses 9.3 (36.2) 142.5
Other, net 19.3 (32.9) (105.6)
Net change in cash due to operating
actitities 93.9 97.3 112.2
Cash flows from investing activities
Proceeds from maturities and sales of
marketable securities and short-term
investments 32.5 107.3 393.1
Purchases of marketable securities and short-
term investments (2.3) (23.1) (194.3)
Capital expenditures (34.1) (110.6) (59.6)
Proceeds from other long-term investments,
net 45.7 2.1 13.3
Proceeds from sales of property, plant and
equipment 25.0 5.5 5.1
Other, net --- (13.6) (7.2)
Net change in cash due to investing
activities 66.8 (32.4) 150.4
Cash flows from financing activities
Dividends paid (97.1) (193.3) (190.1)
Common stock repurchased --- (66.3) (62.9)
Other, net (5.6) 13.5 37.8
Net change in cash due to financing
activities (102.7) (246.1) (215.2)
Effect of exchange rate changes on cash (4.3) (7.8) (3.9)
Net change in cash and cash equivalents 53.7 (189.0) 43.5
Cash and cash equivalents at beginning of
year 69.1 258.1 214.6
Cash and cash equivalents at end of year $122.8 $ 69.1 $ 258.1
Supplemental information
Cash paid for interest $ 5.4 $ 5.3 $ 2.0
Cash paid for income taxes $ 20.5 $ 72.2 $ 158.5
See accompanying notes to consolidated financial statements.
The Reader's Digest Association, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30,
In millions, except per share data 1998 1997 1996
Capital stock
Preferred stock
Balance at beginning and end of year $ 28.8 $ 28.8 $ 28.8
Common stock
Balance at beginning and end of year 1.4 1.4 1.4
Unamortized restricted stock
Balance at beginning of year (1.2) (1.8) (0.7)
Common stock issued under various plans (12.4) 0.6 (1.1)
Balance at end of year (13.6) (1.2) (1.8)
Paid-in capital
Balance at beginning of year 141.8 138.3 118.3
Common stock issued under various plans 3.0 3.5 20.0
Balance at end of year 144.8 141.8 138.3
Retained earnings
Balance at beginning of year 924.2 984.0 1,093.5
Net income 17.9 133.5 80.6
Dividends on common stock ($0.90, $1.80
and $1.75 per share in 1998, 1997 and
1996, respectively) (95.8) (192.0) (188.8)
Dividends on preferred stock (1.3) (1.3) (1.3)
Balance at end of year 845.0 924.2 984.0
Foreign currency translation adjustment
Balance at beginning of year (33.4) (14.2) (0.3)
Translation adjustment (16.4) (19.2) (13.9)
Balance at end of year (49.8) (33.4) (14.2)
Net unrealized (losses) gains on investments
Balance at beginning of year (0.3) (1.3) 5.1
Net unrealized gains (losses), net of tax 0.3 1.0 (6.4)
Balance at end of year --- (0.3) (1.3)
Treasury stock
Balance at beginning of year (715.3) (656.3) (605.3)
Common stock repurchased --- (66.3) (62.9)
Common stock issued under various plans 17.3 7.3 11.9
Balance at end of year (698.0) (715.3) (656.3)
Total stockholders' equity $ 258.6 $ 346.0 $ 478.9
See accompanying notes to consolidated financial statements.
The Reader's Digest Association, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except per share data
ONE Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of The Reader's Digest Association, Inc. and its U.S.
and international subsidiaries (the company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported
amounts in these financial statements. Actual results could
differ from those estimates.
New Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
This statement, which is effective for fiscal years beginning
after June 15, 1999, requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. This statement is
not expected to have a material impact on the company's results
of operations, financial position or cash flow.
In 1998, the FASB issued SFAS No.
132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The company adopted this statement
effective June 30, 1998, and modified disclosures relating to its
pension plans and postretirement benefits accordingly. This
adoption had no effect on the company's results of operations,
financial position or cash flow.
In 1998, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement, which is effective
for fiscal years beginning after December 15, 1998, requires that
entities capitalize certain internal-use software costs once
certain criteria are met. This statement is not expected to have
a material impact on the company's results of operations,
financial position or cash flow.
In 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." These statements, which are effective for fiscal
years beginning after December 15, 1997, expand or modify
disclosures and will have no impact on the company's results of
operations, financial position or cash flow.
In the second quarter of 1998, the
company adopted SFAS No. 128, "Earnings Per Share," for all
periods presented. Diluted earnings per share is the same as
basic earnings per share for all periods presented because the
dilutive impact of potential common shares is not material.
In 1997, the company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This statement requires that certain assets be
reviewed for impairment and, if impaired, remeasured at fair
value, whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable. This
adoption did not have a material effect on the company's results
of operations, financial position or cash flow.
In 1997, the company adopted the fair value disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by this statement, the company did
not change the method of accounting for its stock options and
other stock-based employee compensation awards.
Cash and Cash Equivalents
The company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents.
Receivables, net
Receivables, net are reflected net of allowances for returns and
bad debts of $173.0, $166.2, $193.1 and $227.8 at June 30, 1998,
1997, 1996 and 1995, respectively. Additions to the allowances
amounted to $505.0, $548.7 and $627.8 and amounts written off
amounted to $498.2, $575.6 and $662.5 during the years ended June
30, 1998, 1997 and 1996, respectively.
Inventories
Inventories are stated at the lower of cost or market, primarily
determined on the first-in, first-out (FIFO) basis. The majority
of U.S. inventory is valued on the last-in, first-out basis.
Derivative Financial Instruments
The company is exposed to the effect of foreign exchange rate
fluctuations on the U.S. dollar value of its foreign
subsidiaries' income. The company purchases foreign currency
option contracts to minimize the effect of fluctuating foreign
currencies on its earnings and specifically identifiable
anticipated transactions, generally over periods ranging up to 12
months. In addition, the company enters into forward contracts
to minimize the effect of fluctuating foreign currency exchange
rates on certain foreign currency denominated assets and
liabilities, generally over periods ranging up to 12 months. The
company, as a matter of policy, does not speculate in financial
markets and, therefore, does not hold financial instruments for
trading purposes.
Foreign currency option contracts that reduce the company's
exposure to the effects of fluctuating foreign currencies on its
earnings do not meet the criteria for hedge accounting; however,
option contracts that are designated as hedges and that reduce
the company's exposure to the effects of fluctuating foreign
currencies on specifically identifiable anticipated transactions,
where it is probable that the transactions will occur, meet the
criteria for hedge accounting. Forward contracts meet the
criteria for hedge accounting as they are designated as, and are
effective as, hedges of specifically identified foreign currency
denominated assets and liabilities.
Premiums on option contracts that qualify for hedge accounting
are amortized over the term of the contract and any gains at
maturity are included in other income, net. If an option
contract is terminated before its maturity, the unamortized
premium associated with the contract is written off and included
in other income, net. Option contracts that do not qualify for
hedge accounting are recorded at fair market value, and changes
in market value on such instruments are included in other income,
net. The carrying value of option contracts is included in
prepaid expenses and other current assets. Forward contracts are
reflected in the company's balance sheet at market value and
included in prepaid expenses and other current assets and other
current liabilities, and changes in market value on these
instruments are included in other income, net. In the event that
the underlying foreign currency denominated asset or liability is
extinguished or terminated prior to the forward contract's
maturity, the company's policy is to enter into a separate
forward contract to offset any changes in market value from that
date until the maturity of the original contract.
Depreciation and Amortization
Property, plant and equipment are stated at cost, except for
property, plant and equipment that have been impaired, for which
the carrying amount is reduced to the estimated fair market
value. Buildings and equipment are depreciated using the
straight-line method over useful lives up to 50 years for
buildings and up to five years for other equipment. Leasehold
improvements are amortized using the straight-line method over
the term of the lease or the life of the improvement, whichever
is shorter.
Intangible Assets, net
Intangible assets, net are composed of distribution rights,
contracts, subscription lists and other intangible assets, as
well as the excess of costs over the fair value of net assets of
several businesses acquired. The excess of costs over the fair
value of businesses acquired is amortized, on a straight-line
basis, over varying periods, not in excess of 40 years. Other
acquired intangibles are amortized, on a straight-line basis,
over their estimated useful lives, not in excess of ten years.
The company continually evaluates the recoverability of its
intangible assets to determine whether current events or
circumstances warrant adjustments to the carrying value. Such
evaluation may be based on projected income and cash flows from
operations of related businesses on an undiscounted basis as well
as other economic and market variables.
Stock-Based Compensation
Compensation cost is recognized for stock-based compensation
using the intrinsic value method. Under this method,
compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date over the amount an employee
must pay to acquire the stock. The company's policy is to grant
stock options at fair market value at the date of grant.
Revenues
Sales of Books and Home Entertainment Products, less provisions
for returns, are recorded at the time of shipment. Sales of
magazine subscriptions are recorded as unearned revenue at the
gross subscription price at the time the orders are received.
Proportionate shares of the gross subscription price are
recognized as revenues when the subscriptions are fulfilled.
Promotion Costs
Costs of direct response advertising are matched with the
expected revenue stream, generally over a period of one to 12
months. Direct response advertising consists primarily of
promotion costs incurred in connection with the procurement of
magazine subscriptions and the sale of books and other products.
Promotion costs of $927.0, $942.9 and $972.5 were incurred for
the years ended June 30, 1998, 1997 and 1996, respectively.
Prepaid promotion costs, included in prepaid expenses and other
current assets, amounted to $44.3 at June 30, 1998 and 1997.
Deferred promotion costs, included in other noncurrent assets,
amounted to $102.8 and $119.6 at June 30, 1998 and 1997,
respectively.
Income Taxes
Deferred income taxes, net of appropriate valuation allowances,
are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities.
Deferred federal income taxes have not been provided on
undistributed earnings of foreign subsidiaries as any federal
taxes payable would be substantially offset by foreign tax
credits.
Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income, less
preferred stock dividend requirements, by the weighted average
number of common shares outstanding during the year. 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 year, assuming
exercise and conversion of stock options. A weighted average
number of common shares of 106.7, 106.7 and 108.1 for the years
ended June 30, 1998, 1997 and 1996, respectively was used for the
computation of diluted earnings per share.
Foreign Currency Translation
Revenues and expenses denominated in foreign currencies are
translated at average monthly exchange rates prevailing during
the year. The assets and liabilities of international
subsidiaries are translated into U.S. dollars at the rates of
exchange in effect at the balance sheet date. The resulting
translation adjustment is reflected as a separate component of
stockholders' equity.
The U.S. dollar is used as the functional currency for
subsidiaries operating in highly inflationary economies, for
which both translation adjustments and gains and losses on
foreign currency transactions are included in other income, net.
TWO Other Operating Items
In the first quarter of 1998, the company recorded charges of
$70.0 ($51.8 after tax, or $0.49 per share) composed primarily of
severance costs associated with workforce reductions in Europe,
the United States and at the corporate level, which are
anticipated to be completed by the end of 1999; and other costs
associated with the discontinuation of certain businesses and the
realignment of business processes and operations. Businesses
that were discontinued include a children's book club in the
United States and the company's investment in a World Wide Web
navigation service. The realignment of business processes and
operations also relates to certain vendor contracts in the United
States and Europe.
In the fourth quarter of 1997, the company recorded charges of
$35.0 ($22.2 after tax, or $0.21 per share), relating primarily
to the realignment of the organization and operations. The
realignment of the organization and operations covers the
separation of employee positions from the worldwide workforce by
the end of 1999 primarily through involuntary severance programs.
Also included in other items in the table which follows, are a
contract termination relating to the discontinuance of a
distributor relationship and the discontinuance of individual
products in certain business units.
In the fourth quarter of 1996, the company finalized its lease
termination program in the United Kingdom at a savings of $10.0
below the provision that was originally established as part of
other operating items, originally recorded in 1994, relating to
losses on lease terminations and provisions for certain claims
against the company.
In the third quarter of 1996, the company recorded total charges
of $245.0 ($169.8 after tax, or $1.57 per share), composed of
$204.0 related primarily to the streamlining of the company's
organizational structure and the strategic repositioning of
certain businesses and $41.0 for various claims against the
company.
The charges related to the streamlining included the separation
of approximately 1,300 employees from the worldwide workforce
through a combination of voluntary and involuntary severance
programs. Also associated with the streamlining and included in
other items in the table which follows, are asset write-downs,
contract terminations and the outsourcing of certain functions
where it was cost-beneficial to the company.
The strategic repositioning related primarily to the Special
Interest Magazines in the United States and a publishing and book
club business in the United Kingdom. As a result of this
repositioning, Travel Holiday magazine was sold in 1996, and the
publishing and book club business was sold in 1997.
Balances remaining of the $70.0, $35.0 and $204.0 charges at
June 30, 1998, are:
Balance at Balance at
June 30, 1998 1998 June 30,
1997 Charges Activity 1998
Employee retirement and
severance benefits $ 56.7 $ 39.5 $ (36.6) $ 59.6
Other items 23.6 23.1 (22.5) 24.2
Business repositioning 0.7 7.4 (4.2) 3.9
$ 81.0 $ 70.0 $ (63.3) $ 87.7
THREE Other Income, Net
1998 1997 1996
Interest income $ 6.9 $ 11.4 $ 21.5
Interest expense (9.4) (7.0 (2.4)
Gains on the sales of certain investments 5.2 7.0 15.8
Gains on the sales of certain assets 10.2 1.4 2.1
Gains (losses) on foreign exchange 1.3 8.5 (6.1)
Other, net (2.9) (3.9) (2.5)
$ 11.3 $ 17.4 $ 28.4
FOUR Supplemental Balance Sheet Information
Inventories
1998 1997
Raw materials $ 21.8 $ 17.4
Work-in-progress 24.7 26.5
Finished goods 115.7 123.9
$ 162.2 $167.8
Inventories would have been $10.8 and $12.0 higher than the
amounts reported at June 30, 1998 and 1997, respectively, had the
FIFO method of inventory been used for U.S. inventory.
Property, Plant and Equipment
1998 1997
Land $ 12.5 $ 14.0
Buildings and building improvements 303.2 303.4
Furniture, fixtures and equipment 290.4 316.2
Leasehold improvements 16.3 21.9
622.4 655.5
Accumulated depreciation and amortization (337.0) (340.7)
$285.4 $314.8
Intangible Assets
1998 1997
Distribution rights, contracts, subscription
lists and other $ 56.3 $ 71.9
Excess of cost over fair value of net assets
of businesses acquired 77.2 75.5
133.5 147.4
Accumulated amortization (91.7) (88.3)
$ 41.8 $ 59.1
Accrued Expenses
1998 1997
Compensation and other
employee benefits $ 93.0 $ 85.3
Royalties and copyrights payable 32.3 33.1
Taxes, other than income taxes 15.8 19.1
Other, principally operating expenses F1 236.3 236.1
$ 377.4 $ 373.6
F1 Includes $87.7 and $81.0 relating primarily to the remaining
reserve balances associated with other operating
items at June 30, 1998 and 1997, respectively.
Refer to Note TWO for further explanation.
FIVE Derivative Financial Instruments
The company is a party to financial instruments with off-balance
sheet risk. These financial instruments are used in the normal
course of business to manage the company's exposure to
fluctuations in foreign exchange rates.
The company may be exposed to credit losses in the event of
nonperformance by the financial institutions that are
counterparties to these instruments; however, the company
mitigates this risk through specific minimum credit standards and
diversification of financial institutions with which it enters
into these derivative transactions.
The company's derivative financial instruments also involve
elements of market risk as a result of potential changes in
foreign currency exchange rates. The market risk associated with
the option contracts is limited to the carrying value of these
contracts in the company's consolidated balance sheet. Forward
contracts outstanding at the end of the year are effective hedges
of existing foreign currency exposures. Therefore, the impact of
potential changes in future foreign currency exchange rates on
these instruments would generally offset the related impact on
the assets and liabilities being hedged.
Notional/
Principal Carrying Fair
1998 Amounts Value Value Maturity
Forward Contracts
Assets $ 62.3 $ 62.1 $ 62.1 1999
Liabilities $ 62.3 $ 62.4 $ 62.4 1999
Option Contracts
Assets $ 59.1 $ 1.8 $ 1.8 1999
Notional/
Principal Carrying Fair
1997 Amounts Value Value Maturity
Forward Contracts
Assets $ 28.0 $ 28.0 $ 28.0 1998
Liabilities $ 28.0 $ 27.9 $ 27.9 1998
Option Contracts
Assets $ 181.5 $ 10.5 $ 12.1 1998
SIX Pension Plans and Postretirement Benefits
The company adopted SFAS No. 132 effective June 30, 1998, and has
modified its disclosures relating to its pension plans and
postretirement benefits accordingly.
Assumptions used to determine pension costs and projected
benefit obligations are as follows:
U.S. Plans
1998 1997 1996
Discount rate 7.0% 7.8% 7.8%
Compensation increase rate 5.0% 5.3% 5.3%
Long-term rate of return on plan assets 9.5% 9.5% 9.5%
International Plans
1998 1997 1996
Discount rate 4-15% 4-15% 4-15%
Compensation increase rate 3-10% 3-13% 3-13%
Long-term rate of return on plan assets 5-16% 5-16% 5-16%
Components of the company's consolidated net periodic pension
(benefit) cost are as follows:
Pension Benefits
1998 1997 1996
Service cost $ 18.2 $ 19.4 $ 20.9
Interest cost 45.7 46.1 44.4
Expected return on plan assets (60.7) (54.6) (50.0)
Amortization (3.2) (2.8) (2.8)
Recognized actuarial gain (3.4) (0.1) (0.1)
Special items --- --- 2.5
$ (3.4 $ 8.0 $ 14.9
The company provides medical and dental benefits to U.S. retired
employees and their dependents. Substantially all of the
company's U.S. employees become eligible for these benefits when
they meet minimum age and service requirements. The company has
the right to modify or terminate these unfunded benefits.
A discount rate of 7.0% for 1998, and 7.8% for 1997 and 1996 was
used in determining the accumulated postretirement benefits
liability.
Components of the company's costs for postretirement benefits
are as follows:
Other Benefits
1998 1997 1996
Service cost $ 1.6 $ 2.5 $ 2.9
Interest cost 5.5 7.1 6.1
Recognized actuarial gain (2.2) (0.7) (1.1)
Special items --- --- 3.4
$ 4.9 $ 8.9 $11.3
Amortization in the pension benefits table above reflects both
amortization of prior service cost and amortization of the
transitional asset. Special items in both tables above reflect
the net increase in 1996 pension expense and postretirement
benefits costs resulting from voluntary early retirement and
involuntary severance programs.
During 1998, in accordance with Internal Revenue Code section
401(h), the company transferred $4.7 of excess pension assets to
fund postretirement benefits. The reconciliation of beginning and
ending balances of benefit obligations and fair value of plan
assets, and the funded status of the plans are as follows:
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in benefit obligation:
Benefit obligation at
beginning of year $ 620.7 $ 607.6 $ 99.1 $ 97.7
Service cost 18.2 19.4 1.6 2.5
Interest cost 45.7 46.1 5.5 7.1
Actuarial (gain) or loss 55.2 1.3 (19.4) (3.7)
Exchange rate changes (5.5) (7.4) --- ---
Other items 6.5 (1.5) --- ---
Benefits paid (43.6) (44.8) (5.0) (4.5)
Benefit obligation at
end of year $ 697.2 $ 620.7 $ 81.8 $ 99.1
Change in plan assets:
Fair value of plan assets at
beginning of year $ 830.3 $ 720.1 $ --- $ ---
Actual return on plan assets 154.0 151.7 --- ---
Employer contribution 8.8 8.9 0.3 4.5
IRC section 401(h) transfer (4.7) --- 4.7 ---
Exchange rate changes (7.5) (1.6) --- ---
Other items (1.2) (4.0) --- ---
Benefits paid (43.6) (44.8) (5.0) (4.5)
Fair value of plan assets at
end of year $ 936.1 $ 830.3 $ --- $ ---
Funded status $ 238.9 $ 209.6 $ (81.8) $ (99.1)
Unrecognized actuarial gain (265.2) (233.1) (37.5) (20.3)
Unrecognized transition asset (16.9) (21.9) --- ---
Unrecognized prior service cost 12.9 13.3 --- ---
Additional minimum liability --- (2.4) --- ---
Net amount recognized $ (30.3) $ (34.5) $(119.3) $ (119.4)
Amounts recognized in the balance
sheet are as follows:
Pension Benefits Other Benefits
1998 1997 1998 1997
Prepaid benefit cost $ 34.2 $ 26.8 $ --- $ ---
Accrued benefit liability (64.9) (62.0) (119.3) (119.4)
Intangible assets, net 0.4 0.7 --- ---
Net amount recognized $ (30.3) $ (34.5)$ (119.3) $ (119.4)
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets were
$90.2, $83.7 and $2.4, respectively, as of June 30, 1998, and
$78.9, $70.7 and $2.5, respectively, as of June 30, 1997. The
projected benefit obligation and fair value of plan assets for
the pension plans with projected benefit obligations in excess of
plan assets were $100.7 and $11.9, respectively, as of June 30,
1998, and $91.1 and $11.6, respectively, as of June 30, 1997.
The health care inflation assumption used to determine the
postretirement benefits liability was 8.0% for 1998, decreasing
gradually to 5.5% by the year 2004 and remaining at that level
thereafter. For 1997, the health care inflation assumption used
to determine the postretirement benefits liability was 11.0% with
respect to medical benefits and 10.0% with respect to dental
benefits decreasing to 8.0% by the year 2001. Assumed health
care cost trend rates have a significant effect on the amounts
reported for postretirement benefits. A one-percentage-point
increase in assumed health care cost trend rates would increase
the total of the service and interest cost components and the
postretirement benefit obligation by $1.1 and $9.9, respectively.
A one-percentage-point decrease in assumed health care cost trend
rates would decrease the total of the service and interest cost
components and the postretirement benefit obligation by $0.9 and
$8.8, respectively.
SEVEN Employee Compensation Plans
The 1989 and the 1994 Key Employee Long Term Incentive Plans (the
plans) provide that the Compensation and Nominating Committee of
the Board of Directors (the committee) may grant stock options,
stock appreciation rights, restricted stock, performance units
and other awards to eligible employees. The committee may grant
certain stock-based awards up to a maximum of 5,420,000 and
10,800,000 underlying Class A shares of nonvoting common stock
(Class A) under the plans, respectively. No awards may be
granted with respect to Class B voting common stock (Class B).
Under the plans, options have been granted with exercise prices
not less than 100% of the fair market value of the company's
common stock at the time of the grant, with an exercise term as
determined by the committee, not to exceed ten years. The
options have vesting terms as determined by the committee, but
generally become exercisable over three or four years.
On October 9, 1997, options and stock appreciation rights
related to 2.1 million shares of Class A stock were granted to
over 800 eligible employees pursuant to the plans (October
grant). The October grant was never distributed. The exercise
price of the October grant was $27.03 per share, the fair market
value of the company's common stock at October 9, 1997. These
options provided for vesting ratably over four years and could be
exercised over a period of ten years from the date of grant. On
November 18, 1997, the October grant was canceled and options and
stock appreciation rights related to 2.1 million shares of Class
A stock were reissued to eligible employees at a price of $21.47
per share, the fair market value of the company's stock at
November 18, 1997 (November grant). This reissuance was in
connection with a significant revision of the company's executive
compensation structure, involving the elimination of long-term
cash performance awards, the reduction of annual cash bonuses and
the greater reliance on equity incentive awards. The other terms
of the November grant were not changed from the terms of the
October grant.
The company has adopted the disclosure provisions of SFAS
No. 123, and as permitted by this statement has continued to
measure compensation cost as the excess of the quoted market
price of the company's stock at the grant date over the amount
the employee must pay for the stock. Accordingly, no
compensation expense is recognized for stock-based compensation
other than in the case of restricted stock awards, stock
appreciation rights and phantom stock options.
SFAS No. 123 requires disclosure of pro forma net income and
earnings per share as if the fair value-based method had been
applied in measuring compensation cost for stock-based awards
granted in 1998, 1997 and 1996.
Management believes that 1998, 1997 and 1996 pro forma amounts
are not representative of the effects of stock-based awards on
future pro forma net income and earnings per share because these
pro forma amounts exclude the pro forma compensation expense
related to unvested stock options granted before 1996. In
addition, certain options vest over several years, and awards in
future years may occur whose terms and conditions may vary.
Reported and pro forma net income and earnings per share amounts
are set forth below:
1998 1997 1996
Net income As reported $ 17.9 $ 133.5 $ 80.6
Pro forma $ 10.5 $ 129.1 $ 78.6
Earnings per share
As reported $0.16 $1.24 $0.73
Pro forma $0.09 $1.20 $0.72
The weighted average fair value of options granted in 1998, 1997
and 1996 is $8.38, $9.32 and $14.80, respectively. The weighted
average fair value of options granted in 1998 includes the value
of the November grant less the value of the October grant as of
the date that the November grant was issued. The fair values of
the options granted were estimated on the date of their grant
using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
1998 1997 1996
Risk-free interest rate 5.5% 6.3% 6.4%
Expected life 3.7 years 5.1 years 7.8 years
Expected volatility 29.4% 23.5% 24.4%
Expected dividend yield 1.0% 3.7% 3.0%
The following table summarizes information about stock options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
(Options in thousands)
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Options Life (yrs.) Price Options Price
$20.00 - $29.44 3,208 8.24 $ 23.57 889 $ 25.98
$35.56 - $39.81 110 8.31 $ 38.44 16 $ 38.57
$40.31 - $43.56 2,398 6.96 $ 41.40 1,300 $ 41.45
$45.06 - $48.13 2,950 5.84 $ 47.13 1,932 $ 47.19
$50.94 - $55.12 116 7.04 $ 51.39 35 $ 52.46
8,782 7.07 $ 36.90 4,172 $ 40.89
Changes in outstanding options are as follows:
Shares Weighted
Subject to Average
(Options in thousands) Options Exercise
Price
Outstanding at June 30, 1995 5,554 $ 42.09
Granted 1,303 $ 47.20
Exercised (400) $ 31.11
Canceled (423) $ 44.62
Outstanding at June 30, 1996 6,034 $ 43.76
Granted 1,722 $ 41.04
Exercised (130) $ 25.67
Canceled (733) $ 44.53
Outstanding at June 30, 1997 6,893 $ 43.35
Granted 4,880 $ 24.76
Exercised (26) $ 20.13
Canceled (2,965) $ 32.05
Outstanding at
June 30, 1998 8,782 $ 36.90
Options exercisable at
June 30, 1998 4,172 $ 40.89
Options available for grant at June 30, 1998 4,482
Under the 1989 Employee Stock Purchase Plan (the ESPP), the
company is authorized to issue up to 1,650,000 Class A shares
principally to its full-time employees in the United States,
nearly all of whom are eligible to participate. Under the terms
of the ESPP, employees can choose every six months to have up to
ten percent of their annual base earnings withheld to purchase
Class A shares. The purchase price of the shares is 85% of the
lower of the fair market value of the Class A stock on the first
or last day of the six-month purchase period. Approximately 50%
of eligible employees have participated in the plan in the last
three years. In addition, several international subsidiaries of
the company have employee stock purchase plans (together with the
ESPP, the ESPP plans) under which the company is authorized to
issue up to 300,000 Class A shares to its full-time employees.
The terms of the plans in most locations are essentially the same
as the ESPP, except for one location, where the terms are based
upon a three- or five-year withholding period, and the purchase
price of the shares is 85% of the value of the Class A stock on
the first day of the purchase period. Under the ESPP plans,
employees purchased 251,700 shares in 1998, 239,026 shares in
1997 and 194,162 shares in 1996.
The weighted average fair value of these purchase rights granted
in 1998, 1997 and 1996 is $8.21, $13.13 and $11.72, respectively.
The fair values of the purchase rights were estimated on the date
of their grant using the Black-Scholes option-pricing model based
on the following weighted average assumptions:
1998 1997 1996
Risk-free interest rate 6.5% 5.4% 5.3%
Expected life 1.0 years 1.0 years 0.8 years
Expected volatility 34.0% 29.5% 16.8%
Expected dividend yield 3.5% 4.3% 3.6%
In 1998 the company granted 596,700 restricted Class A shares
with a value of $15.7 to over 100 employees at no cost. In 1996
the company granted 51,347 performance-based restricted Class A
shares with a value of $2.4 to an executive officer at no cost.
The market value of shares awarded is recorded as unamortized
restricted stock which is included in capital stock. Restricted
stock is amortized over the term of the restriction period.
Amortization of restricted stock amounted to $2.3, $0.6 and $1.3
for the years ended June 30, 1998, 1997 and 1996, respectively.
The company granted 212,000 and 12,200 stock appreciation rights
to officers in 1998 and 1996, respectively. The company also
issued 6,000 and 8,000 phantom stock options to non-employee
members of the Board of Directors in 1998 and 1997, respectively.
The company contributed $5.0, $5.0 and $5.3 to its profit-
sharing plan for fiscal 1998, 1997 and 1996, respectively.
Effective with the beginning of fiscal 1999, the company has
amended the restated Employees Profit-Sharing Plan to include a
401(k) Savings Plan component (401(k) plan). The 401(k) plan
provides for employees to make pre-tax contributions to specified
investment options. At the discretion of the Board of Directors,
the company can make matching contributions to the 401(k) plan.
The matching contributions vest ratably over a five-year period.
EIGHT Income Taxes
United States and International income before provision for
income taxes are as follows:
1998 1997 1996
United States $ 8.1 $ 162.5 $ 59.7
International 33.4 47.7 78.0
$ 41.5 $ 210.2 $137.7
Components of the company's (benefit) provision for income taxes
are as follows:
1998 1997 1996
Current
Federal $ (3.8) $ 10.0 $ 40.1
State and local 1.1 3.2 16.1
International 17.4 22.0 75.8
$ 14.7 $ 35.2 $ 132.0
Deferred
Federal $ 2.2 $ 28.5 $ (44.8)
State and local 1.0 6.7 (8.7)
International 5.7 6.3 (21.4)
$ 8.9 $ 41.5 $ (74.9)
$ 23.6 $ 76.7 $ 57.1
The differences between the effective income tax rate and the
statutory U.S. federal income tax rate are as follows:
1998 1997 1996
U.S. statutory tax rate 35.0% 35.0% 35.0%
International operations 2.1 (0.9) (1.1)
State taxes, net 1.2 2.6 2.1
Other operating items 19.4 --- 6.0
Other, net (0.8) (0.2) (0.5)
Effective tax rate 56.9% 36.5% 41.5%
The major components of the deferred tax assets and liabilities
are as follows:
1998 1997
Assets:
Deferred compensation and other
employee benefits $ 81.8 $ 92.8
Accounts receivable and other
allowances 38.2 30.7
Other, net 112.3 123.4
$232.3 $246.9
Liabilities:
Deferred promotion costs $ 3.2 $ 4.8
Deferred compensation and other
employee benefits 7.3 7.0
Other, net 47.0 57.4
$ 57.5 $ 69.2
$174.8 $177.7
The balance sheet classification of the deferred tax assets and
liabilities is as follows:
1998 1997
Prepaid expenses and other current assets $ 67.9 $ 67.9
Other noncurrent assets 121.7 122.1
Other current liabilities 3.7 2.5
Other noncurrent liabilities 11.1 9.8
$174.8 $177.7
Net operating loss carryforwards totaling $135.7 and $138.8 at
June 30, 1998 and 1997, respectively, the majority of which may
be carried forward indefinitely, are available to reduce future
tax of certain foreign subsidiaries in a number of jurisdictions.
NINE Debt
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. Borrowings may be
denominated in U.S. dollars and various foreign currencies. The
credit agreement obligates the company to pay a facility fee
ranging between .2% and .375% of the total commitment, whether
used or unused, dependent on levels of earnings of the company,
as well as a utilization fee of .05% of loans outstanding and
administrative fees. Fees are payable quarterly in arrears. The
amendment to the credit agreement provided for a reduction of the
minimum required level of consolidated tangible net worth, a
reduction of credit available from $400.0 to $300.0 and an
increase in borrowing costs. At June 30, 1998 and 1997, there
were no borrowings outstanding under the credit agreement.
International lines of credit totaled $62.6 and $93.8 at June
30, 1998 and 1997, respectively, of which $8.5 and $21.4 were
outstanding at a weighted average interest rate of 7.9% and 7.5%,
respectively. These lines of credit expire at various dates
throughout 1999. Borrowings under these lines of credit are
included in other current liabilities. Because of the short
maturity of borrowings under the lines of credit, the carrying
amounts approximate fair value at June 30, 1998 and 1997.
In 1998, the company entered into an agreement with Morgan
Guaranty Trust Company of New York for an uncommitted line of
credit of $50.0 (the Morgan line of credit) to be used for
general corporate purposes. The Morgan line of credit lapsed on
June 30, 1998. The loans under the Morgan line of credit were
payable on demand and bore a floating interest rate based on the
cost of funds of the bank plus a margin. The company was also
party to an agreement with The Chase Manhattan Bank for a line of
credit of $75.0 (the Chase line of credit) for a term of one year
to be used for general corporate purposes. The Chase line of
credit lapsed on April 30, 1998. The loans under the Chase line
of credit were payable on demand and bore a floating interest
rate based on the cost of funds of the bank plus a margin. At
June 30, 1997, there were no borrowings outstanding under the
Chase line of credit.
TEN Capital Stock
1998 1997
First Preferred Stock, par value $1.00 per share;
authorized 40,000 shares; issued and
outstanding 29,720 shares $ 3.0 $ 3.0
Second Preferred Stock, par value $1.00 per share;
authorized 120,000 shares; issued and outstanding
103,720 shares 10.3 10.3
Third Subordinated Preferred Stock, par value $1.00 per
share; authorized 230,000 shares; issued and
outstanding 155,022 shares 15.5 15.5
Preference stock, par value $0.01 per share; authorized
25,000,000 shares; issued and outstanding none --- ---
Class A nonvoting common stock, par value $0.01 per
share; authorized 200,000,000 shares; issued
119,428,472 shares 1.2 1.2
Class B voting common stock, par value $0.01 per share;
authorized 25,000,000 shares; issued and outstanding
21,716,057 shares 0.2 0.2
Unamortized restricted stock (13.6) (1.2)
$16.6 $29.0
Common stock in treasury, at cost; 33,982,205 and
34,826,886 Class A shares in 1998 and 1997,
respectively $(698.0) $(715.3)
All shares of preferred stock have a preference in liquidation
of $100.00 per share. The difference between the aggregate par
value and liquidation preference has been appropriated from
retained earnings. Further, all preferred stock is redeemable at
any time at the option of the company at $105.00 per share plus
accrued dividends. The terms of the First Preferred Stock and
the Second Preferred Stock provide for annual cumulative
dividends of $4.00 per share. The terms of the Third
Subordinated Preferred Stock provide for annual cumulative
dividends of $5.00 per share.
In 1997, the company announced its fifth stock repurchase
program, to acquire up to 5,000,000 shares of Class A nonvoting
common stock in open market transactions. This program began
upon the completion of the prior programs, which together
provided for the repurchase of up to 16,000,000 shares of Class A
nonvoting common stock. The company has repurchased a total of
16,768,000 shares of which 768,000 are related to the fifth
program.
ELEVEN Commitments and Contingencies
The company is a defendant in several lawsuits and claims arising
in the regular course of business. Based on the opinions of
management and counsel for the company in such matters,
recoveries, if any, by plaintiffs and claimants would not
materially affect the financial position of the company or its
results of operations.
During the third quarter of 1996, the company's QSP, Inc.
subsidiary and the company reached an agreement with the
plaintiffs to settle an antitrust class action lawsuit commenced
in December 1993 by the Roman Catholic Bishop of San Diego and
the Chino Unified School District. The agreement provided for
QSP, Inc. and the company to deliver up to $40.0 in retail value
of company products, coupons for discounts on QSP, Inc. programs
and cash.
The company and its subsidiaries occupy certain facilities under
lease arrangements and lease certain equipment. Rental expense
amounted to $25.6, $31.7 and $32.4 in 1998, 1997 and 1996,
respectively, and sublease income amounted to $6.0, $7.0 and $6.9
in 1998, 1997 and 1996, respectively.
Future minimum rental commitments, net of sublease income, for
noncancelable operating leases are as follows:
Minimum Minimum
Rental Sublease
Payments Income Net
1999 $ 12.7 $ 0.7 $ 12.0
2000 $ 10.5 $ 0.7 $ 9.8
2001 $ 8.2 $ 0.7 $ 7.5
2002 $ 6.0 $ 0.4 $ 5.6
2003 $ 6.0 $ 0.4 $ 5.6
Later years $ 24.7 $ 0.4 $ 24.3
TWELVE Segments
Segment information is located on pages 21 and 22 of this annual
report.
The company's operations consist of the following business
segments: Reader's Digest Magazine, Books and Home Entertainment
Products, Special Interest Magazines and Other Businesses. The
Books and Home Entertainment Products segment includes Condensed
Books, known as Select Editions in certain markets, series and
general books, recorded music and videos. The Special Interest
Magazine segment includes The Family Handyman, American Health
for Women, New Choices: Living Even Better After 50 and Walking
in the United States and Moneywise in the United Kingdom. Other
Businesses includes QSP, Inc., the company's youth fund-raising
organization and merchandise catalogs in selected countries.
The company's geographic areas are composed of the United
States, Europe, and Pacific and Other Markets, which includes
Asia, Australia, Canada, Latin America, New Zealand and South
Africa.
Identifiable assets by segment are those assets that are used in
the operation of that business. Corporate assets consist
primarily of cash and cash equivalents and prepaid expenses and
other current assets at June 30, 1998. At June 30, 1997 and
1996, corporate assets consisted primarily of cash and cash
equivalents, prepaid expenses and other current assets and other
noncurrent assets.
Intersegment sales are included in the company's Other
Businesses segment. Intersegment sales are accounted for with a
markup ranging between five and 10%, dependent upon the type of
product or service sold.
THIRTEEN Subsequent Events (Unaudited)
In the first quarter of fiscal 1999 the company announced its
intention to enter into a sale leaseback agreement for its
principal operating office in the United Kingdom. The company
anticipates that this transaction will be finalized in the second
quarter of fiscal 1999.
In connection with the new long-term strategy announced in
September 1998, the company expects to record additional charges
to other operating items in fiscal 1999 for the elimination of
unproductive businesses, cost reductions and re-engineering as
components of the plan are finalized.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Reader's Digest Association, Inc.
We have audited the accompanying consolidated balance sheets
of The Reader's Digest Association, Inc. and subsidiaries as
of June 30, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period
ended June 30, 1998. These consolidated financial
statements are the responsibility of the company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of The Reader's Digest Association,
Inc. and subsidiaries at June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of
the years in the three-year period ended June 30, 1998, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
August 18, 1998
REPORT OF MANAGEMENT
The company has prepared the accompanying financial
statements and other related financial information
contained in this annual report in conformity with
generally accepted accounting principles, applying certain
estimates and judgments as required.
The company maintains a system of internal accounting
controls designed to provide reasonable assurance, at
reasonable cost, that transactions and events are recorded
properly and that assets are safeguarded. The internal
control system is supported by written policies and
procedures and by the careful selection, training and
supervision of qualified personnel, and is monitored by an
internal audit function.
The company's financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors, as stated in
their report, which is presented herein.
The Audit Committee of the Board of Directors, composed
only of directors who are not employed by the company,
meets periodically with management, internal auditors and
the independent auditors to review accounting, auditing,
financial reporting and other related matters. The
internal auditors and independent auditors have full and
unrestricted access to the Audit Committee.
THOMAS O. RYDER
Thomas O. Ryder
Chairman and Chief Executive Officer
GEORGE S. SCIMONE
George S. Scimone
Senior Vice President and
Chief Financial Officer
The Reader's Digest Association, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
In millions, except per share data 1998 F1 1997 F2 1996 F3 1995 1994 F4
Income Statement Data
Revenues $2,633.7 $2,839.0 $3,098.1 $3,068.5 $2,806.4
Operating profit $ 30.2 $ 192.8 $ 109.3 $ 391.9 $ 393.7
Net income 17.9 $ 133.5 $ 80.6 $ 264.0 $ 246.3
Basic and diluted earnings per share
before cumulative effect of accounting
changes/extraordinary items $0.16 $1.24 $0.73 $2.35 $2.34
Cumulative effect of accounting
changes/extraordinary items --- --- --- --- (0.23)
Basic and diluted earnings per share $0.16 $1.24 $0.73 $2.35 $2.11
Dividends per common share $0.90 $1.80 $1.75 $1.55 $1.35
Balance Sheet Data
Cash and cash equivalents, short-term
investments and marketable securities $ 126.1 $ 102.4 $ 374.2 $ 532.1 $ 766.9
Total assets $1,564.0 $1,643.8 $1,904.1 $1,958.7 $2,049.4
Stockholders' equity $ 258.6 $ 346.0 $ 478.9 $ 640.8 $ 791.0
Average common shares outstanding 106.5 106.7 107.9 112.0 115.7
Book value per common share $2.14 $2.98 $4.18 $5.66 $6.70
F1 Results for 1998 include the effect of first quarter
charges (aggregate pre-tax charges of $70.0, or $0.49
per share).
F2 Results for 1997 include the effect of fourth quarter
charges (aggregate pre-tax charges of $35.0, or
$0.21 per share).
F3 Results for 1996 include the effects of third quarter
charges (aggregate pre-tax charges of $245.0, or
$1.57 per share) and fourth quarter savings on the
finalization of the company's lease termination program
in the United Kingdom ($10.0, or $0.09 per share).
F4 Results for 1994 include the effects of promotion
accounting changes, net (pre- tax benefit of $113.9, or
$0.60 per share) and other operating items (aggregate
pre-tax charge of $76.0, or $0.51 per share).
SELECTED QUARTERLY FINANCIAL DATA and
DIVIDEND AND MARKET INFORMATION (Unaudited)
High-Low
Operating Net (Loss) Income
In millions, except (Loss) Dividends
per share data Revenues Profit Amount Per Share F1 Per Share F2 Class A Class B
1998
First Quarter F3 $ 561.4 $ (83.5) $(56.4) $(0.53) $0.225 $30-9/16 - 24-1/2 $29-1/4 - 23-15/16
Second Quarter 812.5 86.4 54.3 0.51 0.225 $31-1/2 - 20-7/8 $30 - 21-5/8
Third Quarter 635.5 21.7 14.6 0.13 0.225 $27-1/2 - 22-3/8 $27-7/8 - 23-1/2
Fourth Quarter 624.3 5.6 5.4 0.05 0.225 $29-3/16 - 24-1/2 $29-1/8 - 23-15/16
$2,633.7 $ 30.2 $ 17.9 $ 0.16 $0.90 $31-1/2 - 20-7/8 $30 - 21-5/8
1997
First Quarter $ 644.0 $ 46.6 $ 34.6 $ 0.32 $0.45 $43-3/4 - 38-1/4 $40-1/4 - 36
Second Quarter 874.6 132.6 84.1 0.78 0.45 $41-1/4 - 34 $38-1/8 - 32-3/4
Third Quarter 684.3 51.5 37.6 0.35 0.45 $41 - 28-3/4 $37-1/4 - 26
Fourth Quarter F4 636.1 (37.9) (22.8) (0.22) 0.45 $30 - 22-1/8 $28 - 21-7/8
$2,839.0 $ 192.8 $133.5 $ 1.24 $1.80 $43-3/4 - 22-1/8 $40-1/4 - 21-7/8
The company's Class A and Class B stock are listed on the New
York Stock Exchange under the symbols RDA and RDB,
respectively. As of June 30, 1998, there
were approximately 2,193 holders of record of the company's
Class A stock and 308 holders of record of the company's Class
B stock.
F1 Basic and diluted.
F2 Cash dividends on common stock are declared and paid share
and share alike, on Class A and Class B stock.
F3 Results for 1998 include the effect of first quarter
charges (aggregate pre-tax charges of $70.0, or $0.49 per
share).
F4 Results for 1997 include the effect of fourth quarter
charges (aggregate pre-tax charges of $35.0, or $0.21 per
share).
MANAGEMENT INFORMATION
BOARD OF DIRECTORS
THOMAS O. RYDER
Chairman and Chief Executive Officer
The Reader's Digest Association, Inc.
Director since 1998
LYNNE V. CHENEY(1)(2)
Senior Fello
American Enterprise Institute
for Public Policy
Director since 1993
M. CHRISTINE DEVITA(1)(3)
President
DeWitt Wallace-Reader's Digest Fund
Lila Wallace-Reader's Digest Fund
Director since 1993
GEORGE V. GRUNE
DeWitt Wallace-Reader's Digest Fund
Lila Wallace-Reader's Digest Fund
Director from 1977 to 1995 and since August 1997
MELVIN R. LAIRD(3)
Vice President and Senior Counsellor
The Reader's Digest Association, Inc.
Director since 1990
JAMES E. PRESTON(1)(3)
Chairman
Avon Products, Inc.
Director since 1994
LAWRENCE R. RICCIARDI
Senior Vice President
and General Counsel
International Business Machines Corp.
Director since 1998
ROBERT G. SCHWARTZ(2)(3)
Retired Chairman, President and
Chief Executive Officer
Metropolitan Life Insurance Company
Director since 1989
C.J. SILAS (2)
Retired Chairman and
Chief Executive Officer
Phillips Petroleum Company
Director since 1992
WILLIAM J. WHITE (1)
Professor Northwestern University
Retired Chairman
Bell & Howell Company
Director since 1996
(1) Audit Committee
(2) Compensation and Nominating Committee
(3) Finance Committee
CORPORATE MANAGEMENT
THOMAS O. RYDER
Chairman and Chief Executive Officer
THOMAS A. BELLI
President, QSP, Inc.
M. JOHN BOHANE
Senior Vice President and President
Global Books and Home Entertainment
MICHAEL A. BRIZEL
Vice President and General Counsel
ELIZABETH G. CHAMBERS
Vice President, Business Redesign
GREGORY G. COLEMAN
Senior Vice President and President,
U.S. Magazine Publishing
PETER J.C. DAVENPORT
Senior Vice President, Global Marketing
CLIFFORD H.R. DUPREE
Vice President and Corporate Secretary
THOMAS D. GARDNER
Senior Vice President
Business Planning and Development
ROBERT J. KREFTING
Senior Vice President and President,
International Magazine Publishing
MELVIN R. LAIRD
Vice President and Senior Counsellor
WILLIAM H. MAGILL
Vice President, Investor Relations
BONNIE M. MONAHAN
Vice President and Treasurer
GARY S. RICH
Senior Vice President,
Human Resources
GEORGE S. SCIMONE
Senior Vice President and
Chief Financial officer
CHRISTOPHER P. WILLCOX
Senior Vice President and Editor-in-Chief
Reader's Digest Magazine
CORPORATE AND SHAREHOLDER INFORMATION
STOCK LISTINGS
Class A Nonvoting Common Stock
Listed: New York Stock
Exchange
Symbol: RDA
Class B Voting Common Stock
Listed: New York Stock
Exchange
Symbol: RDB
TRANSFER AGENT AND REGISTRAR
FOR RDA AND RDB
Chase Mellon Shareholder
Services, LLC
85 Challenger Road
Ridgefield Park, New Jersey 07660
Shareholder Inquiries: 800-230-2771
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of shareholders will be held
Friday, November 13, 1998, at 10:00 a.m. at the Reader's
Digest Corporate Headquarters, DeWitt Wallace Auditorium,
Reader's Digest Road, Chappaqua, New York.
Holders of Class B Voting Common Stock of record at the
close of business on September 23, 1998, will be entitled to
vote at the meeting.
SHAREHOLDER REPORTS
Copies of the company's annual report on Form 10-K and proxy
statement filed with the Securities and Exchange
Commission are available upon request.
SHAREHOLDER INFORMATION SERVICE
Individual shareholders can access timely information
about The Reader's Digest Association, Inc. by calling our Shareholder
Information Service, which provides a recorded summary of the most
current financial results and other general investor information.
Callers can also use this service to request printed information
by fax or mail. To access this service, please call toll-free
800-3133-RDA (800-313-3732) anytime day or night.
DIRECT STOCK PURCHASE INVESTOR SERVICES PROGRAM
This program offers a convenient way to buy Reader's
Digest common stock, containing many features such
as dividend reinvestment, optional cash investment and
custodial service for stock certificates. For a complete
informational package, contact:
The Chase Manhattan Bank
P. O. Box 750
Pittsburgh, PA 15230
800-242-4653
INVESTOR RELATIONS
Securities analysts, institutional investors and other investment
professionals should direct their inquiries to:
William H. Magill
Vice President, Investor Relations
Telephone: 914- 244-7683
E-mail: william.magill@readersdigest.com
MEDIA RELATIONS
Editors and reporters in the print, electronic and other
media should direct their questions to:
Stephen J. Morello
Vice President, Public Relations
and Corporate Communications
Telephone: 914-244-7717
E-mail: stephen.morello@readersdigest.com
PRODUCT CATALOGS
For more information on our products, including free
catalogs, please call 800-846-2100 or write to Customer
Service at The Reader's Digest Association, Inc.
(copyright) 1998 The Reader's Digest Association, Inc. Reader's Digest,
The Digest, the Pegasus logo, Today's Best Nonfiction and QSP are
registered trademarks of The Reader's Digest Association, Inc.
The Family Handyman, New Choices: Living Even Better After 50 ,
Walking and American Health For Women are registered trademarks
of RD Publications, Inc.