YOU have probably read Reader’s Digest at least once in your lifetime irrespective of your country of origin. Reader’s Digest is the best selling consumer magazine in the United States, maybe in the world. It has 8 million copies in the US and 18 million copies worldwide. It is read by 40 million people in more than 70 countries in 21 languages.
It was started by Dewitt Wallace in 1922 in New York. While he was recovering from his wounds in WWI, Mr. Wallace decided to collect & condense articles from different magazines into one digest. He was hoping to produce $5,000 of income from doing so. From that humble beginning, the digest became a media conglomerate with the most well known magazine brand in America. I was an avid reader of the digest myself for many years in my younger days, and I relied on the digest’s ‘word power’ section to expand & improve my vocabulary. But despite its tremendous growth in revenues and popularity since 1922, Reader’s Digest’s profits started declining and losing money starting 1999. In the last 4 years, because of continuous losses from declining sales and a leveraged buyout of the business for $2.8 billion using $2.2 billion of debt, its interest expense escalated from $48 million in 2006 to $176 million in 2008!
The heavy debt load of $2.2 billion amidst declining revenues and mounting losses was too much for the Digest to withstand. Thus, in August of 2009, Reader’s Digest decided to file for bankruptcy reorganization to get rid of 75% of its massive debt. For the last 6 months, the company has been negotiating with creditors for a Chapter 11 reorganization plan so that it could emerge out of bankruptcy with a lot less debt to ensure its survival. Creditors would end up owning the business by converting debts owed to them into equity in the new entity but stockholders would end up losing most if not all of their shares in the business. The Chapter 11 filing involved only US operations and did not affect any of the Reader’s Digest’s worldwide operations in Canada, Europe, Latin America, Africa, Asia and Australia. The plan requires the senior lender group to provide $150 million of debtor in possession financing to help fund operations during the reorganization and requires senior secured creditors to swap a major portion of its $1.6 billion debt for equity. Initially, the company expected to get reorganized in 90 days, similar to the time it took GM and Chrysler to get out of bankruptcy court. With the recent announcement of the company that it is done with bankruptcy reorganization and exiting bankruptcy court, it actually took 6 months to get the reorganization done. Nevertheless, Reader’s Digest is leaving bankruptcy court with hundreds of millions less of debt than when it knocked on the doors of bankruptcy court with $2.2 billion of debt. If it achieved its plan of reducing debt by 75%, it was able to cancel $1.6 billion of debt, leaving a balance of a little over $550 million to be serviced by the resultant entity. That would bring interest expense to a more manageable amount of $50 million, instead of $176 million in 2008. But even with a lot less debt, the company is still carrying half a billion of debt. Half a billion of debt was too much to handle even for Michael Jackson. Hence, it remains to be seen if the new Reader’s Digest can now become profitable despite the lingering recession and the deteriorating print media business.
Individual debtors must seriously assess their capacity to handle accumulated debt. Large businesses cannot withstand heavy debt loads. Despite billions of revenues, profits are used to pay interest expense from accumulated debt, resulting in business bankruptcy. When this happens, businesses rely on bankruptcy law and bankruptcy courts to protect itself from creditors and to get rid of debt to ensure its survival. Individuals must also rely on bankruptcy law to get rid of debt to become productive again.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published February 27, 2010 in Asian Journal Los Angeles p. C4 )
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