<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1999
REGISTRATION NO. 333-88625
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE READER'S DIGEST ROAD 13-1726769
(State or other jurisdiction of PLEASANTVILLE, NY 10570-7000 (I.R.S. Employer
incorporation or organization) (914) 238-1000 Identification No.)
(Address, including zip code, and
telephone number, including area
code, of registrant's principal
executive offices)
</TABLE>
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CLIFFORD H.R. DUPREE, ESQ.
VICE PRESIDENT, SECRETARY AND
ASSOCIATE GENERAL COUNSEL
THE READER'S DIGEST ASSOCIATION, INC.
READER'S DIGEST ROAD
PLEASANTVILLE, NY 10570
(914) 238-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
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<S> <C> <C>
JEFFREY BAGNER, ESQ. ANDREW B. JANSZKY, ESQ. DONALD B. BRANT, JR., ESQ.
FRIED, FRANK, HARRIS, SHEARMAN & STERLING MILBANK, TWEED,
SHRIVER & JACOBSON 599 LEXINGTON AVENUE HADLEY & MCCLOY LLP
ONE NEW YORK PLAZA NEW YORK, NEW YORK 10022 ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10004-1980 (212) 848-4000 NEW YORK, NEW YORK 10005
(212) 859-8000 (212) 530-5618
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Nonvoting Common Stock,
par value $0.01 per share......... 11,500,000 shares $28.1875 $324,156,250 $90,116
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</TABLE>
(1) Calculated pursuant to Rule 457(c), based on the average of the high and low
prices of the Class A Nonvoting Common Stock reported on the New York Stock
Exchange Composite Tape on October 4, 1999 ($28.1875 per share).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED OCTOBER 28, 1999.
10,000,000 Shares
THE READER'S DIGEST ASSOCIATION, INC.
Class A Nonvoting Common Stock
-------------------------
All of the shares of Class A nonvoting common stock in the offering are
being sold by the selling stockholders identified in this prospectus. Reader's
Digest will not receive any proceeds from the sale of these shares.
The Class A nonvoting common stock is listed on the New York Stock Exchange
under the symbol "RDA." The last reported price for the Class A nonvoting common
stock on October 27, 1999 was $27.5625 per share.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
To the extent that the underwriters sell more than 10,000,000 shares of
Class A nonvoting common stock, the underwriters have the option to purchase up
to an additional 1,500,000 shares from the selling stockholders at the initial
public offering price less the underwriting discount.
-------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO. LAZARD FRERES & CO. LLC
-------------------------
Prospectus dated , 1999.
<PAGE> 3
ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
at the SEC's web site at http://www.sec.gov and at the public reference room of
the New York Stock Exchange, 20 Broad Street, New York, New York.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all the securities offered under this prospectus are
sold. This prospectus is part of the registration statement we filed with the
SEC.
1. Annual Report on Form 10-K for the year ended June 30, 1999;
2. Current Report on Form 8-K dated August 30, 1999;
3. Current Report on Form 8-K dated September 24, 1999;
4. Current Report on Form 8-K dated October 7, 1999;
5. Current Report on Form 8-K dated October 27, 1999; and
6. Current Report on Form 8-K/A dated October 27, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at The Reader's Digest Association, Inc., Reader's Digest Road,
Pleasantville, New York 10570-7000, telephone (914) 238-1000, Attention:
Investor Relations.
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PROSPECTUS SUMMARY
This summary highlights selected information we have included or
incorporated by reference in this prospectus. However, this summary does not
contain all the information that may be important to you. More detailed
information about this offering, our business and our financial and operating
data is contained elsewhere or incorporated by reference in this prospectus. We
encourage you to read this prospectus in its entirety before making an
investment decision.
Unless we indicate otherwise, references in this prospectus to "Reader's
Digest," "we," "us" and "our" are to The Reader's Digest Association, Inc. and
its consolidated subsidiaries.
READER'S DIGEST
We are a preeminent global leader in publishing and direct marketing. Our
flagship publication, Reader's Digest magazine, was first published in 1922.
Today it is the most widely read magazine in the world. Our products, which have
traditionally included magazines, books, recorded music and videos, are
primarily sold through direct mail campaigns. These campaigns are carefully
tested and target specific audiences. Our worldwide customer database includes
over 57 million households in the United States and approximately 49 million
households abroad.
We are in the midst of executing a strategy intended to strengthen our core
businesses and create opportunities for long-term, sustainable growth. To
address a period of declining operating and financial performance, in August
1997 our board of directors asked George V. Grune, a former Chairman and Chief
Executive Officer of Reader's Digest, to reassume that position on an interim
basis. Under Mr. Grune, we deployed a strategy that involved rebuilding a
management team with strong experience in direct mail marketing at Reader's
Digest. Our strategy also involved strengthening our core business by refocusing
on the fundamentals of disciplined direct marketing testing and promotion
techniques, targeted product development and more effective use of our extensive
database of customer information.
After an extensive executive search, in April 1998 Thomas O. Ryder was
elected to succeed Mr. Grune as Chairman and Chief Executive Officer. Under Mr.
Ryder, we developed a strategy that is designed to build on our progress in
re-establishing the fundamental strengths of our businesses. We intend to
implement this strategy in three phases. Phase I of our strategy, which has been
completed, involved reorganizing our business groups, restructuring our
editorial operations and reassigning selected senior executives as part of the
reorganization and restructuring. As part of our efforts in Phase I, we
redirected our resources to place a greater emphasis on our core magazine
businesses around the world. Phase II, which is ongoing, focuses on reducing
costs, re-engineering our operations to make them more streamlined and efficient
and raising capital by selling underproductive businesses and assets and
reducing our regular quarterly dividend. Phase III, which we announced in
February 1999, concentrates on achieving revenue growth via the following
principal initiatives:
- Expanding our presence in market segments that leverage Reader's Digest's
brand trust and customer base, specifically by:
c Emphasizing five key consumer interest areas: home, health, family,
finance and faith; and
c Targeting consumers' life stages from family formation onward, with a
particular focus on consumers over 50;
- Expanding our product offerings beyond publishing in these targeted
consumer interest areas and life stages;
- Continuing geographic expansion, including expanding into new countries
and expanding the products and services we offer in existing markets;
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- Developing new marketing and distribution channels; and
- Integrating the Internet into all of our businesses by:
+ Revitalizing and globalizing our current Web sites;
+ Making strategic investments in existing Web sites that match our
areas of strategic interest;
+ Expanding our existing U.S.-based Web sites internationally; and
+ On a highly selective basis, creating and launching Web sites that
meet identified consumer needs, leverage our corporate assets and
provide us with substantial e-commerce opportunities.
RECENT DEVELOPMENTS
As part of Phase III of our strategy, we have made various investments,
formed a number of alliances and initiated new product and marketing and
distribution channel development activity as follows:
READER'S DIGEST HEALTH WEB SITE ALLIANCE AND INVESTMENT WITH WEBMD
In June 1999, we announced that we formed an alliance with WebMD, Inc. as
the first step in implementing our strategies to expand our business in the
health category and integrate the Internet into our businesses. WebMD is a
leading healthcare Web site for physicians and consumers. It offers a
comprehensive suite of Internet-based services and information for physicians as
well as healthcare information services and online communities for consumers.
The alliance includes the development of a Reader's Digest health Web site
and the exchange of health-related content between that site and the WebMD
consumer site. The Reader's Digest health site is targeted to current Reader's
Digest magazine readers. Because a significant percentage of our estimated 50
million readers in the United States are interested in health issues, about 20%
of the content of Reader's Digest magazine is health-related.
WebMD's position in the Internet health information and services arena will
enable us to move swiftly to establish our online health presence. The Reader's
Digest health Web site is scheduled to launch in the fall of 1999.
The site is expected to meet the fast-growing consumer demand for access to
credible health-related information, products and services. The site is
comprised of the following primary areas: nutrition, women's health, alternative
medicine, healthy aging, medical library and Reader's Digest features. It will
draw content from our health-related editorial products, including Reader's
Digest magazine, New Choices: Living Even Better After 50, Walking and general
books, in addition to WebMD content and tools. The site will also serve as a
platform for health-related e-commerce opportunities that are currently in
development.
As part of our business alliance, we also made a $13 million strategic
equity investment in WebMD. WebMD has reported that it has also forged strategic
partnerships with other investors, including Microsoft Corporation, E.I. duPont
de Nemours and Company, Excite, Inc., Intel Corporation, Covad Communications
Group Inc., Softbank America Inc., Dell Computer Corporation, Yahoo! Inc., CNN
and HealthSouth Corporation. WebMD has announced plans to merge with Healtheon
Corporation to create one of the largest Internet companies in the health
information arena.
The alliance also contemplates that WebMD will provide Reader's Digest
magazine to its physician service subscribers, purchasing at introductory prices
a minimum of 3,000,000 copies over five years. WebMD will also purchase
advertising in our magazines to promote the WebMD
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site. Each issue of the U.S. edition of Reader's Digest magazine will include
WebMD advertorial pages, including an "Ask WebMD" column and a calendar of
online events that will occur on both our health site and the WebMD site.
We and WebMD will cross-promote the sites through the Reader's Digest
family of general and special interest magazines and through WebMD's marketing
relationships and print advertising. There is also a plan to share advertising
revenues on the two sites under specified conditions.
BOOKS ARE FUN ACQUISITION
On October 1, 1999, we acquired Books Are Fun, Ltd. for approximately $400
million in cash. Books Are Fun sells premium-quality books and gift items at
discount prices by display marketing those products on-site at schools and
businesses in all 50 states of the United States and across Canada.
Through approximately 700 independent representatives, Books Are Fun
displays and sells books and gift items to school teachers and school employees
through "book drops" and to corporate employees primarily through "book fairs."
Books Are Fun distributes through approximately 60,000 schools, 12,000
corporations and institutions, 9,000 day care centers and 20,000 small
businesses.
Books Are Fun sold approximately 17 million book and gift items in 1998.
Books Are Fun is the highest volume purchaser of most of the titles it buys from
over 350 publishers. An average purchase of a top title is approximately 120,000
copies. Categories include The New York Times best sellers, cookbooks,
children's books, educational, and illustrated reference works. In 1999, Books
Are Fun began to market non-book items, including gifts, music, and videos.
Buying and test marketing are keys to Books Are Fun's success. Books Are
Fun has good relationships with all major publishers and gift suppliers. All
titles are tested to ensure successful sell-through and control inventory. The
test system involves purchase of small quantities of a title, which are sold in
limited territories. Based on test results, Books Are Fun often buys over
100,000 copies of a title on a non-returnable basis, allowing it to purchase
product at 85% off of the suggested retail price.
Our acquisition of Books Are Fun is consistent with our overall corporate
strategy, and the company closely matches our acquisition criteria. It is a
successful business that we can expand by using our international expertise and
our editorial assets and that can provide us with broader and profitable
distribution channels for our existing products.
We believe that we can work with Books Are Fun to enhance its and our
businesses in six areas:
- Adding magazine subscriptions from our QSP subsidiary to the Books Are
Fun product mix;
- Increasing QSP's penetration, which is currently 20,000 schools compared
with Books Are Fun's 60,000 schools,
- Expanding distribution opportunities for Reader's Digest products,
especially books, music, and video, through Books Are Fun's distribution
infrastructure;
- Re-branding selected Books Are Fun fairs with the Reader's Digest name to
better define their position with consumers;
- Achieving cost savings through consolidating book production; and
- Expanding internationally using Reader's Digest's global infrastructure.
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FINANCIAL SERVICES MARKETING ALLIANCES AND ACQUISITIONS
In August and September 1999, we announced a series of initiatives to
realize our strategy of expanding our presence in the financial services
industry with both publishing and other products and services. These included
the acquisition of Benchmark, Ltd. and marketing alliances with Torchmark
Corporation, American International Group, Inc, and First USA Bank, N.A.
We have established, smaller scale marketing relationships in several
international markets. Additionally, we had a marketing alliance within the U.S.
insurance sector in the 1980's. Each of these limited initiatives was positive
and suggested the potential of a larger, more focused effort. Financial issues
are a frequent topic in Reader's Digest and New Choices: Living Even Better
After 50 magazines, and are the editorial basis for Moneywise magazine.
On August 10, 1999, we announced that we acquired Benchmark, Ltd., a
publisher of four related investment guide publications distributed in Hong
Kong, Taiwan and Singapore. Benchmark provides readers with reports on global
and Asian fund markets, as well as performance analysis of investment funds. The
service also operates as a Web site at www.benchmag.com.
On September 13, 1999, we announced that we formed an exclusive alliance
with Torchmark Corporation. Under this alliance, Torchmark will market life and
health insurance products to our customers in the United States and Canada. The
products will be marketed and sold by Torchmark through direct mail,
telemarketing, the Internet and advertising in our magazines. Torchmark will
underwrite policies and provide customer and claims services, while we will
contribute our brand name, customer lists and direct marketing expertise.
Initial promotion of Torchmark products will occur in the fall of 1999.
Torchmark is a publicly traded insurance and diversified financial services
company that provides individual life and supplemental health insurance,
annuities and related products. Torchmark is known for its direct marketing
expertise, and as the parent company of Globe Life and Accident Insurance
Company, a major advertiser in Reader's Digest magazine.
Also on September 13, 1999, we announced an agreement in principle with
American International Group, Inc. to develop a program under which it will
market a range of life, accident and health and general insurance products and
services to our customers in 26 countries outside the United States and Canada.
AIG member companies will manage the products and provide customer and claims
services and will provide marketing support for all products.
AIG is a leading U.S.-based international insurance organization. Its
member companies write property, casualty, marine, life and financial lines
insurance in approximately 130 countries and jurisdictions.
On September 21, 1999, we announced a five-year agreement with First USA
Bank, a subsidiary of Bank One Corporation, to market Reader's Digest-branded
MasterCard credit cards to Reader's Digest customers. First USA is among the
leading credit card issuers, offering credit cards under the First USA, First
Card and Bank One names and on behalf of more than 2,200 marketing partners.
GIFTS.COM ONLINE GIFT SHOPPING SERVICE
On September 15, 1999, we announced that, together with our Good Catalog
Company subsidiary and StarTek, Inc., we will create gifts.com, an online gift
shopping service. This is a key step in building our Internet strategy by
creating, on a highly selective basis, Web sites that meet identified consumer
needs, leverage our corporate assets, and provide us with a substantial
e-commerce opportunity.
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The site will initially feature 400 different products, including such
leading brands as Escada(R), Laura Ashley(R), Burberrys(R), Lenox(R) and
Nautica(R), as well as non-branded specialty items.* These items have been
carefully selected by gifts.com to ensure quality choices are available to gift
buyers who care about the gifts they give but often do not know what to buy and
do not have the time to shop. Consumer research indicates that this is an
appealing concept to the target market of relatively upscale, online shoppers.
The online gifts market is expected to grow from about $300 million in 1998
to $1.8 billion by 2003, according to Forrester Research, Inc. We believe there
is no dominant player in the online gifts market today.
We will contribute property and equity and debt financing to the venture,
which will be operated by our Good Catalog Company subsidiary. StarTek, Inc., a
leading provider of outsourced order fulfillment and other process services for
e-commerce and high-tech companies, will contribute property, including the
gifts.com domain name, and equity and debt financing for a 19.9% equity interest
in Good Catalog Company. We will own the remaining 80.1% of the equity in Good
Catalog Company. We are currently negotiating additional details of the
arrangement with StarTek. We expect to formally close this transaction on or
about November 1, 1999. We plan to rename Good Catalog Company as Gifts.com,
Inc.
Competitive advantages in the online gifts market include:
- the gifts.com domain name, which we believe will be very strong in this
market;
- the strategic focus on offering "selectivity" in this category with a
relatively limited line of quality gift ideas selected and sourced by our
merchandising experts at Good Catalog Company;
- the availability of several specialized features, including a customized
Gift Finder, which is designed to help narrow gift ideas even further
based on information about the gift recipient, a Gift Calendar, which
will provide e-mail reminders of upcoming gift occasions, and customized
gift e-cards; and
- state of the art customer service and order fulfillment to be provided by
StarTek.
We intend to launch the gifts.com site on November 1, 1999. In advance of
the 1999 holiday gift season, we will initiate a $20 million consumer marketing
campaign in support of the site. This effort will include television, radio,
print, direct mail and online advertising and promotion. Our own media vehicles,
including Reader's Digest magazine, and direct marketing vehicles will play a
prominent role in the media plan.
ALLIANCE WITH BRANDDIRECT MARKETING
On October 19, 1999, we announced that we agreed to acquire an 18% equity
interest in BrandDirect Marketing Inc., an affinity membership-based direct
marketing company, for approximately $50 million. The agreement also permits us
to acquire additional equity in BrandDirect through the exercise of warrants and
other rights. BrandDirect is one of the nation's largest operators of membership
clubs. Membership clubs typically offer consumers sharing a common interest a
wide range of membership benefits, including topical information and
opportunities to purchase various goods and services at significant discounts,
for an annual membership fee. BrandDirect currently operates ten clubs which
include Field & Stream ClubSM, CTW (Children's Television Network) Kids ClubSM,
IBM Small Business SolutionsSM and Arthur Frommer Budget TravelSM.
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* Escada(R) is a registered trademark of Escada Ag, Laura Ashley(R) is a
registered trademark of Laura Ashley Limited, Burberrys(R) is a registered
trademark of Burberrys Limited, Lenox(R) is a registered trademark of Norfolk
Investments, Inc., and Nautica(R) is a registered trademark of Nautica
Apparel, Inc.
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We and BrandDirect intend to develop and market Reader's Digest-branded
membership clubs. These clubs are expected to focus on our five key consumer
interest areas: home, health, family, finance and faith. The clubs, which will
be marketed through direct mail, telemarketing and the Internet, will provide a
new marketing and distribution channel for our current products, including
books, magazines and music, as well as offer us opportunities to expand into new
product lines. We believe that BrandDirect's telemarketing and club-building
expertise combined with our worldwide infrastructure and customer database
skills will provide a strong foundation for a successful membership club
business both in the United States and through international expansion.
CORE BUSINESS PRODUCT AND CHANNEL DEVELOPMENT INITIATIVES
Throughout our implementation of our Phase III growth initiatives, we have
invested and we expect to continue to invest in the development of products and
channels to support internal growth opportunities in our core businesses. For
example, in our U.S. Magazines business segment, we are continuing to redesign
the layout of Reader's Digest magazine to attract more advertising and a broader
readership. We have also devoted more resources to direct marketing that does
not include a sweepstakes feature and made a major commitment to direct response
television. Other projects include the development of new book series for our
Global Books and Home Entertainment business segment. These series are expected
to include romances, mysteries, inspirational stories and biographies. To
diversify our distribution channels for our Global Books and Home Entertainment
segment we are building on our telemarketing efforts, which we believe will
become a significantly larger part of our promotion strategy over the next
several years, and testing direct response television as a marketing option.
We also expect to continue to target acquisitions and form alliances that
leverage our core strengths.
FIRST QUARTER RESULTS
On October 27, 1999, we announced results of operations for the first
quarter of fiscal 2000.
Our revenues for the first quarter of 2000 decreased by 10% to $519.2
million, compared with $579.7 million for the first quarter of 1999. Excluding
the adverse effect of changes in foreign currency exchange rates, revenues
decreased 8%. The decrease in revenues was principally the result of our planned
strategic reductions in unprofitable activities.
Our operating profit increased by 134% to $38.8 million for the first
quarter of 2000, compared with $16.6 million for the prior year. This increase
in operating profit was due to several factors. We had lower product and
promotion costs as a result of our strategic reduction in the number of mailings
and mail quantities within mailings. Planned lower mail quantities resulted in
improved customer response rates in most developed markets around the world,
especially in the United States. Overhead costs were lower primarily as a result
of initiatives to re-engineer critical processes and to eliminate or sell
marginal businesses.
Our net income for the first quarter of 2000 increased to $28.6 million
from $2.5 million for the first quarter of 1999, or to $0.26 from $0.02 per
basic and diluted earnings per share. The first quarter of 2000 net income
reflects lower foreign exchange translation losses, principally related to
business activities in Russia, and a gain from the sale of American Health
magazine. Net income for the first quarter of 1999 does not give effect to a
$40.5 million gain before taxes, or $0.24 per share, from a change in accounting
principles related to the calculation of the market-related value of pension
plan assets.
------------------------
We are a Delaware corporation, originally incorporated in New York in 1926
and then reincorporated in Delaware in 1951. Our principal executive offices are
located at Reader's Digest Road, Pleasantville, New York 10570-7000, and our
telephone number is (914) 238-1000. We maintain a Web site at
http://www.readersdigest.com. Information contained at that Web site is not a
part of this prospectus.
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THE OFFERING
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Class A nonvoting common stock offered by
the selling stockholders................ 10,000,000 shares
Class A nonvoting common stock outstanding
before and after the offering........... 94,012,532 shares(1)(2)
Class B voting common stock outstanding
before and after the offering........... 12,432,164 shares(2)(3)
Use of proceeds........................... We will not receive any proceeds from this offering.
New York Stock Exchange symbol............ "RDA"
</TABLE>
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(1) Based on 94,012,532 shares of our Class A nonvoting common stock outstanding
as of September 30, 1999. Does not include 11,093,729 shares of our Class A
nonvoting common stock issuable upon the exercise of outstanding employee
stock options as of that date.
(2) Gives effect to the exchange by the DeWitt Wallace-Reader's Digest Fund,
Inc. and the Lila Wallace-Reader's Digest Fund, Inc. on September 24, 1999
of a total of 9,283,893 shares of our Class B voting common stock for a
total of 8,030,567 shares of our Class A nonvoting common stock.
(3) Based on 12,432,164 shares of our Class B voting common stock outstanding as
of September 30, 1999.
Unless we otherwise specifically indicate, the information in this
prospectus assumes that the underwriters will not exercise their overallotment
option.
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SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
You should read the following summary financial information together with
our consolidated financial statements and accompanying notes, which are
incorporated by reference into this prospectus. You should also read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which appears later in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
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1995 1996 1997 1998 1999
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INCOME STATEMENT DATA:
Revenues.......................... $3,120.1 $3,153.2 $2,896.5 $2,691.2 $2,532.2
Operating profit.................. 391.9 109.3 192.8 30.2 129.1
Income before provision for income
taxes........................... 422.5 137.7 210.2 41.5 211.7
Net income........................ 264.0 80.6 133.5 17.9 151.9
Earnings per share:
Basic........................... $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.40
Diluted......................... 2.35 0.73 1.24 0.16 1.39
Adjusted(1)..................... 2.35 2.30 1.45 0.64 0.96
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, short-
term investments and marketable
securities...................... $ 532.1 $ 374.2 $ 102.4 $ 126.1 $ 437.2
Total assets...................... 1,958.7 1,904.1 1,643.8 1,564.0 1,710.5
Long-term notes payable........... 1.7 17.2 1.7 1.7 2.2
Stockholders' equity.............. 640.8 478.9 346.0 258.6 381.5
</TABLE>
- ---------------
(1) Excludes the effect of other operating items, gains on the sale of certain
assets and businesses and the cumulative effect of change in accounting
principles.
10
<PAGE> 12
REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States........................................... $1,293.9 $1,238.9 $1,159.0
International........................................... 1,612.0 1,459.4 1,378.3
Inter-area.............................................. (9.4) (7.1) (5.1)
-------- -------- --------
$2,896.5 $2,691.2 $2,532.2
======== ======== ========
</TABLE>
REVENUES AND OPERATING PROFIT BY OPERATING SEGMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Global Books and Home Entertainment..................... $1,891.5 $1,680.2 $1,544.3
U.S. Magazines.......................................... 625.5 656.3 664.3
International Magazines................................. 379.5 354.7 323.6
-------- -------- --------
$2,896.5 $2,691.2 $2,532.2
======== ======== ========
Operating profit (loss):
Global Books and Home Entertainment..................... $ 161.2 $ 50.0 $ 80.8
U.S. Magazines.......................................... 67.1 64.9 101.7
International Magazines................................. (0.5) (14.7) (15.5)
-------- -------- --------
$ 227.8 $ 100.2 $ 167.0
======== ======== ========
</TABLE>
11
<PAGE> 13
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our Class A
nonvoting common stock in this offering.
PRICE RANGE OF CLASS A NONVOTING COMMON STOCK
AND DIVIDEND INFORMATION
Our Class A nonvoting common stock is traded on the New York Stock Exchange
under the symbol "RDA." The table below shows the high and low sales prices for
shares of our Class A nonvoting common stock on the New York Stock Exchange for
the periods indicated.
<TABLE>
<CAPTION>
DIVIDEND
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
Fiscal Year ended June 30, 1998
First Quarter................................. $ 30.5625 $ 24.50 $0.225
Second Quarter................................ 31.50 20.875 0.225
Third Quarter................................. 27.50 22.375 0.225
Fourth Quarter................................ 29.1875 24.50 0.225
Fiscal Year ended June 30, 1999
First Quarter................................. $ 29.00 $ 17.00 $0.225
Second Quarter................................ 26.1275 16.25 0.05
Third Quarter................................. 36.25 24.75 0.05
Fourth Quarter................................ 40.9375 28.1275 0.05
Fiscal Year ending June 30, 2000
First Quarter................................. $ 29.6875 $ 29.125 $ 0.05
Second Quarter (through October 27, 1999)..... 30.625 26.75 $
--
</TABLE>
On October 27, 1999, the last sale price of our Class A nonvoting common
stock as reported on the New York Stock Exchange Composite Tape was $27.5625.
Our Class B voting common stock, of which there were 12,432,164 shares
outstanding as of September 30, 1999, also trades on the New York Stock
Exchange. Its trading symbol is "RDB." On October 27, 1999, the last sale price
of our Class B voting common stock as reported on the New York Stock Exchange
Composite Tape was $25.00.
The trading prices of our common stock are influenced by our results of
operations, financial condition, cash requirements and future prospects and by
general economic, financial and other factors and market conditions. We cannot
assure you that the prices of our Class A nonvoting common stock will fall
within the ranges shown in the table above in the future.
We reduced the quarterly dividend on our common stock from $0.45 to $0.225,
effective the first quarter of fiscal 1998. We further reduced our quarterly
dividend from $0.225 to $0.05, effective the second quarter of fiscal 1999. Our
board of directors will determine the payment and amount of any future dividends
on the basis of our earnings, capital requirements, financial condition and
other relevant factors.
12
<PAGE> 14
CAPITALIZATION
(IN MILLIONS)
The following table sets forth our condensed consolidated capitalization as
of June 30, 1999.*
<TABLE>
<CAPTION>
JUNE 30,
1999
--------
<S> <C>
Cash and cash equivalents................................... $ 413.4
DEBT:
Current debt.............................................. 0.4
Long-term debt............................................ 2.2
-------
Total debt........................................ $ 2.6
STOCKHOLDERS' EQUITY:
Capital stock............................................. $ 24.8
Paid-in capital........................................... 146.2
Retained earnings......................................... 955.4
Accumulated other comprehensive loss...................... (56.6)
Treasury stock, at cost................................... (688.3)
-------
Total stockholders' equity........................ $ 381.5
-------
Total capitalization........................................ $ 384.1
=======
</TABLE>
- ---------------
* On October 1, 1999, we acquired Books Are Fun, Ltd. for approximately $400
million in cash.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
The following selected financial information should be read together with
our consolidated financial statements and accompanying notes, which are
incorporated by reference into this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing later in
this prospectus. The selected financial data for the fiscal years ended June 30,
1995, 1996, 1997, 1998 and 1999 are derived from our consolidated financial
statements, which have been audited by KPMG LLP, independent auditors.
Historical results are not necessarily indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................................ $3,120.1 $3,153.2 $2,896.5 $2,691.2 $2,532.2
Product, distribution and editorial expenses.... 1,101.3 1,134.9 1,084.2 1,046.6 963.5
Promotion, marketing and administrative
expenses...................................... 1,626.9 1,674.0 1,584.5 1,544.4 1,401.7
Other operating items........................... -- 235.0 35.0 70.0 37.9
Operating profit................................ 391.9 109.3 192.8 30.2 129.1
Other income, net............................... 30.6 28.4 17.4 11.3 82.6
Income before provision for income taxes........ 422.5 137.7 210.2 41.5 211.7
Provision for income taxes...................... 158.5 57.1 76.7 23.6 85.1
Cumulative effect of change in accounting
principles for pension assets, net of tax of
$15.2......................................... -- -- -- -- 25.3
Net income...................................... 264.0 80.6 133.5 17.9 151.9
Basic and diluted earnings per share:
Basic earnings per share:
Weighted-average common shares outstanding.... 112.0 107.9 106.7 106.5 107.3
Before cumulative effect of change in
accounting principles....................... $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.16
Cumulative effect of change in accounting
principles.................................. -- -- -- -- 0.24
Basic earnings per share...................... 2.35 0.73 1.24 0.16 1.40
Diluted earnings per share:
Adjusted weighted-average common shares
outstanding................................. 112.0 107.9 106.7 106.7 108.0
Before cumulative effect of change in
accounting principles....................... $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.15
Cumulative effect of change in accounting
principles.................................. -- -- -- -- 0.24
Diluted earnings per share.................... 2.35 0.73 1.24 0.16 1.39
Dividends per common share...................... 1.55 1.75 1.80 0.90 0.375
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, short-term
investments and marketable securities......... $ 532.1 $ 374.2 $ 102.4 $ 126.1 $ 437.2
Total assets.................................... 1,958.7 1,904.1 1,643.8 1,564.0 1,710.5
Long-term notes payable......................... 1.7 17.2 1.7 1.7 2.2
Stockholders' equity............................ 640.8 478.9 346.0 258.6 381.5
</TABLE>
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our fiscal year ends June 30. All references to 1999, 1998 and 1997 in this
section are to fiscal 1999, fiscal 1998 and fiscal 1997, respectively. All
dollar amounts in this section are in millions of dollars, except per share
data. To enable you to analyze our results on a comparable basis, the discussion
below on operating profit excludes the effects of our 1999 second and fourth
quarter operating charges aggregating $37.9, our 1998 first quarter operating
charges of $70.0 and our 1997 fourth quarter operating charges of $35.0.
RESULTS OF OPERATIONS: COMPANY-WIDE
During 1999, we adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Our results of operations have been restated for prior periods to conform to the
operating segments described below:
- Global Books and Home Entertainment publishes and markets Condensed
Books, series and general books, as well as music and video products.
- U.S. Magazines publishes Reader's Digest magazine and several special
interest magazines in the United States. These magazines and other
products are sold through direct and retail marketing, including the
activities of QSP, Inc. (QSP).
- International Magazines publishes Reader's Digest magazine in numerous
editions and languages outside the United States.
The discussion of operating profit excludes the effect of other operating
items of $37.9 in 1999, $70.0 in 1998 and $35.0 in 1997.
Other operating items for 1999 include costs associated with cost-reduction
and reengineering activities, including employee retirement and severance
benefits, discontinuation of certain unproductive businesses and outsourcing
initiatives. We also recorded impairment losses as a result of reengineering
efforts, relating principally to computer hardware and software that will no
longer be used in our operations. In addition, we adjusted our remaining accrual
balances from costs originally recorded in prior years and from estimates for
certain claims against us.
Other operating items in prior years relate to costs for initiatives that
are substantially complete. These costs primarily relate to workforce
reductions, the discontinuation of certain businesses, and the realignment of
business processes and operations.
15
<PAGE> 17
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Global Books and Home Entertainment............. $1,544.3 $1,680.2 $1,891.5
U.S. Magazines.................................. 664.3 656.3 625.5
International Magazines......................... 323.6 354.7 379.5
-------- -------- --------
Total revenues.................................... $2,532.2 $2,691.2 $2,896.5
-------- -------- --------
Operating profit:
Global Books and Home Entertainment............. $ 80.8 $ 50.0 $ 161.2
U.S. Magazines.................................. 101.7 64.9 67.1
International Magazines......................... (15.5) (14.7) (0.5)
-------- -------- --------
Segment operating profit.......................... 167.0 100.2 227.8
Other operating items............................. (37.9) (70.0) (35.0)
-------- -------- --------
Total operating profit............................ $ 129.1 $ 30.2 $ 192.8
-------- -------- --------
</TABLE>
REVENUES AND OPERATING PROFIT
1999 V. 1998
Revenues decreased 6% in 1999 to $2,532.2, compared with $2,691.2 in 1998.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues decreased 5%. The decline in revenues was largely attributable to lower
volumes in Global Books and Home Entertainment. The decrease in Global Books and
Home Entertainment largely resulted from a strategic reduction in mail
quantities, promotional mailings and marginally profitable activities. These
reductions were principally among general books products and, to a lesser
extent, music products in the United States. Modest growth in U.S. Magazines
principally resulted from higher advertising revenues, revenue growth at QSP and
the acquisition of American Woodworker, partially offset by a decrease in
circulation revenues from a strategic reduction in the circulation rate base of
Reader's Digest magazine. Revenues from International Magazines declined
principally as a result of reduced circulation, particularly in the United
Kingdom and Germany, and in Russia, where operations were scaled back in
response to the Russian economic crisis. The declines in International Magazines
revenues were partially offset by subscription price increases primarily in the
United Kingdom, and revenue growth in Brazil.
Operating profit increased 67% in 1999 to $167.0, compared with $100.2 in
1998. Operating profit increased significantly in the Global Books and Home
Entertainment and U.S. Magazines segments. The primary reason for the increase
was a strategic reduction in the number of mailings and mail quantities within
each mailing, which reduced product, promotion, and related product development
and overhead costs. Additionally, overhead costs were lower, primarily as a
result of reengineering activities and a reduction in costs for employee
benefits. Operating profit also benefited from the termination of certain
strategic alliances.
1998 V. 1997
Revenues decreased 7% in 1998 to $2,691.2, compared with $2,896.5 in 1997.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues decreased 3%. This decline primarily resulted from lower unit sales,
lower-priced product offerings and sales of a lower-priced mix of Global 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. Revenues declined principally in the
United States, Germany and Canada. This decrease was largely offset by growth in
developing markets in Eastern Europe and Latin America.
16
<PAGE> 18
Operating profit decreased 56% in 1998 to $100.2, compared with $227.8 in
1997. Operating results reflected lower revenues for Global Books and Home
Entertainment products in most developed markets, including the United States
and Germany, combined with proportionately higher product costs and promotional
spending. These declines were slightly offset by the benefits of cost-reduction
initiatives in most developed markets.
OTHER INCOME, NET
1999 V. 1998
Other income, net increased in 1999 to $82.6, compared with $11.3 in 1998.
The increase consisted primarily of gains from the sales of important works from
our fine art collection and certain businesses. These gains were partially
offset by losses from the sales of publishing operations in South Africa and
certain international real estate holdings.
1998 V. 1997
Other income, net decreased in 1998 to $11.3, compared with $17.4 in 1997.
This decrease was primarily because of lower gains on foreign exchange
transactions and hedging activity, lower interest income and higher interest
expense. These declines were partially offset by gains from asset sales.
INCOME TAXES
1999 V. 1998
The reported tax rate for 1999 was 40.2%, compared with a reported rate of
56.9% for 1998. Excluding the effect of other operating items, the overall
effective tax rate was 37.9% in 1999 and 37.5% in 1998.
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 other operating items, the overall
effective tax rate was 37.5% in 1998 and 36.5% in 1997. The higher effective tax
rate in 1998 was primarily because of fewer foreign tax credits.
CHANGE IN ACCOUNTING FOR PENSION ASSETS
Effective July 1, 1998, we changed our method for calculating the
market-related value of pension plan assets. This method is used in determining
the return-on-asset component of annual pension expense and the cumulative net
unrecognized gain (loss) subject to amortization. We believe that the new method
is more widely used in practice and is preferable because it results in pension
plan asset values that more closely approximate fair value, while still
mitigating the effect of annual market value fluctuations. In addition, the new
method facilitates the global management of pension plans, as it results in a
consistent methodology for all plans.
This change resulted in a non-cash benefit in 1999 of $40.5 ($25.3 after
tax, or $0.24 per share). This benefit represents the cumulative effect of the
change related to years prior to 1999. In addition, we realized $19.0 ($11.9
after tax, or $0.11 per share) in lower pension expense in 1999, compared with
the previous accounting method. Had this change been applied retroactively,
pension expense would have been reduced by $15.8 and $12.5 ($9.9 and $7.8 after
tax, or $0.09 and $0.07 per share) in 1998 and 1997, respectively.
17
<PAGE> 19
NET INCOME
1999 V. 1998
We reported net income in 1999 of $151.9, or $1.40 for basic earnings per
share and $1.39 for diluted earnings per share. In 1998, we reported net income
of $17.9, or $0.16 for basic and diluted earnings per share. Excluding the
effect of other operating items ($0.26 in 1999 and $0.49 in 1998), gains on
sales of certain assets and other businesses ($0.45), and the cumulative effect
of change in accounting principles ($0.24), basic and diluted earnings per share
increased 50% to $0.96 in 1999, compared with $0.64 in 1998.
1998 V. 1997
We 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 other
operating items, basic and diluted earnings per share decreased 56% to $0.64 in
1998, compared with $1.45 in 1997.
RESULTS OF OPERATIONS: OPERATING SEGMENTS
GLOBAL BOOKS AND HOME ENTERTAINMENT
1999 V. 1998
Revenues for Global Books and Home Entertainment decreased 8% in 1999 to
$1,544.3, compared with $1,680.2 in 1998. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 7%. This decrease
was primarily attributable to a decline in revenues in the United States, Russia
and the United Kingdom, offset by growth in Germany, France and Brazil. The
decrease in the United States was primarily attributable to the strategic
reduction of the number of mailings to marginal customers, principally for
general books and music products. These declines in the United States were
partially offset by sales of a higher-priced mix of products and the acquisition
of Good Catalog Company in October 1998. In Russia, the economic crisis led us
to cease most bulk mailing activity. The decline in the United Kingdom was
driven by the elimination of an unprofitable merchandise catalog business and
video series products, along with reduced mailing activity for music products.
Germany experienced an increase in responses to mailings as a result of
strong product offerings. In France, increased revenues were primarily a result
of a higher-priced mix of general books products and increased unit sales of
music products. Increased revenues in Brazil primarily reflected increased sales
of music products and revenue growth of Condensed Books, which was launched in
1998.
Operating profit for Global Books and Home Entertainment increased 62% in
1999 to $80.8, compared with $50.0 in 1998. The increase was primarily a result
of improved profitability in the United States, Germany and the United Kingdom,
offset by operating losses in Russia. Within the United States, operating profit
improved as a result of significant reductions in promotion and overhead costs.
In Germany, significantly improved profits were the result of strong customer
response rates to product offerings. In the United Kingdom, growth in operating
profit was realized from promotion cost reductions in general books, the
elimination of unprofitable product lines, cost savings from fewer mailings and
reduced quantities within each mailing. These improvements were partially offset
by weaker performance in Russia as a result of the economic crisis, which led to
substantial losses on mailings and higher inventory reserves.
1998 V. 1997
Revenues for Global Books and Home Entertainment decreased 11% in 1998 to
$1,680.2, compared with $1,891.5 in 1997. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 6%. This decrease
was principally attributable to lower revenues in developed countries, including
the United States. These reductions were predomi-
18
<PAGE> 20
nantly a result of significantly lower unit sales in series books, Condensed
Books and general books and, to a lesser extent, lower-priced product offerings,
principally in music and video products.
The decline in series books and Condensed Books revenues was caused by
fewer shipments from reduced mail quantities and, in developed markets, fewer
profitably promotable customers and lower customer response to promotional
mailings. In addition, revenues declined in the United States because of fewer
Condensed Books shipments, a reduced number of series mailings and the scaling
back of a book series.
Declines in general books revenues occurred in most developed countries,
including the United States. The substantial decrease in general books sales in
the United States was primarily a result of lower customer response rates to
promotional mailings and lower mail quantities in 1998. This was offset by
growth in Eastern Europe and Latin America, principally in Russia and Brazil.
Operating profit for Global Books and Home Entertainment decreased 69% in
1998 to $50.0, compared with $161.2 in 1997. Operating results were affected by
lower revenues and higher product costs, in part because of higher inventory
reserve levels in the United States and proportionately higher promotional
spending.
U.S. MAGAZINES
1999 V. 1998
Revenues for U.S. Magazines increased by 1% in 1999 to $664.3, compared
with $656.3 in 1998. The increase in revenues was attributable to an increase in
Reader's Digest magazine advertising revenue from more advertising pages sold,
although at lower rates per page, the acquisition of American Woodworker in the
second quarter of 1999, and an increase in the sales of magazine subscriptions
and music products of QSP. Partially offsetting these increases in revenues was
lower circulation for Reader's Digest magazine because of the strategic
reduction of the magazine's circulation rate base.
Operating profit increased 57% in 1999 to $101.7, compared with $64.9 in
1998. The increase principally resulted from lower overhead costs in 1999,
improved margins at QSP, and lower promotion and production spending for
Reader's Digest magazine because of cost-reduction initiatives. The increase in
operating profit was partially offset by higher promotional spending associated
with our special interest magazines.
1998 V. 1997
Revenues for U.S. Magazines increased 5% in 1998 to $656.3, compared with
$625.5 in 1997. The increase in revenues was attributable to the acquisition of
Walking magazine in the third quarter of 1997, the launch of the Reader's Digest
Large Edition for Easier Reading in the first quarter of 1998, higher
circulation revenues for Reader's Digest magazine and growth in subscription
sales of QSP. These increases were slightly offset by lower advertising revenues
for Reader's Digest magazine caused by a decline in the number of advertising
pages sold.
Operating profit for U.S. Magazines decreased 3% in 1998 to $64.9, compared
with $67.1 in 1997. This decrease was the result of increased promotional
spending associated with Walking and Reader's Digest Large Edition for Easier
Reading and significantly higher promotional spending to acquire and renew
subscribers. These decreases in operating profit were partially offset by the
benefits of cost-reduction initiatives.
19
<PAGE> 21
INTERNATIONAL MAGAZINES
1999 V. 1998
Revenues for International Magazines decreased 9% in 1999 to $323.6,
compared with $354.7 in 1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 6%. Circulation levels for Reader's
Digest magazine were reduced in most markets, particularly in the United
Kingdom. We also reduced the publication frequency of the Russian edition from
twelve to six issues per year in response to the Russian economic crisis. These
actions were partially offset by subscription price increases in most markets.
Advertising revenues declined in most markets primarily as a result of fewer
pages sold at a lower rate per page. Advertising revenues decreased principally
as a result of adverse market conditions in Asia and Canada and circulation
rate-base-related reductions in Italy and The Netherlands.
Operating loss for International Magazines increased 5% in 1999 to ($15.5),
compared with ($14.7) in 1998 principally as a result of lower revenues,
partially offset by reduced product and promotion costs.
1998 V. 1997
Revenues for International Magazines decreased 7% in 1998 to $354.7,
compared with $379.5 in 1997. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues increased 1%. Increased circulation revenues
from developing markets, primarily Russia and Brazil, were partially offset by
circulation declines in several major markets, particularly Germany.
Operating loss for International Magazines increased in 1998 to ($14.7),
compared with ($0.5) in 1997. The increase reflected significantly higher
promotional spending incurred to maintain the circulation rate base in major
markets. The increase in promotional spending was partially offset by
cost-reduction initiatives in most markets.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated statement of cash flows for the year ended June 30, 1999
is summarized below:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Net change in cash due to:
Operating activities........................................ $222.5
Investing activities........................................ 114.6
Financing activities........................................ (36.4)
Effect of exchange rate changes on cash and cash
equivalents............................................... (10.1)
------
Net change in cash and cash equivalents..................... $290.6
------
</TABLE>
Cash provided by operations increased significantly in 1999. This increase
was principally as a result of growth in net income and improvement in working
capital.
Investment activities included proceeds from the sale of property, plant
and equipment of $193.0, consisting principally of our operating facilities in
the United Kingdom and important works from our fine art collection. In
addition, we realized net proceeds from other long-term investments of $14.6.
Partially offsetting these amounts were the acquisitions of Good Catalog Company
and American Woodworker for a total of $32.7, the purchase of investments of
$35.8 and capital expenditures of $26.3, primarily relating to information
technology.
Financing activities primarily included dividend payments of $41.5 in 1999,
compared with $97.1 in 1998. During 1999, we reduced our quarterly dividend on
common stock from $0.225 to
20
<PAGE> 22
$0.05 per share. This resulted in a 58% reduction in the full-year dividend
payment for 1999 to $0.375 per share, compared with $0.90 per share in 1998.
We are a party to a Competitive Advance and Revolving Credit Facility
Agreement, amended as of September 2, 1999, with a syndicate of domestic and
foreign banks. The Credit Agreement, which expires on October 31, 2001, permits
competitive advance and revolving credit borrowings of up to $300.0 by us and
our designated subsidiaries. Interest rates are based on several pricing options
that can vary based upon our operating results. 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 the incurrence of debt, liens and guarantees of indebtedness. We
must also comply with certain financial covenants. Prior to the amendment of the
Credit Agreement on September 2, 1999, these covenants included a covenant to
maintain a minimum level of consolidated tangible net worth. The amendment
provided borrowing flexibility by replacing this covenant with covenants to
maintain minimum levels of consolidated assets, net worth and leverage. At June
30, 1999, there were no borrowings outstanding under the Credit Agreement and we
were in compliance with all covenants.
Various of our international subsidiaries have available lines of credit
totaling $60.0. At June 30, 1999, no amounts were outstanding under these lines
of credit.
We believe that our liquidity, capital resources, cash flow and borrowing
capacity are sufficient to fund normal working capital requirements, capital
expenditures, the payment of dividends, Year 2000 remediation costs and the
implementation of our strategic growth initiatives.
CURRENCY RISK MANAGEMENT
In the normal course of business, we are exposed to the effect of foreign
exchange rate fluctuations on the United States dollar value of our foreign
subsidiaries' results of operations and financial condition. We purchase foreign
currency option and forward contracts to minimize the effect of fluctuating
foreign currency exchange rates on our earnings and specifically identifiable
anticipated transactions. In addition, we enter into forward contracts to
minimize the effect of fluctuating foreign currency exchange rates on certain
foreign currency denominated assets and liabilities.
At June 30, 1999, our primary foreign currency market exposures included
the euro and the British pound. We estimated that the results of a uniform 10%
weakening in the value of the United States dollar relative to the currencies in
which the options and forwards are denominated, with all other variables held
constant, would result in a net decrease in the fair value of these instruments
of approximately $9.2. 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 United
States dollar. Changes in exchange rates not only affect the dollar value of the
fair value, but also impact the underlying foreign subsidiaries' income. Our
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 Note 1 and Note 5 in Notes to our Consolidated Financial Statements
incorporated by reference in this prospectus.
YEAR 2000 READINESS
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs that 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 the years 1900 and
2000 and programs that perform arithmetic operations, comparisons or sorting of
date fields may begin yielding incorrect results. This could potentially cause
system failures or miscalculations that could disrupt operations.
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<PAGE> 23
STATE OF READINESS
Our remediation plan for our Year 2000 issue is currently under way and
involves three overlapping phases:
1) Inventory -- Creation of an inventory of three functional areas:
applications and information technology (IT) equipment, non-information
technology (non-IT) embedded systems and vendor relationships. All
locations have fully completed the inventory phase.
2) Analysis -- 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. All locations
have fully completed the analysis phase.
3) Implementation -- Execution of the implementation plan for all
applicable hardware and software, interfaces and systems. This involves
testing the changes, beginning to utilize the changed procedures in
actual operations, testing in a Year 2000-simulated environment and
vendor interface testing.
The implementation phase, including testing for certain critical
applications, has been substantially completed in most locations for
applications, IT equipment and non-IT embedded systems. We anticipate
substantial completion of the implementation phase for all locations by October
1999.
Our remediation plan for our Year 2000 issue is an ongoing process and
estimated completion dates are subject to change.
RISK OF THE YEAR 2000 ISSUE
At this time, we believe that our systems will be Year 2000 compliant in a
timely manner for several reasons:
- Most significant marketing and fulfillment systems are already compliant.
- We extensively utilize certain shared applications that have been or will
be remediated once and then deployed to all appropriate locations.
- Comprehensive testing of all critical systems is conducted in a simulated
Year 2000 environment.
- Critical fulfillment systems in the United States and several developed
international locations 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 does not require separate attention.
We believe that the area of greatest risk of the Year 2000 issue relates to
significant suppliers failing to remediate their Year 2000 issues in a timely
manner. We have relationships with certain significant suppliers in most of the
locations in which we operate. These relationships may be material to some local
operations and, in the aggregate, may be material to us. We rely on suppliers to
deliver a broad range of goods and services worldwide. These include book and
magazine printing services, suppliers of promotional materials and paper,
warehouse facilities, lettershops that assemble promotional mailings, customer
service facilities, postal delivery services, banking services,
telecommunications and electricity providers. We have conducted formal
communications with our significant suppliers in all locations to determine the
extent to which we 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. We are
monitoring our suppliers' progress toward implementing Year 2000 corrective
procedures. If a number of significant suppliers are not Year 2000 compliant,
this could have a material adverse effect on our results of operations,
financial position or cash flow.
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<PAGE> 24
CONTINGENCY PLANS
We are in the process of developing our country-by-country contingency
plans. Contingency plans are expected to be substantially completed by October
1999, with subsequent revisions being made, as needed, for the remainder of the
year.
To mitigate the effects of our or our significant suppliers' potential
failure to remediate the Year 2000 issue in a timely manner, we will 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 us 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
our results of operations, financial position or cash flow.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The total cost of our remediation plan is estimated at approximately $15.0
to $18.0 and is being funded through operating cash flows. To manage the cash
flow effects of these incremental costs, we have deferred certain IT development
activities and system enhancements. Of the total cost, approximately $2.0 is
attributable to new hardware and software that will be capitalized. The
remainder will be expensed as incurred. To date, approximately $12.0 of the
total cost of the remediation plan has been spent, of which approximately $1.5
was capitalized.
IMPACT OF THE EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
(legacy currencies) and a single currency called the euro. The legacy currencies
are scheduled to remain legal tender as denominations of the euro during the
transition period from January 1, 1999 to December 31, 2001. Beginning January
1, 2002, euro-denominated bills and coins will be introduced and by July 1,
2002, legacy currencies will no longer be legal tender.
We performed an internal analysis regarding the business and systems issues
related to the euro conversion and has developed 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, our operations in
markets that have adopted the euro are able to accept payments and pay suppliers
in euros, and are able to indicate the euro equivalent of pricing on invoices.
During the transition period, we will be monitoring customer and competitor
reaction to the euro and will update the strategic plan as needed.
During the transition period, we believe that the conversion to the euro
will not have a significant impact on the marketing strategy for our European
operations. The euro is not expected to have a significant competitive impact,
including the resulting need to synchronize prices between markets, primarily
because the editorial content of our publishing products varies. In addition,
products are published in local languages and are sold principally through
direct mail rather than retail channels. These factors result in products that
tend to be unique to each market and do not easily lend themselves to price
comparisons across borders. The estimated costs to convert all affected systems
to the euro are not expected to have a material adverse effect on our results of
operations, financial position or cash flow.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for fiscal years beginning after June 15, 2000,
will require us to recognize all derivatives on the
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<PAGE> 25
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through earnings. If the derivative is an effective hedge, changes in
its fair value will be offset against the change in the fair value of the hedged
item in either other comprehensive income or earnings. The ineffective portion
of a derivative classified as a hedge will be immediately recognized in
earnings. We are required to adopt the new statement effective July 1, 2000, and
have not yet determined the effect SFAS No. 133 will have on our results of
operations and financial position. This statement is not required to be applied
retroactively to financial statements of prior periods.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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, will require us to capitalize certain internal-use
software costs once certain criteria are met. This statement is not expected to
have a material impact on our results of operations, financial position or cash
flow.
CAUTIONARY STATEMENT
This prospectus includes "forward-looking statements" within the meaning of
the U.S. federal securities laws. Forward-looking statements include any
statements that address future results or occurrences. These forward-looking
statements inherently involve risks and uncertainties that could cause actual
future results and occurrences to differ materially from the forward-looking
statements. Some of these risks and uncertainties include factors relating to:
- the effect of potentially more restrictive privacy and other governmental
regulation relating to our 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 our 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 acquisitions, strategic
alliances and joint ventures;
- the ability to integrate newly acquired and newly formed businesses
successfully;
- the strength of relationships of newly acquired and newly formed
businesses with their employees, suppliers and customers;
- the accuracy of the basis of forecasts relating to newly acquired and
newly formed businesses;
- the ability to contain and reduce costs, especially through global
efficiencies;
- the cost and effectiveness of reengineering of business processes and
operations;
- the accuracy of management's assessment of the current status of our
business;
- the evolution of our organizational and structural capabilities;
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<PAGE> 26
- our ability to respond to competitive pressures within and outside the
direct marketing industry, including the Internet;
- 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.
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<PAGE> 27
BUSINESS
We are a preeminent global leader in publishing and direct marketing. We
create and deliver products that inform, enrich, entertain and inspire. These
products have traditionally included magazines, books, recorded music
collections and videos.
We are best known for publishing our flagship Reader's Digest magazine
which was founded by DeWitt and Lila Acheson Wallace in 1922. Today, Reader's
Digest has a worldwide circulation of about 25 million and over 100 million
readers each month. Reader's Digest is published in 48 editions and 19
languages.
Currently, our largest business unit is our global books and home
entertainment operations, which publish and market Reader's Digest Select
Editions, series books, general books, recorded music collections and series,
and video products and series.
STRATEGIC INITIATIVES
We are undertaking a three-phase strategy to build on our fundamental
strengths and create growth opportunities. In July 1998, we announced Phase I of
our strategy, which involved:
- reorganizing our business groups on a global basis;
- restructuring our editorial organization;
- establishing new reporting relationships; and
- reassigning some of our executives.
We made further refinements to our organizational structure in late fiscal
1999 to finalize the global operating segments discussed below.
We announced Phase II of our strategy in September 1998, which targets:
- reducing costs and streamlining processes;
- raising capital by selling some underproductive assets; and
- restructuring some underproductive businesses.
Actions that we have taken as part of the ongoing Phase II include:
- reducing the number of individual promotional mailings globally,
including eliminating related product development and overhead costs. The
purpose of this action is to increase response rates on continuing
mailings;
- reducing the circulation rate base for Reader's Digest in the United
States and in most international markets. The purpose of this action is
to improve the efficiency of our promotional spending;
- eliminating or redirecting some product lines, including adult and
children's retail book publishing, the Today's Best Nonfiction(R) book
series, and video or music businesses in selected international markets;
- selling our publishing operations in South Africa and closing our
operations in Chile, Colombia and Peru;
- consolidating our operations in Benelux, the Nordic countries, Germany
and Switzerland, and those in the Czech Republic and Hungary;
- selling important works from our fine art collection;
- outsourcing support functions where it is cost-effective;
- consolidating suppliers and combining purchasing efforts for greater
negotiating leverage;
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- selling international real estate holdings, including those in the United
Kingdom, Canada and Italy; and
- reducing our quarterly dividend from $0.225 per share to $0.05 per share.
We announced Phase III of our strategy in February 1999. Phase III
concentrates on achieving revenue growth via the following principal
initiatives:
- Expanding our presence in market segments that leverage Reader's Digest's
brand trust and customer base, specifically by:
c Emphasizing five key consumer interest areas: home, health, family,
finance and faith; and
c Targeting consumers' life stages from family formation onward, with a
particular focus on consumers over 50;
- Expanding our product offerings beyond publishing in these targeted
consumer interest areas and life stages;
- Continuing geographic expansion, including expanding into new countries
and expanding the products and services we offer in existing markets;
- Developing new marketing and distribution channels; and
- Integrating the Internet into all of our businesses by:
c Revitalizing and globalizing our current Web sites;
c Making strategic investments in existing Web sites that match our
areas of strategic interest;
c Expanding our existing U.S.-based Web sites internationally; and
c On a highly selective basis, creating and launching Web sites that
meet consumer needs, leverage our corporate assets and provide us with
substantial e-commerce opportunities.
Throughout our implementation of our Phase III growth initiatives, we have
invested and we expect to continue to invest in the development of products and
channels to support internal growth opportunities in our core businesses. We
also expect to target acquisitions and form alliances that leverage our core
strengths.
OPERATING SEGMENTS
We have three operating segments: Global Books and Home Entertainment, U.S.
Magazines, and International Magazines. Financial information about each of our
operating segments is included in Note 12 to our consolidated financial
statements, which are incorporated by reference into this prospectus.
GLOBAL BOOKS AND HOME ENTERTAINMENT
Our Global Books and Home Entertainment operations publish Reader's Digest
Select Editions, series books, general books, recorded music collections and
series and video products and series. We market these products principally by
direct mail. Global Books and Home Entertainment also includes the operations of
our subsidiary, Good Catalog Company. For more information about how we market
our products, please refer to the section of this prospectus captioned "Direct
Marketing Operations."
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SELECT EDITIONS
Reader's Digest Select Editions, which were formerly called "Condensed
Books" in many markets, are a continuing series of condensed versions of current
popular fiction. A condensed work reduces the length of an existing text, while
retaining the author's style, integrity and purpose. Today, we publish Select
Editions in 16 languages, and market them in 27 countries. Select Editions
generated worldwide revenues of $254.1 million in fiscal 1999, $260.4 million in
fiscal 1998 and $307.0 million in fiscal 1997.
International editions of Select Editions generally include some material
from the U.S. edition or from other international editions, translated and
edited as appropriate. International editions also include some condensed
versions of locally published works. Each local editorial staff determines
whether existing Select Editions selections are appropriate for their local
market.
We publish six volumes of Select Editions a year in the United States. Some
of our international subsidiaries also publish six volumes a year, while others
publish four or five.
SERIES BOOKS
We market two types of series books: reading series and illustrated series.
These book series may be either open-ended continuing series or closed-ended
series, which consist of a limited number of volumes. We publish series books in
six languages and market them in 11 countries. Series books generated worldwide
revenues of $142.8 million in fiscal 1999, $162.1 million in fiscal 1998 and
$209.5 million in fiscal 1997.
Our reading series include The World's Best Reading, which consists of
full-length editions of classic works of literature. We publish six volumes of
The World's Best Reading each year in four countries in two languages.
We publish illustrated series, which are generally closed-ended, in 10
languages and market them in 16 countries.
GENERAL BOOKS
Our general books consist primarily of reference books, cookbooks, "how-to"
and "do-it-yourself" books and children's books. We also publish books on
subjects such as history, travel, religion, health, nature and the home. We
publish some of our general books in series. We publish general books in 17
languages and market them in 39 countries. General books generated worldwide
revenues of $540.4 million in fiscal 1999, $606.0 million in fiscal 1998 and
$679.9 million in fiscal 1997.
New general books are usually 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, we conduct extensive research and prepare an
appropriate marketing strategy for the book.
We sell most copies of a general book through initial bulk promotional
mailings. We also sell substantial additional copies through subsequent
promotions, through catalog sales and through the use of sales inserts in
mailings for other Reader's Digest products. We also distribute our general
books for retail sale in stores through independent distributors.
MUSIC
We publish recorded music packages on cassettes and compact discs. The
music packages are generally collections of previously recorded and newly
commissioned material by a variety of artists, although they may include
selections from our almost 18,000-selection library. The collections span a
broad range of musical styles. Our marketing strategy for music packages is
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similar to our marketing strategy for general books. In some markets, we also
sell music series, which we market in the same manner as series books.
We market music products in 33 countries. We offer different music products
in the various international markets because of diverse tastes. Music products
generated worldwide revenues of $345.5 million in fiscal 1999, $377.5 million in
fiscal 1998 and $404.2 million in fiscal 1997.
We are a member of the Recording Industry Association of America in the
United States, and we have been recognized with 49 gold, platinum and
multi-platinum certificates.
VIDEO
Our video products and series are in genres similar to our general books.
We continue to expand our video operations in the United States and in
international markets. We presently market video products in the United States
and 26 other countries. We also sell our video products through retail
establishments. Video products generated worldwide revenues of $200.5 in fiscal
1999, $215.8 million in fiscal 1998 and $243.5 million in fiscal 1997.
Most of our original programs have been licensed to cable television
networks. Several original programs have won awards of excellence, including
five Emmy awards. In May 1999, we entered into a multi-year agreement with CBS
Productions to develop television movies and mini-series based on the personal
dramas chronicled in Reader's Digest.
MERCHANDISE CATALOGS
In October 1998, we acquired Good Catalog Company, a catalog marketer of
home, garden and gift-related products. In July 1999, Good Catalog Company
launched the www.goodcatalog.com Web site, which is currently conducting
e-commerce business.
PRODUCTION AND FULFILLMENT
We hire independent contractors to print and bind the various editions of
Select Editions. We have an exclusive agreement with a printing company for
printing English-language Select Editions distributed in the United States and
Canada. That agreement expires in 2002. We solicit bids for printing and binding
each general book or book series. We usually hire independent contractors to
produce and manufacture our music and video products.
Paper is the principal raw material necessary for production of our Select
Editions, series books and general books. We have an exclusive agreement with a
major supplier to supply paper for Select Editions. The agreement expires in
2002. We purchase paper for series books and general books for each printing. We
believe that our existing contractual arrangements and other available sources
of paper provide us with an adequate supply of paper at competitive prices. We
use independent contractors to arrange for us to acquire some of the necessary
raw materials to manufacture music and video products.
We usually hire independent contractors to handle our fulfillment,
warehousing, customer service and payment processing. The printers or suppliers
of our products generally package and deliver those products directly to the
postal service. For information about postal rates and postal services, please
refer to the section of this prospectus captioned "Direct Marketing Operations."
It is our direct marketing policy that a customer may return any book or
home entertainment product to us for a refund, either before or after payment.
We believe that our returned goods policy is essential to our reputation and
that it elicits a greater number of orders. Many of those orders are not
returned because a high number of consumers are satisfied with our products.
Nevertheless, this policy and our "first book free" policy for Select Editions
and series books result in a significant amount of returned goods.
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We sell more books and home entertainment products in some seasons than
others. In the direct marketing industry as a whole, more consumers respond in
the winter months than during the rest of the year. Sales are also higher during
the pre-Christmas season than in spring and summer.
U.S. MAGAZINES
Our U.S. Magazines operations publish Reader's Digest and several special
interest magazines in the United States. These magazines and other products are
sold through direct and retail marketing, including the activities of our QSP,
Inc. subsidiary.
U.S. Magazines publishes Reader's Digest in several editions, including an
English-language edition, a Spanish language edition and the Reader's Digest
Large Edition for Easier Reading. We license independent contractors to publish
a braille edition and a recorded edition in the United States.
Reader's Digest is a monthly, general interest magazine consisting of
original articles, previously published articles in condensed form, and a
condensed version of a previously published or soon-to-be published full-length
book. Reader's Digest also contains monthly humor columns such as "Laughter, The
Best Medicine(R)," "Life's Like That(R)," "Humor In Uniform(R)," and "All In A
Day's Work(R)," and other regular features, including "Heroes For Today(R)," "It
Pays To Enrich Your Word Power(R)," "News From The World Of Medicine(R)," "Tales
Out of School(R)," "Virtual Hilarity(R)," "Personal Glimpses(R)," and "Campus
Comedy(R)." The international editions of Reader's Digest include similar
features.
We publish several special interest magazines that we believe are
consistent with our image, editorial philosophy and market expertise. The Family
Handyman(R) magazine provides instructions and guidance for "do-it-yourself"
home improvement projects. New Choices: Living Even Better After 50(R) magazine
is aimed at active, mature readers and provides information on entertainment,
travel, health and leisure time activities. Walking(R) magazine provides
information on health and fitness for walking enthusiasts. American
Woodworker(R) magazine and its consumer trade show operations provide
information, instruction and guidance for professional and serious amateur
woodworkers. Prior to August 1999, we also published American Health for
Women(R) magazine, which provided helpful information on medicine, nutrition,
psychology and fitness as those issues relate to women. In August 1999, we sold
the American Health magazine trademark, subscriber list and other circulation
assets.
We promote our U.S. special interest magazines to our U.S. Reader's Digest
customer list. We also promote our other products to each magazine's customer
list, as appropriate. This strategy helps us to expand the customer base for all
of our products.
We also publish other limited-edition special interest publications in the
United States, such as Reader's Digest Christmas, which we have published
annually since 1997 and Reader's Digest Your Family, which debuted as a special
edition in May 1999.
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CIRCULATION AND ADVERTISING
The following table shows circulation and advertising information for U.S.
Magazines operations for fiscal 1999.
<TABLE>
<CAPTION>
ISSUES JUNE 30,1999 ADVERTISING
PER CIRCULATION PAGES
MAGAZINE TITLE YEAR RATE BASE CARRIED
- -------------- ------ ------------ -----------
<S> <C> <C> <C>
Reader's Digest -- U.S. -- English edition............ 12 12,500,000 1,137
Reader's Digest Large Edition for Easier Reading...... 12 425,000 159
The Family Handyman................................... 10 1,100,000 638
American Health for Women............................. 10 1,000,000 571
New Choices: Living Even Better After 50.............. 10 600,000 412
Walking............................................... 6 650,000 366
American Woodworker................................... 7 324,000 187
</TABLE>
Approximately 70% of total U.S. fiscal 1999 revenues for Reader's Digest
was generated by circulation revenues and 30% by advertising revenues.
Approximately 58% of total U.S. fiscal 1999 revenues for the special interest
magazines was generated by circulation revenues and 42% by advertising revenues.
We have determined that the U.S. -- English edition of Reader's Digest has
the largest paid circulation of any U.S. magazine, other than those
automatically distributed to all members of the American Association of Retired
Persons. Our determination is based on the most recent audit report issued by
the Audit Bureau of Circulation, Inc., a not-for-profit organization that
monitors circulation in the United States and Canada. Approximately 95% of the
U.S. paid circulation of Reader's Digest consists of subscriptions. The balance
consists of single copy sales at newsstands and in supermarkets and similar
retail establishments. We sell our special interest magazines by subscription
and at newsstands.
We maintain the circulation rate base for Reader's Digest through annual
subscription renewals and new subscriptions. The circulation rate base for the
U.S. -- English edition of Reader's Digest was reduced from 15 million to 13.3
million copies per issue for the January - June 1999 issues and to 12.5 million
with the July 1999 issue. We sell approximately 3.4 million new subscriptions in
the United States to maintain the current circulation rate base. We sell new
subscriptions primarily by direct mail, with extensive use of sweepstakes
entries. We sell the largest percentage of subscriptions between July and
December of each year. Subscribers to Reader's Digest may cancel their
subscriptions at any time and we will refund the unused subscription price. For
additional information regarding direct marketing of subscriptions, please refer
to the section of this prospectus captioned "Direct Marketing Operations."
We also market and sell subscriptions to Reader's Digest and the special
interest magazines in the United States through QSP, Inc., one of our wholly
owned subsidiaries. QSP 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 revenues from the sale of
products to fundraising organizations. A substantial majority of QSP's sales
occur during the first half of our fiscal year, which includes the fall school
semester.
The U.S. editions of Reader's Digest offer advertisers different regional
editions, major market editions and demographic editions. These editions, which
usually contain the same editorial material, permit advertisers to concentrate
their advertising in specific markets or to target specific audiences. Reader's
Digest sells advertising in the United States principally through an internal
advertising sales force. We sell advertisements in multiple Reader's Digest
editions worldwide, and offer discounts for placing advertisements in more than
one edition.
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Like most other magazines, our special interest magazines are highly
dependent on advertising revenues.
EDITORIAL
Reader's Digest is a reader-driven, family magazine. Its editorial content
is, therefore, crucial to the loyal subscriber base that constitutes the
cornerstone of our 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. We employ a professional staff to research and fact-check all published
pieces.
PRODUCTION AND FULFILLMENT
We hire independent contractors to print all U.S. editions of Reader's
Digest and our special interest magazines. We have an exclusive contract with a
U.S. printer to print the U.S. editions of Reader's Digest. The contract will
expire in 2007. We believe that generally there is an adequate supply of
alternative printing services available to us at competitive prices, should the
need arise. Nevertheless, significant short-term disruption could occur. We have
developed plans to minimize recovery time in the event of a disaster with
current contract printers.
Lightweight coated and uncoated paper are the principal raw materials used
in the production of Reader's Digest. We have supply contracts with a number of
global and regional suppliers of paper. We believe those supply contracts
provide an adequate supply of paper for our needs and that, in any event,
alternative sources are available at competitive prices. A variety of factors
affect paper prices, including demand, capacity, pulp supply, and general
economic conditions.
We deliver subscription copies of the U.S. edition of Reader's Digest and
the special interest magazines through the United States Postal Service as
"periodicals" class mail. For additional information about postal rates and
service, please refer to the section of this prospectus captioned "Direct
Marketing Operations."
A distribution network handles newsstand and other retail distribution.
Several hundred other publishers make magazine subscriptions available to
QSP at competitive, discounted prices. QSP also obtains discounted music
products from a large music publisher. QSP engages an independent contractor to
handle processing of magazine and music orders. A subsidiary of QSP handles
processing of video, book, gift and food orders.
INTERNATIONAL MAGAZINES
Our International Magazines operations publish Reader's Digest in 48
editions and 19 languages outside the United States. We license independent
contractors to publish Reader's Digest in Korea, India and South Africa. These
operations also publish Moneywise, a magazine devoted to helping families manage
their finances, in the United Kingdom. In August 1999, we acquired Benchmark,
Ltd., the publisher of four investment guides distributed in Hong Kong, Taiwan
and Singapore.
CIRCULATION AND ADVERTISING
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
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in which they are published. For most international editions of Reader's Digest,
subscriptions comprise almost 98% of circulation. The balance is attributable to
newsstand and other retail sales. Approximately 83% of total international
fiscal 1999 revenues for Reader's Digest was generated by circulation revenues
and 17% by advertising revenues.
The following table shows circulation and advertising information for
International Magazines operations for fiscal 1999.
<TABLE>
<CAPTION>
ISSUES JUNE 30,1999 ADVERTISING
PER CIRCULATION PAGES
MAGAZINE TITLE YEAR RATE BASE CARRIED
- -------------- ------ ------------ -----------
<S> <C> <C> <C>
Reader's Digest....................................... 12 12,278,585 11,729
Moneywise............................................. 12 108,075 660
</TABLE>
We maintain the circulation rate base for Reader's Digest through annual
subscription renewals and new subscriptions. Each year, we sell approximately
three million new international Reader's Digest subscriptions to maintain the
international circulation rate base. We sell new subscriptions primarily by
direct mail, with extensive use of sweepstakes entries. We sell the largest
percentage of subscriptions between July and December of each year. Subscribers
to Reader's Digest may cancel their subscriptions at any time and we will refund
the unused subscription price.
The larger international editions of Reader's Digest offer advertisers
different regional editions, major market editions and demographic editions.
These editions, which usually contain the same editorial material, permit
advertisers to concentrate their advertising in specific markets or to target
specific audiences. Reader's Digest sells international advertising principally
through an internal advertising sales force. We sell advertisements in multiple
Reader's Digest editions worldwide, and offer discounts for placing
advertisements in more than one edition.
EDITORIAL
The international editions of Reader's Digest contain content and follow
editorial procedures similar to the U.S. editions. 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 U.S. edition and material taken from other international editions varies
greatly among editions. In general, our 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
We hire independent contractors to print all international editions of
Reader's Digest. Issues relating to available printing capacity and paper
supplies are similar to those in the United States.
Subscription copies of international editions of Reader's Digest are
delivered through the postal service in each country of publication. We have
also contracted in each country with a newsstand magazine distributor for the
distribution of Reader's Digest. For additional information about postal rates
and service, please refer to the section of this prospectus captioned "Direct
Marketing Operations."
DIRECT MARKETING OPERATIONS
We sell magazine subscriptions, Select Editions, series books, general
books, music and video products, as well as certain other products, principally
through direct mail solicitations to households on our customer lists. Our
products and product offers are usually accompanied by sweepstakes entries and,
in some cases, premium merchandise offers. For many years, we have been
acknowledged as a pioneer and innovator in the direct mail industry.
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<PAGE> 35
As part of our growth strategy and our strategy to develop new marketing
and distribution channels, we have begun to pursue increased distribution of our
products through direct response channels other than direct mail. These other
distribution channels include direct response television, telemarketing, the
Internet, catalogs and clubs. We are also continuing to conduct tests of
non-sweepstakes promotional mailing packages in the United States. The initial
results of these tests have been encouraging.
We are adapting the editorial content and the marketing methods of our
magazines and books and home entertainment products to new technologies. In
1997, we launched Reader's Digest World, a Web site (www.readersdigest.com) that
links our 24 local and international Web sites, for shopping and information
about our products. In 1999, Reader's Digest World had over 3.5 million visitors
from around the world.
To promote the sale of our products in the United States, we usually offer
a sweepstakes in our promotional mailings. Prizes totaled about $9 million for
the 1999 edition of the sweepstakes. Generally, each of our international
subsidiaries sponsors its own sweepstakes. The mechanics of the sweepstakes vary
from jurisdiction to jurisdiction, depending upon local law.
From time to time, we are involved in legal, regulatory and investigative
proceedings concerning our sweepstakes and other direct marketing practices.
Also from time to time, jurisdictions in which we do business consider more
restrictive laws or regulations governing sweepstakes or direct marketing.
Although some of these proceedings may have negatively affected our direct
marketing business, we do not believe that these proceedings and proposed laws
and regulations will have a material adverse effect on our direct marketing
business.
We are subject to postal rate increases, which affect our product
deliveries, promotional mailings and billings. Postage is one of the largest
expenses in our promotional and billing activities. In the past, we have had
sufficient advance notice of most increases in postal rates so that we could
factor the higher rates into our pricing strategies and operating plans. Higher
postal rates or other delivery charges usually increase the total cost to the
customer, which may have a negative effect on sales. As a result, we may
strategically determine the extent, if any, to which we will pass these cost
increases on to our customers.
We rely on postal delivery service for timely delivery of our 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 international
jurisdictions, some or all of our products are subject to sales tax or value
added tax. Taxes, like delivery costs, are generally stated separately on bills,
where permitted by applicable law. Higher taxes increase the total cost to the
customer, which may have a negative effect on sales. In jurisdictions where
applicable tax must be included in the purchase price, we may be unable to fully
recover from customers the amount of any tax increase or new tax.
INFORMATION TECHNOLOGY AND CUSTOMER LIST ENHANCEMENT
The size and quality of our computerized customer list of current and
prospective customers in each country where we operate contributes significantly
to our business. We are constantly striving to improve our customer lists. We
believe that our U.S. list of over 57 million households -- over half the total
number of households in the country -- is one of the largest direct response
lists in the United States. Our international lists include a total of
approximately 49 million households.
We continue to make significant investments in our database list management
and related information technology to improve our operating efficiencies, to
increase the level of service we provide to our customer base and to facilitate
globalization of our operations.
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<PAGE> 36
Some international jurisdictions, particularly in Europe, have data
protection laws or regulations prohibiting or limiting the exchange of
information of the type that we maintain. Some jurisdictions also prohibit the
retention of information, other than certain basic facts, about noncurrent
customers. Although these regulations may hinder our ability to collect, retain
and use customer information, we believe that current laws and regulations do
not prevent us from engaging in activities necessary to operate our current
businesses.
COMPETITION AND TRADEMARKS
Although Reader's Digest 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. We believe that the extensive and
longstanding international operations of Reader's Digest provide us with a
significant advantage over competitors seeking to establish a global
publication.
We own numerous trademarks that we use in our business worldwide. Our two
most important trademarks are "Reader's Digest" and the "Pegasus" logo. We
believe that the name recognition, reputation and image that we have developed
in each of our markets significantly enhance customer response to our direct
marketing sales promotions. For these reasons, trademarks are important to our
business and we aggressively defend our trademarks.
We believe that our company name, image and reputation, as well as the
quality of our customer lists, provide a significant competitive advantage over
many other direct marketers. However, our books and home entertainment business
competes with companies selling similar products at retail as well as by direct
marketing through various channels, including the Internet. Because tests show
that consumers' responses to direct marketing promotions can be adversely
affected by the overall volume of direct marketing promotions, we also compete
with all other direct marketers, regardless of whether their products are
similar to our products.
Each of our special interest magazines competes with other magazines of the
same genre for readers and advertising. Nearly all of our products compete with
other products and services that utilize leisure activity time or disposable
income.
EMPLOYEES
As of June 30, 1999, we employed about 4,800 people worldwide. We employed
about 1,900 in the United States and about 2,900 in our international
subsidiaries. Our relationship with our employees is generally satisfactory.
PROPERTIES
Our headquarters and principal operating facilities are located on
approximately 120 acres in Westchester County, New York. The site includes five
principal buildings occupying approximately 703,000 square feet. Those buildings
house executive, administrative, editorial and operational offices and data
processing and other facilities. In New York City, we lease approximately
153,180 square feet of office space in two buildings, portions of which we use
as editorial offices for our books and home entertainment products business, as
advertising sales offices for Reader's Digest magazine and as offices for our
special interest magazines. We lease approximately 263,000 square feet of
additional space 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.
We own approximately 694,000 square feet and lease approximately 528,000
square feet of space outside the United States for our international operating
subsidiaries. They use this space principally as headquarters, administrative
and editorial offices and warehouse space.
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<PAGE> 37
We believe that our current facilities, together with expansions and
upgrading presently underway or planned, will meet our present and reasonably
foreseeable needs. We also believe that we will find adequate space to replace
any leased facilities whose leases expire in the near future.
LEGAL PROCEEDINGS
We and our subsidiaries are defendants in various lawsuits and claims
arising in the regular course of business. Based on the opinions of our
management and our counsel for those matters, we believe any recoveries by
plaintiffs and claimants will not materially affect our financial position or
results of operations.
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<PAGE> 38
MANAGEMENT
DIRECTORS
Our board of directors currently consists of nine members who are elected
annually to hold office until our next annual meeting of stockholders or until
their successors are duly elected and qualified. Immediately preceding our 1999
annual meeting of stockholders scheduled for November 12, 1999, the size of our
board of directors will be reduced to eight members. Mr. Grune, one of our
current directors, will not be standing for re-election at that meeting. Our
board of directors is responsible for the management of our business.
The following table sets forth the name, age, present positions and offices
with Reader's Digest, the year first elected and principal occupations during
the past five years of each of our directors.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas O. Ryder (55)......... Mr. Ryder has been our Chairman of the Board and Chief
Executive Officer and one of our directors since April 28,
1998. Mr. Ryder was President, American Express Travel
Related Services International, a division of American
Express Company (travel, financial and network services),
from October 1995 to April 1998. Before October 1995, he
served as President, Establishment Services -- Worldwide of
American Express Travel Related Services.
Lynne V. Cheney (58)......... Dr. Cheney joined our board of directors in 1993. She is an
author and lecturer and has been a senior fellow of the
American Enterprise Institute for Public Policy Research
since January 1993. Prior to January 1993, she served as
Chairman of the National Endowment for the Humanities. Dr.
Cheney is also a director of IDS Mutual Fund Group,
Lockheed-Martin Corporation and Union Pacific Resources
Group, Inc.
M. Christine DeVita (49)..... Ms. DeVita has been a member of our board of directors
since 1993. She has been President of the DeWitt Wallace --
Reader's Digest Fund, Inc. and the Lila Wallace -- Reader's
Digest Fund, Inc. since June 1989.
George V. Grune (70)......... Mr. Grune is the Chairman of the DeWitt Wallace -- Reader's
Digest Fund, Inc. and the Lila Wallace -- Reader's Digest
Fund, Inc. Mr. Grune, who first joined Reader's Digest in
1960, retired as our Chairman of the Board and Chief
Executive Officer in August 1995 and August 1994,
respectively. He returned to Reader's Digest in those
capacities from August 1997 to April 1998 and remained an
employee until July 1998. He served as one of our directors
from 1976 to his retirement in 1995, and returned to our
board in August 1997. Mr. Grune is a director of Federated
Department Stores, Inc.
James E. Preston (66)........ Mr. Preston has been a member of our board of directors
since 1994. He retired as Chairman of the Board of Avon
Products, Inc. (beauty and related products) in May 1999, a
position he has held since January 1989 and was Chief
Executive Officer prior to July 1998, and President prior
to November 1993. Mr. Preston also serves on the board of
directors of Aramark, Inc., Cyberian Outpost, Inc. and
Venator Group, Inc.
</TABLE>
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<PAGE> 39
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Lawrence R. Ricciardi (59)... Mr. Ricciardi has been a member of our board of directors
since 1998. He is Senior Vice President and General Counsel
of International Business Machines Corporation, a position
he has held since May 1995. Prior to May 1995, Mr.
Ricciardi was President and General Counsel of RJR Nabisco
Holdings Corp.
C. J. Silas (67)............. Mr. Silas has been a member of our board of directors since
1992. He retired in May 1994 as Chairman and Chief
Executive Officer of Phillips Petroleum Company, positions
he had held since 1985. Mr. Silas is also director of
Halliburton Company.
William J. White (61)........ Mr. White has been a member of our board of directors since
1996. He has been a professor at the Robert R. McCormick
School of Engineering and Applied Sciences at Northwestern
University since January 1998. He retired as Chairman of
the Board of Bell & Howell Company (information access and
mail processing systems) in December 1997, a position he
had held since 1990. Mr. White also served as Chief
Executive Officer of Bell & Howell Company until March 1997
and as President until February 1995. Mr. White is also a
director of Bell & Howell Company, Ivex Packaging
Corporation and TJ International, Inc.
Ed Zschau (59)............... Mr. Zschau has been a member of our board of directors
since January 1999. He is a professor of management at the
Graduate School of Business Administration of Harvard
University, where he joined the faculty in 1996. He is also
a Visiting Professor at Princeton University. Mr. Zschau
was General Manager, IBM Corporation Storage Systems
Division of International Business Machines Corporation
from April 1993 to July 1995 and was Chairman and Chief
Executive Officer of Censtor Corp. from July 1988 to April
1993. Mr. Zschau is also a director of GenRad, Inc. and
StarTek, Inc.
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth the name, age and offices with Reader's
Digest of each of our present executive officers, the period during which each
executive officer has served in that capacity and each executive officer's
business experience during the past five years:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas O. Ryder (55)......... Mr. Ryder has been our Chairman of the Board and Chief
Executive Officer since April 1998. Mr. Ryder was
President, American Express Travel Related Services
International, a division of American Express Company
(travel, financial and network services), from October
1995 to April 1998. Before October 1995, he served as
President, Establishment Services -- Worldwide of American
Express Travel Related Services.
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
M. John Bohane (63).......... Mr. Bohane has been Senior Vice President and President,
Global Books and Home Entertainment since July 1998.
Before July 1998, he was Senior Vice President of Reader's
Digest and President International Operations, a position
he held since rejoining Reader's Digest in September 1997.
He first joined Reader's Digest in 1964 and served in a
number of executive capacities, including President,
Direct Marketing, until leaving Reader's Digest 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 (42)....... Mr. Brizel has been Vice President and General Counsel
since July 1998. Before July 1998, he was Vice President,
Legal U.S. and Associate General Counsel, a position he
held since September 1996. Before September 1996, he was
one of our Associate General Counsel. Mr. Brizel joined
Reader's Digest in July 1989.
Elizabeth G. Chambers (36)... Ms. Chambers has been Senior Vice President, Strategy and
Business Redesign since October 26, 1999. She joined
Reader's Digest as Vice President, Business Redesign in
August 1998. She was a partner at the management
consulting firm of McKinsey & Company from June 1995 to
August 1998 and was an associate there from October 1989
to June 1995.
Gregory G. Coleman (45)...... Mr. Coleman has been a Senior Vice President and
President, U.S. Magazine Publishing since July 1998. Mr.
Coleman 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.
Peter J.C. Davenport (59).... Mr. Davenport has been Senior Vice President, Global
Marketing and Publishing since October 26, 1999. Prior to
that date, he was Senior Vice President, Global Marketing,
except for a temporary retirement from March to September
1997. Mr. Davenport first joined Reader's Digest in 1958.
Clifford H.R. DuPree (49).... Mr. DuPree has been Vice President, Corporate Secretary
and Associate General Counsel since July 1998. He joined
Reader's Digest in May 1992 as Associate General Counsel,
became Assistant Secretary in March 1995 and Vice
President in September 1996.
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas D. Gardner (42)....... Mr. Gardner has been Senior Vice President, Business
Planning and Development since July 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 before April 1995. Mr. Gardner joined Reader's
Digest in February 1992.
Robert J. Krefting (55)...... Mr. Krefting has been Senior Vice President and President,
International Magazine Publishing since July 27, 1998.
Prior to joining Reader's Digest, 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.
Albert L. Perruzza (52)...... Mr. Perruzza has been Senior Vice President, Global
Operations since October 26, 1999. He served as Vice
President, Database Management Operations from August 1998
to October 1999 and as Vice President, Customer Service
Operations from April 1995 to August 1998. He was
Director, U.S. Customer Fulfillment Services from October
1994 to April 1995. Mr. Perruzza joined Reader's Digest in
1972.
Robert E. Raymond (43)....... Mr. Raymond has been Vice President, Strategic
Acquisitions & Alliances since June 7, 1999. Before June
1999, he was Vice President and General Manager, Music,
Video, Special Channels, a position he held since April
1998. Mr. Raymond also served as Vice President Marketing,
Video/New Business from December 1997 until April 1998,
Director of Marketing, Video/New Business from July 1995
until December 1997, Marketing Director, New Business from
August 1994 until July 1995. Mr. Raymond joined Reader's
Digest in 1993.
Gary S. Rich (38)............ Mr. Rich has been Senior Vice President, Human Resources,
since August 1998. Before joining Reader's Digest, he was
Senior Vice President, Global Human Resources for A.C.
Nielsen Corporation (provider of market research,
information and analysis to the consumer products and
service industries), a position he held from June 1996 to
July 1998. Before June 1996, Mr. Rich was Vice President,
Human Resources -- Europe, Middle East and Africa, at
American Express Company (travel, financial and network
services).
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
George S. Scimone (52)....... Mr. Scimone has been Senior Vice President and Chief
Financial Officer since July 1998. Mr. Scimone served as
Vice President and Chief Financial Officer from September
1997 to July 1998, as Vice President and President,
Reader's Digest U.S.A. from November 1996 to September
1997 and Vice President and Corporate Controller from
September 1995 to November 1996. Prior to joining Reader's
Digest, Mr. Scimone was Business Chief Financial Officer,
Electrical Distribution and Control of General Electric
Company (appliances, aircraft engines, and other
electrical products and services).
Christopher P. Willcox Mr. Willcox has been Senior Vice President and Editor-in-
(52)....................... Chief of Reader's Digest magazine since March 1996. Before
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
Reader's Digest in 1988.
</TABLE>
Under our by-laws, our officers serve at the pleasure of our board of
directors. Our officers are elected annually to serve until their respective
successors are elected and qualified.
41
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table summarizes information as of September 30, 1999
regarding the beneficial ownership of our Class B voting common stock, the only
outstanding class of our voting securities. The stockholders identified below
are the only stockholders we know that beneficially own more than five percent
of our Class B voting common stock. The information set forth below is based on
information reported to us by those stockholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
- ------------------------------------ ----------------------- ----------
<S> <C> <C>
DeWitt Wallace-Reader's Digest Fund, Inc.................... 3,108,054 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
Lila Wallace-Reader's Digest Fund, Inc...................... 3,108,053 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
State Street Bank and Trust Company, ....................... 1,716,057 shares 13.80%
as trustee of The Reader's Digest Employee (shared voting and
Ownership Plan and 401(k) Partnership(2) investment power)
Gabelli Funds, LLC(3)....................................... 702,000 shares 5.65%
One Corporate Center (sole voting and
Rye, NY 10580 investment power)
GAMCO Investors Inc.(3)..................................... 890,200 shares 7.16%
One Corporate Center (sole voting and
Rye, NY 10580 investment power)
Gemini Capital Management Ltd.(3)........................... 35,500 shares 0.29%
c/o Appleby, Spurling & Kempe (sole voting and
Cedar House, 41 Cedar Avenue investment power)
Hamilton HM12 Bermuda
</TABLE>
- ---------------
(1) As of September 30, 1999, the DeWitt Wallace-Reader's Digest Fund, Inc. also
owned 9,957,523 shares of our Class A nonvoting common stock, which,
together with its holdings of our Class B voting common stock, represented
about 12.28% of our total outstanding common stock. As of September 30,
1999, the Lila Wallace-Reader's Digest Fund, Inc. also owned 6,329,842
shares of our Class A nonvoting common stock, which, together with its
holdings of our Class B voting common stock, represented about 8.87% of our
total outstanding common stock.
(2) State Street Bank and Trust Company is trustee of the trust created by the
Trust Agreement, amended and restated as of July 1, 1992 between Reader's
Digest and State Street, as trustee, relating to The Reader's Digest
Employee Ownership Plan and the 401(k) Partnership. According to the
Schedule 13G filed with the SEC by State Street in that capacity, State
Street may be considered to have shared voting and shared dispositive power
over the shares listed, but it has disclaimed beneficial ownership of all of
those shares.
(3) As reported on a Schedule 13D filed with the SEC by Mario J. Gabelli, Marc
J. Gabelli and various entities that either one directly or indirectly
controls or for which either one acts as chief investment officer.
Each of the DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. has five members and a board consisting of
five directors. Ms. DeVita and Messrs. Silas and Grune, who are our directors,
are also members and directors of each of these funds.
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<PAGE> 44
SELLING STOCKHOLDERS
The following table summarizes information regarding each selling
stockholder's beneficial ownership of Class A nonvoting common stock as of
September 30, 1999.
<TABLE>
<CAPTION>
CLASS A NONVOTING COMMON
STOCK BENEFICIALLY OWNED(1)
--------------------------------------
BEFORE GIVING AFTER GIVING
EFFECT TO THE EFFECT TO THE
OFFERING OFFERING
----------------- -----------------
SELLING STOCKHOLDER SHARES % SHARES %
- ------------------- ------ - ------ -
<S> <C> <C> <C> <C>
DeWitt Wallace-Reader's Digest Fund,
Inc.(2)(3)(4)(5).................................. 9,957,523 10.6 7,121,454 7.6
Lila Wallace-Reader's Digest Fund,
Inc.(2)(3)(4)(5).................................. 6,329,842 6.7 4,281,213 4.6
Lila Acheson Wallace Fund for the Metropolitan
Museum of Art(2)(3)............................... 6,826,531 7.3 5,344,736 5.7
Lila Acheson and DeWitt Wallace Fund for Lincoln
Center(2)......................................... 6,380,759 6.8 5,497,796 5.9
DeWitt Wallace Fund for Macalester College(2)(3).... 5,957,310 6.3 5,407,735 5.8
Lila Acheson and DeWitt Wallace Fund for the Hudson
Highlands(2)(3)................................... 5,510,657 5.9 4,975,220 5.3
DeWitt Wallace Fund for Colonial
Williamsburg(2)(3)................................ 2,900,346 3.1 2,270,785 2.4
Lila Acheson Wallace Fund for the New York
Zoological Society(2)(3).......................... 2,900,346 3.1 2,498,999 2.7
DeWitt Wallace Fund for Memorial Sloan-Kettering
Cancer Center(2)(3)............................... 2,320,277 2.5 1,999,199 2.1
Community Funds, Inc. .............................. 2,624,119 2.8 2,310,573 2.5
</TABLE>
- ---------------
(1) Includes up to the following number of shares of Class A nonvoting common
stock subject to forward purchase contracts entered into between the
Reader's Digest Common Exchange Security Trust and certain of the selling
stockholders in connection with the sale of $1.9336 Trust Automatic Common
Exchange Securities of the trust in February 1998: Lila Acheson and DeWitt
Wallace Fund for Lincoln Center, 2,313,009 shares; DeWitt Wallace Fund for
Macalester College, 3,425,454 shares; Lila Acheson and DeWitt Wallace Fund
for the Hudson Highlands, 3,043,937 shares; Lila Acheson Wallace Fund for
the New York Zoological Society, 1,051,368 shares; DeWitt Wallace Fund for
Memorial Sloan-Kettering Cancer Center, 841,094 shares; and Community Funds,
Inc., 1,179,634 shares. Unless certain events occur, the selling
stockholders are obligated to deliver these shares of Class A nonvoting
common stock on February 15, 2001. Under certain circumstances the selling
stockholders will be required to deliver these shares or cash in place of
these shares at an earlier date.
(2) Mr. Grune, one of our directors, is also a director and member of the DeWitt
Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest Fund,
Inc., the Lila Acheson Wallace Fund for the Metropolitan Museum of Art, the
Lila Acheson and DeWitt Wallace Fund for Lincoln Center, the DeWitt Wallace
Fund for Macalester College, the Lila Acheson and DeWitt Wallace Fund for
the Hudson Highlands, the DeWitt Wallace Fund for Colonial Williamsburg, the
Lila Acheson Wallace Fund for the New York Zoological Society and the DeWitt
Wallace Fund for Memorial Sloan-Kettering Cancer Center.
(3) Ms. DeVita, one of our directors, is also a director and member of the
DeWitt Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest
Fund, Inc., the Lila Acheson Wallace Fund for the Metropolitan Museum of
Art, the DeWitt Wallace Fund for Macalester College, the Lila Acheson and
DeWitt Wallace Fund for the Hudson Highlands, the DeWitt Wallace Fund for
Colonial Williamsburg, the Lila Acheson Wallace Fund for the New York
Zoological Society and the DeWitt Wallace Fund for Memorial Sloan-Kettering
Cancer Center.
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<PAGE> 45
(4) Mr. Silas, one of our directors, is also a director and member of the DeWitt
Wallace-Reader's Digest Fund, Inc. and the Lila Wallace-Reader's Digest
Fund, Inc.
(5) As of September 30, 1999, the DeWitt Wallace-Reader's Digest Fund, Inc. also
owned 3,108,054 shares of our Class B voting common stock. As of September
30, 1999, the Lila Wallace-Reader's Digest Fund, Inc. also owned 3,108,053
shares of our Class B voting common stock.
We have agreed to indemnify each of the selling stockholders, their
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our common stock, preferred stock and
preference stock is not complete and is qualified by reference to our
certificate of incorporation and by-laws. Copies of our certificate of
incorporation and our by-laws have been filed as exhibits to the registration
statement that this prospectus is a part of.
We are authorized to issue up to 200,000,000 shares of our Class A
nonvoting common stock and up to 25,000,000 shares of our Class B voting common
stock. As of September 30, 1999, 94,012,532 shares of our Class A nonvoting
common stock and 12,432,164 shares of our Class B voting common stock were
issued and outstanding.
We are authorized to issue up to 40,000 shares of our Preferred Stock (the
"First Preferred Stock"), up to 120,000 shares of our Second Preferred Stock, up
to 230,000 shares of our Third Subordinated Preferred Stock (the "Third
Preferred Stock") and up to 25,000,000 shares of our Preference Stock.
As of September 30, 1999, there were outstanding 29,720 shares of our First
Preferred Stock, 103,720 shares of our Second Preferred Stock and 155,022 shares
of our Third Preferred Stock. We have not issued any shares of our Preference
Stock.
We may issue our Preference Stock in series. Our board of directors has the
authority to designate the powers, preferences and rights pertaining to each
series, subject to some limitations regarding voting rights (as described below)
and convertibility into our voting stock.
Our preferred stock is primarily held by various charities and charitable
remainder annuity trusts. These charities and trusts obtained their shares,
directly or indirectly, by gift or bequest from DeWitt and Lila Wallace.
VOTING RIGHTS
Holders of our Class A nonvoting common stock and preferred stock have no
voting power for any purpose, except as the law otherwise provides. Holders of
our Class B voting common stock have full voting power for all purposes, except
as the law otherwise provides. If the holders of our Class B voting common stock
approve, our board of directors may designate one or more series of preference
stock. The holders of our preference stock may have voting rights, including the
right to elect up to two additional directors to our board of directors if there
are dividend arrearages, if we so specify in the certificate of designation for
the preference stock.
DIVIDEND AND LIQUIDATION RIGHTS
Holders of our First Preferred Stock and Second Preferred Stock are
entitled to receive an annual dividend of $4.00 per share, and holders of our
Third Preferred Stock are entitled to receive an annual dividend of $5.00 per
share. Holders of all classes of our preferred stock are entitled to a
liquidation preference of $100.00 per share, together all accrued and unpaid
dividends, and, upon redemption of those shares, are entitled to receive $105.00
per share, together with unpaid accrued dividends. Subject to the rights of the
holders of our preferred stock and rights of the holders of our preference
stock, holders of our Class A nonvoting common stock and holders of our Class B
voting common stock are entitled to participate equally, on a per share basis,
in dividends and in distributions of our assets upon liquidation or otherwise,
except that:
(1) any dividend or other distribution on our common stock that is payable
in shares of our common stock may be paid only in shares of our Class A
nonvoting common stock to holders of our Class A nonvoting common stock
and only in shares of our Class B voting common stock to holders of our
Class B voting common stock; and
45
<PAGE> 47
(2) any dividend or other distribution on our common stock that is payable
in shares of common stock of any subsidiaries may be paid to holders of
our Class B voting common stock only in shares of common stock of those
subsidiaries having full voting rights and may be paid to holders of
our Class A nonvoting common stock only in shares of common stock of
those subsidiaries having no voting rights other than those prescribed
by law. If there is any split or reverse split of our common stock, the
number of shares of our Class A nonvoting common stock and the number
of shares of our Class B voting common stock must be increased or
decreased, as applicable, in the same proportion, share and share
alike.
GENERAL
No holder of our Class B voting common stock or Class A nonvoting common
stock has any preemptive right to subscribe for any of our securities. All
outstanding shares of our Class B voting common stock and Class A nonvoting
common stock are validly issued, fully paid and nonassessable.
PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION
We have proposed amendments to our certificate of incorporation that would
require us to first obtain the approval of the holders of our Class B voting
common stock if we were to issue or sell any additional shares of our Class B
voting common stock to any of our employee benefit plans. We have submitted
these amendments to a vote of our stockholders at our 1999 Annual Meeting of
Stockholders to be held on November 12, 1999.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. acts as transfer agent and
registrar for our Class A nonvoting common stock and our Class B voting common
stock.
SHARES ELIGIBLE FOR FUTURE SALE
Rule 144 under the Securities Act provides that a person (or persons whose
sales are aggregated) who is one of our affiliates, or who has beneficially
owned for at least one year shares that were issued and sold in reliance upon
exemptions from registration under the Securities Act, is entitled to sell
within any three-month period a number of those restricted shares that does not
exceed the greater of one percent of the then outstanding shares of that class
of stock or the average weekly trading volume in that class of stock during the
four calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about us. However, a person who is not considered to
have been one of our affiliates at any time during the three months preceding a
sale, and who has beneficially owned restricted shares for at least two years,
may sell those shares under Rule 144 without regard to volume limitations,
manner-of-sale provisions, notice requirements or the availability of current
public information about us.
The selling stockholders may be considered to be our affiliates depending
upon a variety of factors, including whether the selling stockholders are under
common control with us. In addition, if those stockholders are considered to be
our affiliates and act in concert in disposing of our Class A nonvoting common
stock, their sales could be aggregated for purposes of determining the number of
shares they may sell under Rule 144. As of September 30, 1999, 94,012,532 shares
of our Class A nonvoting common stock were outstanding. Of those shares,
41,021,691 shares were freely tradable without restriction or registration under
the Securities Act, 653,062 shares were owned by our directors and officers and
51,707,710 shares were owned in the aggregate by the selling stockholders. Of
the 51,707,710 shares held by the selling stockholders, up to 11,854,496 shares
are subject to forward purchase contracts entered into between the
46
<PAGE> 48
Reader's Digest Common Exchange Security Trust and certain of the selling
stockholders in connection with the sale of $1.9336 Trust Automatic Common
Exchange Securities of the Reader's Digest Automatic Common Exchange Security
Trust in February 1998. Any shares held by affiliates may be sold in accordance
with Rule 144.
Subject to certain exceptions, we and the selling stockholders have agreed
with the underwriters not to sell any shares of our Class A nonvoting common
stock or our Class B voting common stock for a period of 180 days after the
closing of the offering of our Class A nonvoting common stock, without the
underwriters' prior written consent. See "Underwriting." Our Employee Ownership
Plan and 401(k) Partnership presently plans to sell up to approximately 15% of
the Class B voting common stock that it holds, subject to market conditions.
On September 30, 1999, 12,432,164 shares of our Class B voting common stock
were outstanding. Of those shares, a total of 7,932,164 shares were held by the
DeWitt Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest
Fund, Inc. and our Employee Ownership Plan and 401(k) Partnership and could be
sold in accordance with Rule 144.
As of September 30, 1999, our employees held options to purchase a total of
11,093,729 shares of our Class A nonvoting common stock at exercise prices
ranging from $16.94 to $55.125 per share.
We cannot predict the effect, if any, that market sales of shares of our
Class B voting common stock or Class A nonvoting common stock or the
availability of shares of our Class B voting common stock or Class A nonvoting
common stock for sale will have on the market price for our Class A nonvoting
common stock. Nevertheless, sales of substantial amounts of our Class B voting
common stock or Class A nonvoting common stock could adversely affect prevailing
market prices for our Class A nonvoting common stock.
47
<PAGE> 49
UNDERWRITING
Reader's Digest, the selling stockholders and the underwriters for the
offering (the "Underwriters") named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each Underwriter has severally agreed to purchase the number of
shares of Class A nonvoting common stock indicated in the following table.
Goldman, Sachs & Co. and Lazard Freres & Co. LLC are the representatives of the
Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Lazard Freres & Co. LLC.....................................
----------
Total............................................. 10,000,000
==========
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
1,500,000 shares from the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by the selling stockholders. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase 1,500,000 additional shares.
<TABLE>
<CAPTION>
Paid by the
Selling Stockholders
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................... $ $
Total.............................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
Reader's Digest and the selling stockholders have agreed with the
Underwriters that, subject to certain exceptions, during the period beginning
from the date of this prospectus and continuing to and including the date 180
days after the date of this prospectus, they will not offer, sell, contract to
sell or otherwise dispose of any Class A nonvoting common stock or other
securities of Reader's Digest (other than pursuant to employee plans existing,
or on the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this prospectus) which are substantially similar to
the Class A nonvoting common stock, or which are convertible or exchangeable
into Class A nonvoting common stock or other securities which are substantially
similar to the Class A nonvoting common stock, without the prior written consent
of the representatives.
In connection with the offering, the Underwriters may purchase and sell
shares of Class A nonvoting common stock in the open market. These transactions
may include short sales,
48
<PAGE> 50
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the Underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Class A nonvoting
common stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Class A nonvoting common stock. As a result, the
price of the Class A nonvoting common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the Underwriters at any time. These transactions may
be effected on the New York Stock Exchange, in the over-the-counter market or
otherwise.
The selling stockholders estimate that their share of the total expenses of
the offering, excluding underwriting discounts and commissions, will be
approximately $ .
Reader's Digest and the selling stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
Goldman, Sachs & Co. has periodically performed investment banking and
financial advisory services for us, and Lazard Freres & Co. LLC has periodically
performed investment banking and financial advisory services for the selling
stockholders and related entities.
VALIDITY OF SECURITIES
The validity of the shares of our Class A nonvoting common stock will be
passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York, and certain legal
matters will be passed upon for the underwriters by Milbank, Tweed, Hadley &
McCloy LLP, New York, New York. Laraine S. Rothenberg, a member of Fried, Frank,
Harris, Shriver & Jacobson, is a member and director of each of the DeWitt
Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest Fund, Inc.
and the Lila Acheson and DeWitt Wallace Fund for Lincoln Center.
EXPERTS
Our financial statements as of June 30, 1999 and 1998, and for each of the
years in the three-year period ended June 30, 1999, have been incorporated by
reference in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference, and upon
the authority of that firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Books Are Fun, Ltd. as of and for the year ended December 31,
1998, included in our Current Report on Form 8-K dated October 7, 1999, as set
forth in their report, which is incorporated by reference in this prospectus and
elsewhere in the registration statement. The financial statements of Books Are
Fun, Ltd. are incorporated by reference in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
49
<PAGE> 51
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information................ 2
Prospectus Summary.................... 3
Use of Proceeds....................... 12
Price Range of Class A Nonvoting
Common Stock and Dividend
Information......................... 12
Capitalization........................ 13
Selected Consolidated Financial
Information......................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 26
Properties............................ 35
Legal Proceedings..................... 36
Management............................ 37
Principal Stockholders................ 42
Selling Stockholders.................. 43
Description of Capital Stock.......... 45
Underwriting.......................... 48
Validity of Securities................ 49
Experts............................... 49
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,000,000 Shares
THE READER'S DIGEST
ASSOCIATION, INC.
Class A Nonvoting Common Stock
------------------------
READER'S DIGEST LOGO
------------------------
GOLDMAN, SACHS & CO.
LAZARD FRERES & CO. LLC
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses (except for the SEC registration
fee), other than underwriting discounts and commissions, to be incurred in
connection with the issuance and distribution of the securities registered under
this Registration Statement:
<TABLE>
<S> <C>
SEC registration fee........................................ $90,116
Fees and expenses of qualification under state securities
laws (including legal fees)............................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
The selling stockholders will bear substantially all of such expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reader's Digest's Restated Certificate of Incorporation, as amended,
provides that Reader's Digest shall indemnify each officer or director of
Reader's Digest to the fullest extent permitted by law, subject to the
limitations set forth in its By-Laws. The By-Laws provide that Reader's Digest
shall indemnify to the fullest extent permitted by law any person made or
threatened to be made a party to any action, suit or proceedings, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person or such person's testator or intestate is or was a director or officer of
Reader's Digest or serves or served at the request of Reader's Digest or any
other enterprise as a director or officer. Expenses incurred by any such person
in defending any such action, suit or proceeding shall be paid or reimbursed by
Reader's Digest promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is not
entitled to be indemnified by Reader's Digest. The rights of any person under
the By-Laws shall be enforceable against Reader's Digest by such person, who
shall be presumed to have relied upon them in serving or continuing to serve as
a director or officer as provided above. Notwithstanding the foregoing, and
except as otherwise provided by law, Reader's Digest may not make any payment
for indemnification pursuant to the By-Laws to any person to the extent of the
amount of such payment that would result in the imposition of an excise tax
under Chapter 42 of the Internal Revenue Code of 1986, as amended.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceedings. The Delaware General Corporation Law also provides
that Delaware corporations may purchase insurance on behalf of any director,
officer, employee or agent.
II-1
<PAGE> 53
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
4.1.1 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
Annual Report on Form 10-K for the year ended June 30, 1993
and incorporated herein by reference).
4.1.2 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 Annual Report on Form 10-K for the
year ended June 30, 1993 and incorporated herein by
reference).
4.1.3* Proposed Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
4.2 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 Annual Report on Form 10-K
for the year ended June 30, 1993 and incorporated herein by
reference).
5.1** Opinion of Fried, Frank, Harris, Shriver and Jacobson as to
the validity of the Class A Nonvoting Common Stock being
registered.
23.1 Consent of KPMG LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson
(included in Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 54
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Reader's
Digest Association, Inc. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-3 (File No. 333-88625) to be signed on its
behalf by the undersigned, thereunto duly authorized, in Pleasantville, New York
on October 28, 1999.
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ THOMAS O. RYDER
------------------------------------
Name: Thomas O. Ryder
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-3 (File No. 333-88625) has been
signed by the following persons in the capacities and on the date first above
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THOMAS O. RYDER Chairman of the Board and Chief Executive Officer
- --------------------------------------------------- and Director (Principal Executive Officer)
Thomas O. Ryder
/s/ GEORGE S. SCIMONE Senior Vice President and Chief Financial Officer
- --------------------------------------------------- (Principal Financial Officer)
George S. Scimone
/s/ DORVIN D. LIVELY Vice President and Corporate Controller
- --------------------------------------------------- (Controller)
Dorvin D. Lively
* Director
- ---------------------------------------------------
Lynne V. Cheney
* Director
- ---------------------------------------------------
M. Christine DeVita
* Director
- ---------------------------------------------------
George V. Grune
* Director
- ---------------------------------------------------
James E. Preston
* Director
- ---------------------------------------------------
Lawrence R. Ricciardi
</TABLE>
II-4
<PAGE> 56
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
- ---------------------------------------------------
C.J. Silas
* Director
- ---------------------------------------------------
William J. White
* Director
- ---------------------------------------------------
Ed Zschau
* /s/ CLIFFORD H.R. DUPREE
- ---------------------------------------------------
Clifford H.R. DuPree
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
4.1.1 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
Annual Report on Form 10-K for the year ended June 30, 1993
and incorporated herein by reference).
4.1.2 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 Annual Report on Form 10-K for the
year ended June 30, 1993 and incorporated herein by
reference).
4.1.3* Proposed Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
4.2 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 Annual Report on Form 10-K
for the year ended June 30, 1993 and incorporated herein by
reference).
5.1** Opinion of Fried, Frank, Harris, Shriver and Jacobson as to
the validity of the Class A Nonvoting Common Stock being
registered.
23.1 Consent of KPMG LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson
(included in Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
CLASS A NONVOTING COMMON STOCK
(par value $0.01 per share)
UNDERWRITING AGREEMENT
----------------------
November [10], 1999
Goldman, Sachs & Co.,
Lazard Freres & Co. LLC,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Certain stockholders named in Schedule II hereto (the "Selling
Stockholders") of The Reader's Digest Association, Inc., a Delaware corporation
(the "Company"), propose, subject to the terms and conditions stated herein, to
sell to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 10,000,000 shares (the "Firm Shares") and, at the election of the
Underwriters, up to 1,500,000 additional shares (the "Optional Shares") of Class
A Nonvoting Common Stock, par value $0.01 per share ("Stock"), of the Company
(the Firm Shares and the Optional Shares which the Underwriters elect to
purchase pursuant to Section 2 hereof are herein collectively called the
"Shares").
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters and the Selling Stockholders that:
(i) A registration statement on Form S-3 (File No.
333-88625) (the "Initial Registration Statement") in respect of the
Shares has been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto but including all documents
incorporated by reference in the prospectus contained therein, to you
for delivery to each of the other Underwriters, have been declared
effective by, or have been filed with, as the case may be, the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no
other document with respect to either the Initial Registration
Statement or any document incorporated by reference therein has
heretofore been filed with the Commission; and no stop order suspending
the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no notice has been received from
the Commission by the Company that any proceeding for that purpose has
been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the rules and regulations of
the Commission under the Act, is hereinafter called a
<PAGE> 2
"Preliminary Prospectus"; the various parts of the Initial
Registration Statement or the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including (A) the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of
the Initial Registration Statement at the time it was declared
effective and (B) the documents incorporated by reference in the
prospectus contained in the Initial Registration Statement at the time
such part of the Initial Registration Statement became effective as
amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration Statement
if any, became or hereafter becomes effective, are hereinafter
collectively called the "Registration Statement"; such final
prospectus, in the form first filed pursuant to Rule 424(b) under the
Act, is hereinafter called the "Prospectus"; any reference herein to
any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant
to Item 12 of Form S-3 under the Act, as of the date of such
Preliminary Prospectus or Prospectus, as the case may be; any reference
to any amendment or supplement to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include any documents filed
after the date of such Preliminary Prospectus or Prospectus, as the
case may be, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any
amendment to the Registration Statement shall be deemed to refer to and
include any annual report of the Company filed pursuant to Section
13(a) or 15(d) of the Exchange Act after the effective date of the
Initial Registration Statement that is incorporated by reference in the
Registration Statement);
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. or by a Selling
Stockholder expressly for use therein;
(iii) The documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and any further documents
so filed and incorporated by reference in the Prospectus or any further
amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. or by a Selling Stockholder expressly for
use therein;
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<PAGE> 3
(iv) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus, when they become effective or
are filed with the Commission, will conform, in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment
thereto, and as of the applicable filing date as to the Prospectus and
any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. or by a Selling Stockholder
expressly for use therein;
(v) Neither the Company nor any of its subsidiaries
has sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference, material to the Company and its subsidiaries taken as a
whole, with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as set forth or
incorporated by reference in the Prospectus; and, since the respective
dates as of which information is given in the Registration Statement
and the Prospectus, there has not been any change in the capital stock
of the Company (other than in connection with the issuance of Stock in
the ordinary course of business pursuant to the Company's 1989 Key
Employee Long Term Incentive Plan, the 1994 Key Employee Long Term
Incentive Plan, the Employee Ownership Plan and 401(k) Partnership and
the Employee Stock Purchase Plan described in the Prospectus) or any of
its subsidiaries, any change in the short-term debt or long-term debt
of the Company or any of its subsidiaries, which change is material to
the Company and its subsidiaries, taken as a whole, or any material
adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, taken as a whole, otherwise than as
set forth or contemplated in the Prospectus;
(vi) The Company has good and marketable title in fee
simple to its headquarters and principal operating facilities in
Westchester County, New York free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as
do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and the Company or a
subsidiary of the Company has good and marketable title in fee simple,
or, in jurisdictions outside of the United States, the substantive
equivalent thereto, to all other real property and good and marketable
title to all personal property owned by the Company or a subsidiary of
the Company, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do
not in the aggregate materially affect the business or financial
condition of the Company and its subsidiaries, taken as a whole; and
any real property and buildings held under lease by the Company or a
subsidiary of the Company are held by the Company or a subsidiary of
the Company under valid, subsisting and enforceable leases with such
exceptions as do not, in the aggregate, materially adversely affect the
business or financial condition of the Company and its subsidiaries,
taken as a whole;
(vii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware, with power and authority to own its properties
and conduct its business as described in the Prospectus, and has been
duly qualified as a foreign corporation for the transaction of business
and is in good standing under
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<PAGE> 4
the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified or in good standing in any
such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, or, in
jurisdictions outside of the United States, the substantive equivalent
thereto, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus,
except as to the extent that the failure of any subsidiary or
subsidiaries of the Company to be in good standing would not,
individually or in the aggregate, result in any material liability or
disability of the Company and its subsidiaries, taken as a whole, and
except that no representation is made with respect to any currently
inactive subsidiary of the Company;
(viii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and conform to the description of the
Stock contained in the Prospectus; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable, or
the substantive equivalent thereto, and (except for directors'
qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims, except
that no representation is made with respect to any currently inactive
subsidiary of the Company;
(ix) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries
is in violation of its certificate of incorporation or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or its properties may be bound other than
any violation or default which would not have a material adverse effect
on the Company and its subsidiaries taken as a whole;
(xi) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, present fairly the
information disclosed therein in all material respects;
(xii) Other than as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or
4
<PAGE> 5
of which any property of the Company or any of its subsidiaries is the
subject which the Company has reasonable cause to believe would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, stockholders' equity
or results of operations of the Company and its subsidiaries; and, to
the best of the Company's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
(xiii) The Company is not an "investment company" or
an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act" and, together with the Act, the "Acts");
(xiv) The Stock is listed on the New York Stock
Exchange;
(xv) Neither the Company nor any of its affiliates
does business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section 517.075,
Florida Statutes;
(xvi) (A) KPMG LLP, who have certified certain
financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder; and (B) Ernst & Young LLP,
who have certified certain financial statements of Books Are Fun, Ltd.
("Books Are Fun"), are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder;
(xvii) The Company has reviewed its operations and
that of its subsidiaries and any third parties with which the Company
or any of its subsidiaries has a material relationship to evaluate the
extent to which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a material adverse effect
on the general affairs, management, the current or future consolidated
financial position, business prospects, stockholders' equity or results
of operations of the Company and its subsidiaries taken as a whole or
result in any material loss or interference with the Company's business
or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000; and
(xviii) The Company owns all the patents, trademarks,
service marks, trade names and copyrights or licenses rights with
respect to the foregoing necessary for the present and planned future
conduct of its business, except where the failure to own or license the
same would not have a material adverse effect on the business or
condition, financial or otherwise, of the Company and its subsidiaries,
taken as a whole, without any known conflict with the rights of others,
the result of which conflict could materially and adversely affect the
business or condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole, and to the knowledge of the Company
there is no infringement of such patents, trademarks, service marks,
trade names and copyrights by others, the result of which infringement
could materially and adversely affect the business or condition,
financial or otherwise, of the Company and its subsidiaries, taken as a
whole.
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<PAGE> 6
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
(i) The compliance by such Selling Stockholder with
all of the provisions of this Agreement, the power of attorney in
connection with this transaction (the "Power of Attorney") and the
Custody Agreement in connection with this transaction (the "Custody
Agreement"), each to which such Selling Stockholder is a party, and the
consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of such Selling Stockholder, or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Selling Stockholder or any of the
property of such Selling Stockholder; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the execution and
delivery of or compliance by such Selling Stockholder with or the
consummation by such Selling Stockholder of the transactions
contemplated by this Agreement, the Power of Attorney to which such
Selling Stockholder is a party or the Custody Agreement to which such
Selling Stockholder is a party, except the registration under the Act
of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares;
(ii) This Agreement has been duly authorized,
executed and delivered by such Selling Stockholder. The Power of
Attorney and the Custody Agreement, each to which such Selling
Stockholder is a party, have been duly authorized, executed and
delivered by such Selling Stockholder and, assuming due authorization,
execution and delivery by the other parties thereto, constitute valid
and legally binding agreements of such Selling Stockholder, enforceable
in accordance with their respective terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
(iii) Such Selling Stockholder has, and immediately
prior to each Time of Delivery (as defined in Section 4(a) hereof) such
Selling Stockholder will have, good and valid title to the Shares to be
sold by such Selling Stockholder hereunder, free and clear of all
liens, encumbrances, equities or claims; and upon delivery of such
Shares and payment therefor pursuant hereto, good and valid title to
such Shares, free and clear of all liens, encumbrances, equities or
claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof
and continuing to and including the date 180 days after the First Time
of Delivery (as defined herein), such Selling Stockholder will not
offer, sell, contract to sell or otherwise dispose of any Shares or any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into
or exchangeable for, or that represent the right to receive, Shares or
any such substantially similar securities without prior written consent
of you, as the representatives of the Underwriters, except as provided
hereunder, pursuant to the Purchase Contracts in connection with the
February 13, 1998 offering of Trust Automatic Common Exchange
Securities, or pursuant to bona fide grants to persons who agree in
writing with you to be bound by the provisions of this clause;
provided, however, that in the event the Company enters into a
definitive business combination agreement providing for the acquisition
of the
6
<PAGE> 7
Company by, or the merger of the Company with, a third party in which
substantially all of the outstanding Shares or assets of the Company
are acquired by such third party, this provision shall not prohibit
such Selling Stockholder from tendering its Shares into any tender
offer or exchange offer, or from voting its Shares in favor of any
transaction, contemplated by such agreement;
(v) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares; and
(vi) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto are made in reliance
upon and in conformity with written information furnished to the
Company by such Selling Stockholder expressly for use therein, such
Preliminary Prospectus and the Registration Statement did, and the
Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus, when they become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Acts and the rules and
regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
Each of the Selling Stockholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Stockholder hereunder have been placed in custody under a Custodial
Agreement, in the form heretofore furnished to you, duly executed and delivered
by such Selling Stockholder to ChaseMellon Shareholder Services L.L.C., as
custodian (the "Custodian"), and that such Selling Stockholder has duly executed
and delivered a Power of Attorney, in the form heretofore furnished to you,
appointing the persons indicated in Schedule II hereto, and each of them, as
such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of such Selling
Stockholder, to authorize the delivery of the Shares to be sold by such Selling
Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder
in connection with the transactions contemplated by this Agreement and the
Custody Agreement.
Each of the Selling Stockholders specifically agrees that the
Shares represented by the certificates held in custody for such Selling
Stockholder under the Custody Agreement are subject to the interests of the
Underwriters hereunder, and that the arrangements made by such Selling
Stockholder for such custody, and the appointment by such Selling Stockholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
Each of the Selling Stockholders specifically agrees that the obligations of the
Selling Stockholders hereunder shall not be terminated by operation of law,
whether by the dissolution of any Selling Stockholder, or by the occurrence of
any other event. If any Selling Stockholder should be dissolved, or if any other
such event should occur, before the delivery of the Shares hereunder,
certificates representing the Shares shall be delivered by or on behalf of the
Selling Stockholders in accordance with the terms and conditions of this
Agreement and of the Custody
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<PAGE> 8
Agreements, as appropriate, and actions taken by the Attorneys-in-Fact pursuant
to the Powers of Attorney shall be as valid as if such dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) each of
the Selling Stockholders agrees, severally and not jointly, to sell to each of
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from each of the Selling Stockholders, at a purchase price
per share of $_____, the number of Firm Shares (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Shares to be sold by each of the Selling Stockholders as set forth opposite
their respective names in Schedule II hereto by a fraction, the numerator of
which is the aggregate number of Firm Shares to be purchased by such Underwriter
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from all of the Selling Stockholders hereunder and (b)
in the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, each of the Selling Stockholders
agrees, severally and not jointly, to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from each of
the Selling Stockholders, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Selling Stockholders, as and to the extent indicated in Schedule II
hereto, hereby grant, severally and not jointly, to the Underwriters the right
to purchase at their election up to 1,500,000 Optional Shares, at the purchase
price set forth in clause (a) of the first paragraph of this Section 2, for the
sole purpose of covering overallotments in the sale of the Firm Shares. Any such
election to purchase Optional Shares shall be made in proportion to the maximum
number of Optional Shares to be sold by each Selling Stockholder as set forth in
Schedule II hereto. Any such election to purchase Optional Shares may be
exercised only by written notice from you to the Attorneys-in-Fact (with copies
to Jeffrey Bagner, Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza,
New York, New York 10004 and Andrew B. Janszky, Shearman & Sterling, 599
Lexington Avenue, New York, New York 10022), given within a period of 30
calendar days after the date of this Agreement, setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4(a) hereof) or, unless you
and the Attorneys-in-Fact otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Selling Stockholders, shall be delivered by or on behalf of the
Selling Stockholders to Goldman, Sachs & Co., through the facilities of the
Depository Trust Company ("DTC") for the account of such Underwriter, against
payment by or on behalf of such Underwriter of the purchase price therefor by
wire transfer or certified or official bank check or checks in Federal (same
day) funds to the account specified by each of the Selling Stockholders, to
Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing
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<PAGE> 9
the Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of DTC or its designated custodian (the "Designated Office"). The
time and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York City time, on November [16], 1999 or such other time
and date as Goldman, Sachs & Co. and the Selling Stockholders may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York City
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Selling
Shareholders may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, New
York 10005 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at the
Closing Location at 3:30 p.m., New York City time, on the New York Business Day
next preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York City are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of Delivery
which shall be disapproved by you promptly after reasonable notice
thereof, such disapproval not to be unreasonably exercised; to advise
you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus
has been filed and to furnish you with copies thereof; to file promptly
all reports and any definitive proxy or information statements required
to be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
the Prospectus and for so long as the delivery of a prospectus is
required in connection with the offering or sale of the Shares; to
advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus
or for additional information; and, in the event of the issuance of any
stop order or any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, to promptly use its best efforts to obtain the
withdrawal of such order;
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<PAGE> 10
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 a.m. New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time to furnish the Underwriters with copies of the Prospectus in
such quantities as you may reasonably request, and, if the delivery of
a prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any events shall
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for
any other reason it shall be necessary during such same period to amend
or supplement the Prospectus or to file under the Exchange Act any
document incorporated by reference in the Prospectus in order to comply
with the Act or the Exchange Act, to notify you and upon your request
to file such document and to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter,
to prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its security-holders as
soon as practicable, but in any event not later than eighteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), an earnings statement of the Company and
its subsidiaries (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations of the Commission
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the First Time of
Delivery, not to offer, sell, contract to sell or otherwise dispose of
any Stock or any securities of the Company (other than pursuant to
employee plans existing (including the Employee Ownership Plan and
401(k) Partnership), or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of the Prospectus)
which are substantially similar to the Shares, including but not
limited to any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or such
substantially similar securities without your prior written consent;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), to make available to its stockholders consolidated summary
financial information of the Company and its subsidiaries for such
quarter in reasonable detail;
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<PAGE> 11
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders
generally, and deliver to you as soon as they are available, copies of
any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed. Such financial statements will be
on a consolidated basis to the extent the accounts of the Company and
its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission;
(h) To use its best efforts to maintain the listing of the
Stock on the New York Stock Exchange; and
(i) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with the one another and with the several Underwriters that (a) the Company will
pay or cause to be paid (i) the cost of preparing stock certificates for the
Shares; (ii) the cost and charges of any transfer agent or registrar for the
Shares; and (iii) all other costs and expenses incident to the performance of
its obligations hereunder which are not otherwise specifically provided for in
this Section; (b) the Selling Stockholders will pay or cause to be paid a pro
rata share (based on the number of Shares to be sold by each such Selling
Stockholder) of the following: (i) the fees, disbursements and expenses of the
Company's outside accountants and of the Company's outside counsel in connection
with the registration of the Shares under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus, the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing or producing any Agreement
among Underwriters, this Agreement and Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) the filing fees
incident to, and the fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the NASD of the terms of the
sale of the Shares; (v) all fees and expenses in connection with the preparation
and filing of a registration statement under the Exchange Act relating to the
Shares and all costs and expenses incident to the listing of the Shares on the
New York Stock Exchange or other national or regional exchange, if any; and (vi)
all fees, expenses and costs of the Company and the Selling Stockholders in
connection with the marketing of the Shares; and (c) each Selling Stockholder
will pay or cause to be paid all costs and expenses incident to the performance
of such Selling Stockholder's obligations hereunder which are not otherwise
specifically provided for in this Section, including (i) any fees and expenses
of counsel for such Selling Stockholder; (ii) such Selling Stockholder's pro
rata share of the fees and expenses of the Attorneys-in-Fact and the Custodian;
and (iii) all expenses and taxes incident to the sale and delivery of the Shares
to be sold by such Selling Stockholder. In connection with clause (c)(iii) of
the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock
transfer tax, and the Selling Stockholders agree to reimburse Goldman, Sachs &
Co. for associated carrying costs if such tax payment is not rebated on the day
of payment and for any portion of such tax payment not rebated. It is
understood, however, that the Company shall bear, and the Selling
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<PAGE> 12
Stockholders shall not be required to pay or to reimburse the Company for, the
cost of any other matters not directly relating to the sale and purchase of the
Shares pursuant to this Agreement, and that, except as provided in this Section,
Section 8 and Section 11 hereof, the Underwriters will pay all of their own
costs and expenses, including the fees of their counsel, transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected with
any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties of the Company and the
Selling Stockholders herein are, at and as of such Time of Delivery, true and
correct, the condition that the Company and the Selling Stockholders shall have
performed all of its and their obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall have
been complied with to your reasonable satisfaction;
(b) Milbank, Tweed, Hadley & McCloy LLP, counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated such
Time of Delivery, with respect paragraphs (i), (ii), (iv) and (ix) of subsection
(c) below, as well as a statement to the effect of the text following paragraph
(ix) of subsection (c) below, and such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Fried, Frank, Harris, Shriver & Jacobson, special counsel
for the Company, shall have furnished to you their written opinion, dated such
Time of Delivery, in form and substance satisfactory to you, to the effect that:
(i) The Company has been incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority necessary to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the Shares have been duly and
validly authorized and issued and are fully paid and non-assessable;
(iii) Each of QSP, Inc., and R.D. Manufacturing
Corporation (each a "Designated Subsidiary" and collectively, the
"Designated Subsidiaries") has been incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with corporate power and authority necessary to own its
properties and conduct its business as described in the Prospectus; and
all of the issued shares of capital stock of each such Designated
Subsidiary have been duly and validly authorized and issued, are fully
paid and non-assessable, and (except for directors' qualifying shares)
are owned of record directly or indirectly by the Company;
(iv) This Agreement has been duly authorized,
executed and delivered by the Company;
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<PAGE> 13
(v) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, (i) any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, (ii) the provisions of
the Certificate of Incorporation or By-laws of the Company, (iii) the
Delaware General Corporation Law or any present law, or present
regulation of any government agency or authority, of the State of New
York or the United States of America known by us to be applicable to
the Company or any of its subsidiaries or their respective properties
or (iv) any court decree or order binding upon the Company or any of
its subsidiaries or their respective properties (it being understood
that (A) with respect to the opinions in clauses (i) and (iv) of this
paragraph, (w) such opinions are limited to the indentures, mortgages,
deeds of trust, loan agreements, other agreements, instruments or court
decrees or orders (the "Identified Documents") which have been
identified to such counsel in a certificate provided by an officer of
the Company as material to the Company and its subsidiaries, taken as a
whole, (x) such counsel is not required to express any opinion with
respect to any violation not readily ascertainable from the face
thereof or arising under or based upon any cross-default provision
insofar as it relates to a default under any indentures, mortgages,
deeds of trust, loan agreements, other agreements, instruments or court
decrees or orders not listed on such certificate, (y) in rendering its
opinion with respect to any covenant of a financial or numerical nature
or requiring computation such counsel may rely as to matters of fact on
an officers' certificate of the Company and (z) such counsel is not
required to make any independent investigation as to whether the
Identified Documents which are governed by the laws of any jurisdiction
other than the State of New York, will be enforced as written under the
laws of such jurisdiction and (B) the opinion in clause (iii) of this
paragraph is limited (x) to our review of only those laws and
regulations that, in our experience, are normally applicable to
transactions of the type contemplated by this Agreement, and (y) in
that such counsel is not required to express any opinion with respect
to the application of, or compliance with, Federal or state securities
or Blue Sky laws or any rules or regulations thereunder);
(vi) No consent, approval, authorization, order,
registration or qualification of or with any United States or New York
court or governmental agency or body, or with respect to matters
arising under the Delaware General Corporation Law, Delaware court or
governmental agency or body is required by or of the Company for the
sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration
under the Act of the Shares, and such consents, approvals,
authorizations, orders, registrations or qualifications as may be
required under state or foreign securities or Blue Sky laws, rules and
regulations in connection with the purchase and distribution of the
Shares by the Underwriters (it being understood that this opinion is
limited to those consents, approvals, authorizations, orders,
registrations or qualifications that, in our experience, are normally
applicable to transactions of the type contemplated by this Agreement);
(vii) The Company is not an "investment company", as
such term is defined in the Investment Company Act;
(viii) The documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules, and other financial data derived from
the financial statements or accounting records of the Company therein,
as to which such counsel need express no opinion), when they were filed
with the Commission appear on their face to be
13
<PAGE> 14
responsive as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission
thereunder; and
(ix) The Registration Statement and the Prospectus
and or any amendments or supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules, and other financial data derived from the financial
statements or accounting records of the Company, therein, as to which
such counsel need express no opinion), appear on their face to be
responsive as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder.
In addition, in the course of the preparation by the Company of the
Registration Statement and any amendment thereto and the Prospectus and any
amendment or supplement thereto, such counsel has participated in conferences
with certain of the officers and other representatives of the Company,
representatives of the independent certified public accountants for the Company
and representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus were discussed. Between the date of
effectiveness of the Registration Statement and any such amendment thereto and
the time of delivery of this letter, such counsel attended additional
conferences with certain of the officers and representatives of the Company, at
which the contents of the Registration Statement and any such amendment thereto
and the Prospectus and any such amendment or supplement thereto were discussed
to a limited extent. Given the limitations inherent in the independent
verification of factual matters and the character of determinations involved in
the registration process, such counsel may state that they are not passing upon
or assuming any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and any such amendment
thereto or the Prospectus and any such amendment or supplement thereto. Subject
to the foregoing and on the basis of the information gained in the performance
of the services referred to above, including information obtained from officers
and other representatives of, and the independent public accountants for, the
Company, no facts have come to their attention to cause them to believe that as
of its effective date, the Registration Statement or any amendment thereto made
by the Company prior to such Time of Delivery contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that, as of its
date, the Prospectus or any amendment or supplement thereto made by the Company
prior to such Time of Delivery contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. Also,
subject to the foregoing, no facts have come to such counsel's attention in the
course of the procedures described in the second paragraph of this section that
have caused such counsel to believe that, as of such Time of Delivery, the
Prospectus as amended or supplemented contains an untrue statement of a material
fact or omits to state a material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading. Such
counsel may state that they express no view or belief, however, with respect to
the financial statements and related schedules included in, and other financial
data derived from the financial statements or accounting records of the Company
excluded or omitted from, the Registration Statement or Prospectus.
In rendering such opinion, such counsel may rely, in respect to matters
of fact, and to the extent not specifically set forth above, upon certificates
of officers of the Company and its subsidiaries and certificates of public
officials. In rendering such opinion, such counsel may state that they express
no opinion as to the laws of any jurisdiction other than the laws of the State
of New York, the Federal law of the United States and, to the extent relevant
for the opinions expressed, the General Corporation Law of the State of
Delaware;
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<PAGE> 15
(d) Clifford H.R. DuPree, Vice President and Associate General
Counsel of the Company, shall have furnished to you his written opinion, dated
such Time of Delivery, in form and substance satisfactory to you, to the effect
that:
(i) The Company has been incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority and all governmental
licenses, permits, approvals, franchises, consents and authorizations
necessary to own its properties and conduct its business as described
in the Prospectus other than any such license, permit, approval,
franchise, consent or authorization the failure to possess which would
not have a material adverse effect on the business or financial
condition of the Company and its subsidiaries, taken as a whole;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the Shares have been duly and
validly authorized and issued and are fully paid and non-assessable;
and the Shares conform to the description of the Stock contained in the
Prospectus;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified or in good standing in any such
jurisdiction;
(iv) Each of QSP, Inc., R.D. Manufacturing
Corporation, The Reader's Digest Association Proprietary Limited, The
Reader's Digest Association (Canada) Ltd., Selection du Reader's Digest
S.A., Verlag Das Beste G.m.b.H., The Reader's Digest Association
Limited and Books Are Fun, Ltd. (each an "Indicated Subsidiary" and
collectively, the "Indicated Subsidiaries") has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation or, in jurisdictions outside
of the United States, the substantive equivalent thereto, with
corporate power and authority and all governmental licenses, permits,
approvals, franchises, consents and authorizations necessary to own its
properties and conduct its business as described in the Prospectus,
other than any such license, permit, approval, franchise, consent or
authorization the failure to possess which would not have a material
adverse effect on the business or financial condition of the Company
and its subsidiaries, taken as a whole; and all of the issued shares of
capital stock of each such Indicated Subsidiary have been duly and
validly authorized and issued, are fully paid and non-assessable, and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(v) Other than as set forth or incorporated by
reference in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the knowledge
of such counsel, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(vi) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
15
<PAGE> 16
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, except for any such conflict, breach,
violation or default which individually or in the aggregate would not
have a material adverse effect on the Company and its subsidiaries
taken as a whole or which would not have an adverse effect on the
transactions contemplated hereby, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties;
(vii) Neither the Company nor any of the Designated
Subsidiaries is in violation of its certificate of incorporation or
by-laws;
(viii) The documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules, and other financial data derived from
the financial statements or accounting records of the Company therein,
as to which such counsel need express no opinion), when they were filed
with the Commission complied as to form in all material respects with
the requirements of the Exchange Act and the rules and regulations of
the Commission thereunder; and he has no reason to believe that any of
such documents, when such documents were so filed contained an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so
filed, not misleading;
(ix) To the knowledge of such counsel, the Company,
either directly or through a subsidiary, owns all the patents,
trademarks, service marks, trade names and copyrights, or licenses
rights with respect to the foregoing necessary for the present and
planned future conduct of its business as described in the Prospectus,
except where the failure to own or license the same would not have a
material adverse effect on the business or condition, financial or
otherwise, of the Company and its subsidiaries, taken as a whole,
without any conflict known to such counsel with the rights of others,
the result of which conflict could materially and adversely affect the
business or condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole, and, to the knowledge of such counsel,
there is no infringement on such patents, trademarks, service marks,
trade names and copyrights by others, the result of which infringement
could materially and adversely affect the business or condition,
financial or otherwise, of the Company and its subsidiaries, taken as a
whole; and
(x) The Registration Statement and the Prospectus and
or any amendments or supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules, and other financial data derived from the financial
statements or accounting records of the Company, therein, as to which
such counsel need express no opinion), appear on their face to be
responsive as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder.
In addition, in the course of the preparation by the Company of the
Registration Statement and any amendment thereto and the Prospectus and any
amendment or supplement thereto, such counsel has participated in conferences
with certain of the officers and other representatives of the Company,
representatives of the independent certified public accountants for the Company
and representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus were discussed. Between the date of
effectiveness of the Registration Statement and any such amendment thereto and
the
16
<PAGE> 17
time of delivery of this letter, such counsel attended additional conferences
with certain of the officers and representatives of the Company, at which the
contents of the Registration Statement and any such amendment thereto and the
Prospectus and any such amendment or supplement thereto were discussed to a
limited extent. Given the limitations inherent in the independent verification
of factual matters and the character of determinations involved in the
registration process, such counsel may state that he is not passing upon or
assuming any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and any such amendment
thereto or the Prospectus and any such amendment or supplement thereto. Subject
to the foregoing and on the basis of the information gained in the performance
of the services referred to above, including information obtained from officers
and other representatives of, and the independent public accountants for, the
Company, no facts have come to his attention to cause him to believe that as of
its effective date, the Registration Statement or any amendment thereto made by
the Company prior to such Time of Delivery contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that, as of its
date, the Prospectus or any amendment or supplement thereto made by the Company
prior to such Time of Delivery contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. Also,
subject to the foregoing, no facts have come to such counsel's attention in the
course of the procedures described in the second paragraph of this section that
have caused such counsel to believe that, as of such Time of Delivery, the
Prospectus as amended or supplemented contains an untrue statement of a material
fact or omits to state a material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading. Such
counsel may state that he expresses no view or belief, however, with respect to
the financial statements and related schedules therein, and other financial data
derived from the financial statements or accounting records of the Company
excluded or omitted from the Registration Statement or Prospectus. Further,
based upon such participation and subject to such limitations and qualifications
described above, he does not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or required to
be incorporated by reference into the Prospectus or required to be described in
the Registration Statement or the Prospectus which are not filed or incorporated
by reference or described as required.
In rendering such opinion, such counsel may rely, (A) in respect to
matters of fact, and to the extent not specifically set forth above, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials, and (B) as to matters of law other than New York and Federal
law and the General Corporation Law of Delaware, on the opinions of local
counsel, provided that such counsel shall state that he believes that both you
and he is justified in relying upon such opinions and certificates and provided
further that true and complete copies of such opinions and certificates shall be
delivered to you. In lieu of delivering such opinion as to matters governed by
the laws of jurisdictions outside of the United States, such counsel shall cause
to be delivered to you opinions of local counsel reasonably satisfactory to you,
provided that such local counsel shall state that they believe that both you and
he are justified in relying upon such opinions;
(e) Shearman & Sterling, special counsel for each of the
Selling Stockholders, shall have furnished to you their written opinion with
respect to each of the Selling Stockholders, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) A Power of Attorney has been duly authorized,
executed and delivered by each Selling Stockholder and constitutes a
valid and binding agreement of each such Selling Stockholder
enforceable against such Selling Stockholder in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws
affecting
17
<PAGE> 18
enforcement of creditors' rights generally and except as enforcement
thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law);
(ii) A Custody Agreement has been duly authorized,
executed and delivered by each Selling Stockholder and assuming due
authorization, execution and delivery thereof by ChaseMellon
Shareholder Services L.L.C., constitutes a valid and binding agreement
of each such Selling Stockholder enforceable against such Selling
Stockholder in accordance with its terms, except as enforcement thereof
may be limited by bankruptcy, insolvency (including, without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law);
(iii) This Agreement has been duly executed and
delivered by or on behalf of each Selling Stockholder;
(iv) The compliance by each Selling Stockholder with
all of the provisions of this Agreement, the Power of Attorney and the
Custody Agreement to which such Selling Stockholder is a party and the
consummation of the transactions therein contemplated will not conflict
with or result in a breach or violation of, or constitute a default
under, (i) any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound, or to which any of
the property or assets of such Selling Stockholder is subject, (ii) the
provisions of the Certificate of Incorporation or By-laws of such
Selling Stockholder, (iii) any present law, or present regulation of
any government agency or authority, of the State of New York or the
United States of America known by such counsel to be applicable to such
Selling Stockholder or its properties or (iv) any court decree or order
binding upon such Selling Stockholder or its properties (it being
understood that (A) with respect to the opinions in clauses (i) and
(iv) of this paragraph, (w) these opinions are limited to the
indentures, mortgages, deeds of trust, loan agreements, other
agreements, instruments or court decrees or orders (the "Specified
Documents") which have been identified to such counsel as material to
such Selling Stockholder in certificates attached to such counsel's
opinion as Exhibit A (the "Certificates") of an officer of such Selling
Stockholder and only to the extent such Specified Documents are
governed by the laws of the State of New York or the federal laws of
the United States of America, (x) such counsel expresses no opinion
with respect to any violation not readily ascertainable from the face
thereof or arising under or based upon any cross-default provision
insofar as it relates to a default under any indenture, mortgage,
deed of trust, loan agreement, other agreement, instrument or court
decree or order not listed on the Certificates [and (y) in rendering
its opinion with respect to any covenant of a financial or numerical
nature or requiring computation such counsel has relied as to matters
of fact on an officer's certificate of such Selling Stockholder
attached to such counsel's opinion as Exhibit A and Exhibit B] and (B)
the opinion in clause (iii) of this paragraph is limited (x) to such
counsel's review of only those laws and regulations that, in such
counsel's experience, are normally applicable to transactions of the
type contemplated by this Agreement, the Custody Agreement and the
Power of Attorney, and (y) in that such counsel expresses no opinion
with respect to the application of, or compliance with, Federal or
state securities or Blue Sky laws or any rules or regulations
thereunder);
(v) No consent, approval, authorization, order,
registration or qualification of or with any United States or New York
court or governmental agency or body is required by or on behalf of
such Selling Stockholder for the consummation of the transactions
contemplated
18
<PAGE> 19
by this Agreement, except for the registration of the Shares under the
Act and such as may be required under state or foreign securities or
Blue Sky laws, rules or regulations in connection with the purchase and
distribution of the Shares by the Underwriters (it being understood
that this opinion is limited to those consents, approvals,
authorizations, orders, registrations or qualifications that, in our
experience, are normally applicable to transactions of the type
contemplated by this Agreement, the Custody Agreement and the Power of
Attorney);
(vi) Assuming that (i) the certificate or
certificates representing the Common Stock to be sold by such Selling
Stockholder pursuant to this Agreement has been effectively indorsed in
blank in accordance with Article 8 of the Uniform Commercial Code as in
effect in the State of New York ("NYUCC") and (ii) neither the
Underwriters, nor the agents acquiring possession of the Shares on
their behalf, have notice of any adverse claim to the Shares, then,
upon the Underwriters' acquiring possession of such certificate or
certificates for the Shares (or the agent's acquiring possession of
such certificate or certificates for the Shares on the Underwriters'
behalf) and paying the purchase price therefor pursuant to the
Underwriting Agreement, each Underwriter will be a "protected
purchaser" of the Shares to be purchased by it (within the meaning of
Section 8-303 of the NYUCC) and will acquire its interest in such
Shares (including, without limitation, all rights that such Selling
Stockholder had or has the power to transfer in such Shares) free of
any adverse claim; and
(vii) None of the Selling Stockholders is an
"investment company," as such term is defined under the Investment
Company Act of 1940, as amended.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the State of
New York and the Federal laws of the United States.
(f) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery, (i)
the accounting firm listed in Section 1(a)(xvi)(A) hereof shall have furnished
to you a letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in Annex I
hereto and (ii) the accounting firm listed in Section 1(a)(xvi)(B) hereof shall
have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex II hereto;
(g) (i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position, results of
operations, prospects, investment objectives, investment policies or liabilities
of the Company, otherwise than as set forth or contemplated in the Prospectus,
(ii) neither the Company nor any of its subsidiaries shall have sustained since
the date of the latest audited financial statements included in the Prospectus
or incorporated by reference therein any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus, and (iii)
since the respective dates as of which information is given in the Prospectus
there shall not have been any change in the capital stock short-term debt or
long-term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, taken as a whole, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such case
described in clause (i), (ii) or (iii), is in your judgment so material and
adverse as
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<PAGE> 20
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being issued at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange; (ii) a suspension or
material limitation in trading in the securities of the Company on the New York
Stock Exchange; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the outbreak
or material escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this clause (iv) in your judgment makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being issued at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(i) The Shares to be sold by the Selling Stockholders at such
Time of Delivery shall have been duly listed, subject to notice of issuance, on
the New York Stock Exchange;
(j) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of copies of the Prospectus
on the New York Business Day next succeeding the date of this Agreement; and
(k) The Company and the Selling Stockholders shall have
furnished or caused to be furnished to you at such Time of Delivery certificates
of officers of the Company and the Selling Stockholders, respectively,
satisfactory to you as to the accuracy of the representations and warranties of
the Company and the Selling Stockholders, respectively, herein at and as of such
Time of Delivery, as to the satisfaction and performance by the Company and the
Selling Stockholders of all of their respective obligations hereunder and
thereunder to be performed at or prior to such Time of Delivery, as to the
matters set forth in subsections (a) and (g) of this Section (except in the case
of the Selling Stockholders) and as to such other matters relating to the
transactions contemplated herein and therein as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or any such amendment or supplement thereto, in reliance upon
and in conformity with written information furnished to the Company by any
Underwriter through Goldman, Sachs & Co. expressly for use therein, and
provided, further, that the Company shall not be liable to any Underwriter under
the indemnity agreement in this subsection (a) with respect to any Preliminary
Prospectus to the extent that any such loss, claim, damage or liability results
from the fact such Underwriter sold Shares to a person to whom there was not
sent or given, at or prior to the written confirmation of such sale, a copy of
the Prospectus (or of the Prospectus as then amended or supplemented) in any
case where such delivery is required by the Act if the Company has previously
furnished copies thereof to such Underwriter and the loss, claim, damage or
liability of such Underwriter results from an untrue statement
20
<PAGE> 21
or omission of a material fact contained in the Preliminary Prospectus which was
corrected in the Prospectus (or the Prospectus as amended or supplemented).
(b) Each Selling Stockholder, severally, and not jointly, in
proportion to the number of Shares to be sold by each such Selling Stockholder
will indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Selling Stockholder shall not be liable to any Underwriter under the indemnity
agreement in this subsection (b) with respect to any Preliminary Prospectus to
the extent that any such loss, claim, damage or liability of such Underwriter
results from the fact such Underwriter sold Shares to a person to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the Prospectus or of the Prospectus as then amended or supplemented in any
case where such delivery is required by the Act if the Company has previously
furnished copies thereof to such Underwriter and the loss, claim, damage or
liability of such Underwriter results from an untrue statement or omission of a
material fact contained in the Preliminary Prospectus which was corrected in the
Prospectus (or the Prospectus as amended or supplemented).
(c) Each Underwriter will indemnify and hold harmless the
Company and each Selling Stockholder against any losses, claims, damages or
liabilities to which the Company or such Selling Stockholder may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified,
21
<PAGE> 22
to assume the defense thereof, with counsel satisfactory to such indemnified
party, provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have been advised by its counsel that representation of such indemnified party
and the indemnifying party by the same counsel would be inappropriate (whether
or not such representation by the same counsel has been proposed) under
applicable standards of professional conduct due to actual or potential
differing interests between them, the indemnified party or parties shall have
the right to select one separate counsel to participate in the defense of such
action on behalf of all such indemnified parties. Upon receipt of notice from
the indemnifying party to such indemnified party of its election so to assume
the defense of such action and approval by the indemnified party of counsel, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation unless the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Selling Stockholders on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in
subsection (c) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of
22
<PAGE> 23
this subsection (e), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint, and the
Selling Stockholders' obligations in this subsection (e) to contribute are
several and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section 8 shall be in addition to any liability which
the Company and the respective Selling Stockholders may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and of any
Selling Stockholders and to each person, if any, who controls the Company or any
Selling Stockholder within the meaning of the Act.
(g) Notwithstanding the foregoing provisions of this Section
8, in no event shall any Selling Stockholder be liable under this Section 8 for
an amount in excess of the net proceeds received by such Selling Stockholder
from the sale of the Shares.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder, you may in your discretion
arrange for you or another party or other parties to purchase such Shares on the
terms contained herein at a Time of Delivery. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Stockholders shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company and the Selling Stockholders agree to
file promptly any amendments to the Registration Statement or the Prospectus
which in your opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholders as provided in subsection (a) above,
the aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company and the Selling Stockholders shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
23
<PAGE> 24
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholders as provided in subsection (a) above,
the aggregate number of such Shares which remains unpurchased exceeds
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, or if the Company and the Selling Stockholders shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Selling Stockholders sell
the Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company and the Selling Stockholders,
except for the expenses to be borne by the Company, the Selling Stockholders and
the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company or any of the Selling Stockholders or any officer or
director or controlling person of the Company or any controlling person of any
Selling Stockholder and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason, any Shares are not delivered by or on behalf of the
Selling Stockholders as provided herein, the each of Selling Stockholders, pro
rata (based on the number of Shares to be sold by each such Selling Stockholder
hereunder), will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company and
the Selling Stockholders shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; and if to any Selling Stockholder
shall be delivered or sent by mail, telex or facsimile transmission to counsel
for such Selling Stockholder at its address set forth in Schedule II hereto;
provided, however, that any notice to an Underwriter pursuant to Section 8(d)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire, or
telex constituting such Questionnaire, which address will be supplied to
24
<PAGE> 25
the Company or the Selling Stockholders by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company, the Selling Stockholders and each person who controls the Company,
any Selling Stockholder or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between each of the Underwriters,
the Company and the Selling Stockholders. It is understood that your
25
<PAGE> 26
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company and the Selling Stockholders for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
THE READER'S DIGEST ASSOCIATION, INC.
By:
---------------------------------
Name: George S. Scimone
Title: Senior Vice President and
Chief Financial Officer
DEWITT WALLACE-READER'S DIGEST FUND, INC.
LILA WALLACE-READER'S DIGEST FUND, INC.
LILA ACHESON WALLACE FUND FOR THE
METROPOLITAN MUSEUM OF ART
LILA ACHESON AND DEWITT WALLACE FUND FOR
LINCOLN CENTER
DEWITT WALLACE FUND FOR
MACALESTER COLLEGE
LILA ACHESON AND DEWITT WALLACE FUND FOR
THE HUDSON HIGHLANDS
DEWITT WALLACE FUND FOR
COLONIAL WILLIAMSBURG
LILA ACHESON WALLACE FUND FOR
THE NEW YORK ZOOLOGICAL SOCIETY
DEWITT WALLACE FUND FOR MEMORIAL
SLOAN-KETTERING CANCER CENTER
COMMUNITY FUNDS, INC.
By:
-----------------------------
As Attorney-in-Fact
Accepted as of the date hereof:
Goldman, Sachs & Co.
Lazard Freres & Co. LLC
By:
------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
26
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
UNDERWRITER TOTAL NUMBER OF FIRM NUMBER OF OPTIONAL SHARES
- ----------- SHARES TO BE PURCHASED IF
TO BE PURCHASED MAXIMUM OPTION EXERCISED
--------------- ------------------------
<S> <C> <C>
Goldman, Sachs & Co.
Lazard Freres & Co. LLC
========== =========
Total 10,000,000 1,500,000
</TABLE>
<PAGE> 28
SCHEDULE II
<TABLE>
<CAPTION>
Total Number of Number of
Firm Shares to Optional Shares
be Delivered to be Delivered
---------------- if Maximum
Option Exercised
----------------
The Selling Stockholders(a):
<S> <C> <C>
DeWitt Wallace-Reader's Digest Fund, Inc.................... 2,836,069 425,410
Lila Wallace-Reader's Digest Fund, Inc...................... 2,048,629 307,294
Lila Acheson Wallace Fund for the Metropolitan Museum Of Art 1,481,795 222,270
Lila Acheson and Dewitt Wallace Fund for Lincoln Center..... 882,963 132,444
Dewitt Wallace Fund for Macalester College 549,575 82,437
Lila Acheson and Dewitt Wallace Fund for the Hudson Highlands. 535,437 80,315
Dewitt Wallace Fund for Colonial Williamsburg............... 629,561 94,435
Lila Acheson Wallace Fund for the New York Zoological Society 401,347 60,202
Dewitt Wallace Fund for Memorial Sloan-Kettering Cancer Center 321,078 48,161
Community Funds, Inc........................................ 313,546 47,032
------- ------
Total............................................. 10,000,000 1,500,000
</TABLE>
- ---------------
(a) Each Selling Stockholder is represented by Shearman & Sterling, 599
Lexington Avenue, New York, New York 10022 and has appointed George V.
Grune and M. Christine DeVita, and each of them, as the
Attorneys-in-Fact for such Selling Stockholder.
1
<PAGE> 29
ANNEX I
Pursuant to Section 7(f)(i) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and
any supplementary financial information and schedules (and, if
applicable, financial forecasts and/or pro forma financial information)
examined by them and included or incorporated by reference in the
Registration Statement or the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Act or the Exchange Act, as applicable, and the related published rules
and regulations thereunder; and, if applicable, they have made a review
in accordance with standards established by the American Institute of
Certified Public Accountants of the consolidated interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified
in such letter, as indicated in their reports thereon, copies of which
have been furnished to the representatives of the Underwriters (the
"Representatives") and are attached hereto;
(iii) They have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus and/or included in the Company's
quarterly report on Form 10-Q incorporated by reference into the
Prospectus as indicated in their reports thereon copies of which are
attached hereto; and on the basis of specified procedures including
inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations, nothing came to their
attention that caused them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and
regulations;
(iv) The unaudited selected financial information
with respect to the consolidated results of operations and financial
position of the Company for the five most recent fiscal years included
in the Prospectus and included or incorporated by reference in Item 6
of the Company's Annual Report on Form 10-K for the most recent fiscal
year agrees with the corresponding amounts (after restatement where
applicable) in the audited consolidated financial statements for such
five fiscal years which were included or incorporated by reference in
the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the
Prospectus under selected captions with the disclosure requirements of
Regulation S-K and on the basis of limited procedures specified in such
letter nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material
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<PAGE> 30
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not
constituting an examination in accordance with generally accepted
auditing standards, consisting of a reading of the unaudited financial
statements and other information referred to below, a reading of the
latest available interim financial statements of the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that
caused them to believe that:
(A) (i) the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus and/or
included or incorporated by reference in the Company's
Quarterly Reports on Form 10-Q incorporated by reference in
the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the
Exchange Act as it applies to Form 10-Q and the related
published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed
consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the
Prospectus or included in the Company's Quarterly Reports on
Form 10-Q incorporated by reference in the Prospectus, for
them to be in conformity with generally accepted accounting
principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and
any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial
statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent
fiscal year;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived the unaudited
condensed financial statements referred to in Clause (A) and
any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in Clause (B) were
not determined on a basis substantially consistent with the
basis for the audited financial statements included or
incorporated by reference in the Company's Annual Report on
Form 10-K for the most recent fiscal year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the
Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation rights,
upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest balance sheet included or incorporated
by
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<PAGE> 31
reference in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included or incorporated by
reference in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
and
(F) for the period from the date of the latest financial
statements included or incorporated by reference in the
Prospectus to the specified date referred to in Clause (E)
there were any decreases in consolidated net revenues or
operating profit or the total or per share amounts of
consolidated net income or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with the
comparable period of the preceding year and with any other
period of corresponding length specified by the
Representatives, except in each case for increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in
their report(s) included or incorporated by reference in the Prospectus
and the limited procedures, inspection of minute books, inquiries and
other procedures referred to in paragraphs (iii) and (vi) above, they
have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Representatives which are derived from the general
accounting records of the Company and its subsidiaries, which appear in
the Prospectus (excluding documents incorporated by reference) or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives or in documents incorporated by
reference in the Prospectus specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and
have found them to be in agreement.
3
<PAGE> 32
ANNEX II
Pursuant to Section 7(f)(ii) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to Books Are Fun within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and
any supplementary financial information and schedules (and, if
applicable, financial forecasts and/or pro forma financial information)
examined by them and incorporated by reference in the Registration
Statement or the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act or the Exchange
Act, as applicable, and the related published rules and regulations
thereunder;
(iii) They have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited condensed statements of income, balance
sheets and statements of cash flows included in the Company's amended
current report on Form 8-K/A as filed with the Commission on
___________, 1999 (the "BAF 8-K"), which amends and restates the
Company's current report on Form 8-K as filed with the Commission on
October 7, 1999, incorporated by reference into the Prospectus as
indicated in their reports thereon copies of which are attached hereto;
and on the basis of specified procedures including inquiries of
officials of Books Are Fun who have responsibility for financial and
accounting matters regarding whether the unaudited condensed financial
statements referred to in paragraph (iv) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations; and
(iv) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of Books Are Fun, inspection of the minute
books of Books Are Fun since the date of the latest audited financial
statements incorporated by reference in the Prospectus, inquiries of
officials of Books Are Fun responsible for financial and accounting
matters and such other inquiries and procedures as may be specified in
such letter, nothing came to their attention that caused them to
believe that the unaudited condensed statements of income, balance
sheets and statements of cash flows included in the BAF 8-K
incorporated by reference in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of
the Exchange Act as it applies to Quarterly Reports on Form 10-Q and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed statements of
income, balance sheets and statements of cash flows included in the BAF
8-K incorporated by reference in the Prospectus, for them to be in
conformity with generally accepted accounting principles.
1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
The Reader's Digest Association, Inc.
We consent to the use of our report on the consolidated financial statements of
The Reader's Digest Association, Inc. as of June 30, 1999 and 1998 and for each
of the years in the three-year period ended June 30, 1999, incorporated herein
by reference and to the reference to our firm under the headings "Selected
Consolidated Financial Information" and "Experts" in the prospectus.
KPMG LLP
New York, New York
October 27, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-88625) and
related Prospectus of The Reader's Digest Association, Inc. for the
registration of 11,500,000 shares of its Class A Nonvoting Common Stock and to
the incorporation by reference therein of our report dated January 25, 1999,
with respect to the financial statements of Books Are Fun, Ltd. as of and for
the year ended December 31, 1998, included in the Current Report of The
Reader's Digest Association, Inc. on Form 8-K dated October 7, 1999, filed with
the Securities and Exchange Commission.
ERNST & YOUNG LLP
Des Moines, Iowa
October 26, 1999
