As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
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)
DELAWARE READER'S DIGEST ROAD 13-1726769
(State or other PLEASANTVILLE, NY 10570-7000 (I.R.S. Employer
jurisdiction (914) 238-1000 Identification No.)
of incorporation or (Address, including zip code,
organization) and telephone number,
including area code, of
registrant's principal
executive offices)
-----------------------
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:
Jeffrey Bagner, Esq. Andrew Janszky, Esq. Donald B. Brant, Jr., Esq.
Fried, Frank, Harris Shearman & Sterling Milbank, Tweed, Hadley &
Shriver & Jacobson 599 Lexington Avenue McCloy LLP
One New York Plaza New York, New York One Chase Manhattan Plaza
New York, New York 10022 New York, New York 10005
10004-1980 (212) 848-8000 (212) 530-5618
(212) 859-8000
-----------------------
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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================
AMOUNT PROPOSED PROPOSED MAXIMUM AMOUNT
TITLE OF EACH CLASS OF TO BE MAXIMUM AGGREGATE OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE REGISTRATION
PER UNIT FEE (1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Nonvoting Common 11,500,000
Stock, par value $0.01 per shares $28.1875 $324,156,250 $90,116
share....................
============================================================================================
<FN>
(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 5, 1999 ($28.1875
per share).
</FN>
</TABLE>
<PAGE>
===============================================================================
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.
===============================================================================
<PAGE>
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.
<PAGE>
Subject to Completion. Dated October 8, 1999.
10,000,000 Shares
THE READER'S DIGEST ASSOCIATION, INC.
Class A Nonvoting Common Stock
(par value $0.01 per share)
-------------
The selling stockholders identified in this prospectus are offering
all 10,000,000 shares to be sold in this offering. 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." On October 7, 1999, the last reported
price for the Class A Nonvoting Common Stock as reported on the New York
Stock Exchange Composite Tape was $30 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.
-------------
Per Share Total
--------- -----
Initial price to public..................... $ $
Underwriting discount....................... $ $
Proceeds, before expenses, to the selling $ $
stockholders..............................
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>
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; and
4. Current Report on Form 8-K dated October 7, 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.
<PAGE>
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, and references to the
"Funds" are to the DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc.
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:
o Expanding our presence in market segments that leverage Reader's
Digest's brand trust and customer base, specifically by:
o Emphasizing five key consumer interest areas: home, health,
family, finance and faith; and
o Targeting consumers' life stages from family formation
onward, with a particular focus on consumers over 50,
o Expanding our product offerings beyond publishing in these
targeted consumer interest areas and life stages;
o Continuing geographic expansion, including expanding into new
countries and expanding the products and services we offer in
existing markets;
o Developing new marketing and distribution channels; and
o Integrating the Internet into all of our businesses by:
o Revitalizing and globalizing our current Web sites;
o Making strategic investments in existing Web sites that
match our areas of strategic interest;
o Expanding our existing U.S.-based Web sites internationally;
and
o 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
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
dependable 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 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 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 results, for
example, 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:
o Adding magazine subscriptions from our QSP subsidiary to the
Books Are Fun product mix;
o Expanding distribution opportunities for Reader's Digest
products, especially books, music, and video, through Books Are
Fun's distribution infrastructure;
o Increasing QSP's penetration, which is currently 20,000 schools
compared with Books Are Fun's 60,000 schools,
o Re-branding selected Books Are Fun fairs with the Reader's Digest
name to better define their position with consumers;
o Achieving cost savings through consolidating book production; and
o Expanding internationally using Reader's Digest's global
infrastructure.
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.benchmark.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.
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)(FN1), 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.
- --------
FN1 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.
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 and our Good Catalog Company subsidiary will contribute property
and financing in exchange for an 80.1% equity interest in the venture.
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 financing for a 19.9%
equity interest in the venture.
Competitive advantages in the category include:
o the gifts.com domain name, which we believe will be very strong
in this category;
o 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;
o 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
o 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.
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 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 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.
---------------
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.
THE OFFERING
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"
- -----------
(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 Funds 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. For
more information regarding the share exchange, see "Principal
Stockholders" elsewhere in this prospectus.
(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.
<PAGE>
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,
---------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ----------- ----------- ----------- ----------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ----------- ----------- ----------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
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
- ----------------
<FN>
(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.
</FN>
</TABLE>
<PAGE>
REVENUES BY GEOGRAPHIC AREA
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
1997 1998 1999
------------- ------------- ------------
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
============= ============= ============
REVENUES AND OPERATING PROFIT BY OPERATING SEGMENT
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
1997 1998 1999
------------- ------------- ------------
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
============= ============= ============
<PAGE>
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.
DIVIDEND
HIGH LOW PER SHARE
---- --- -----------
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 7, 1999) ............... 30.3125 27.625 $ --
On October 7, 1999, the last sale price of our Class A nonvoting
common stock as reported on the New York Stock Exchange Composite Tape was
$30.
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 7, 1999, the last sale
price of our Class B voting common stock as reported on the New York Stock
Exchange Composite Tape was $27.
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 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.
<PAGE>
CAPITALIZATION
(in millions)
The following table sets forth our condensed consolidated
capitalization as of June 30, 1999.
JUNE 30, 1999
------------------
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
=============
<PAGE>
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 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>
<PAGE>
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:
o Global Books and Home Entertainment publishes and markets
Condensed Books, series and general books, as well as music and
video products.
o 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).
o 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.
<PAGE>
YEARS ENDED JUNE 30,
------------------------------------
1999 1998 1997
---------- --------- ---------
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 $ 80.8 $ 50.0 $ 161.2
Entertainment...............
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
--------- --------- ---------
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.
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.
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 predominantly
a result of significantly lower unit sales in series books, Condensed Books
and general books and, to a lesser extent, lower-priced product offerings,
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.
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:
1999
---------------
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
---------------
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 $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, including a minimum level of consolidated tangible net
worth. 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 One and Note Five 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.
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
September 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:
o Most significant marketing and fulfillment systems are already
compliant.
o We extensively utilize certain shared applications that have been
or will be remediated once and then deployed to all appropriate
locations.
o Comprehensive testing of all critical systems is conducted in a
simulated Year 2000 environment.
o 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.
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 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:
o the effect of potentially more restrictive privacy and other
governmental regulation relating to our marketing methods;
o the effect of modified and varied promotions; the ability to
identify customer trends;
o the ability to continue to create a broadly appealing mix of new
products;
o 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;
o the ability to attract and retain subscribers and customers in an
economically efficient manner;
o the effect of selective adjustments in pricing; the ability to
expand and more effectively utilize our customer database;
o 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;
o the ability to negotiate and implement productive acquisitions,
strategic alliances and joint ventures;
o the ability to integrate newly acquired and newly formed
businesses successfully;
o the strength of relationships of newly acquired and newly formed
businesses with their employees, suppliers and customers;
o the accuracy of the basis of forecasts relating to newly acquired
and newly formed businesses;
o the ability to contain and reduce costs, especially through
global efficiencies;
o the cost and effectiveness of reengineering of business processes
and operations;
o the accuracy of management's assessment of the current status of
our business;
o the evolution of our organizational and structural capabilities;
o our ability to respond to competitive pressures within and
outside the direct marketing industry, including the Internet;
o the effect of worldwide paper and postage costs; the effect of
postal disruptions on deliveries;
o the effect of foreign currency fluctuations; the effect of the
Year 2000 issue;
o the effect of the transition to the euro; and
o general economic conditions.
<PAGE>
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 49 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:
o reorganizing our business groups on a global basis;
o restructuring our editorial organization;
o establishing new reporting relationships; and
o 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:
o reducing costs and streamlining processes;
o raising capital by selling some underproductive assets; and
o restructuring some underproductive businesses.
Actions that we have taken as part of the ongoing Phase II include:
o 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;
o 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;
o 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;
o selling our publishing operations in South Africa and closing our
operations in Chile, Colombia and Peru;
o consolidating our operations in Benelux, the Nordic countries,
Germany and Switzerland, and those in the Czech Republic and
Hungary;
o selling important works from our fine art collection;
o outsourcing support functions where it is cost-effective;
o consolidating suppliers and combining purchasing efforts for
greater negotiating leverage;
o selling international real estate holdings, including those in
the United Kingdom, Canada and Italy; and
o 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:
o Expanding our presence in market segments that leverage Reader's
Digest's brand trust and customer base, specifically by:
o Emphasizing five key consumer interest areas: home, health,
family, finance and faith; and
o Targeting consumers' life stages from family formation
onward, with a particular focus on consumers over 50,
o Expanding our product offerings beyond publishing in these
targeted consumer interest areas and life stages;
o Continuing geographic expansion, including expanding into new
countries and expanding the products and services we offer in
existing markets;
o Developing new marketing and distribution channels; and
o Integrating the Internet into all of our businesses by:
o Revitalizing and globalizing our current Web sites;
o Making strategic investments in existing Web sites that
match our areas of strategic interest;
o Expanding our existing U.S.-based Web sites internationally;
and
o 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."
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
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.
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.
CIRCULATION AND ADVERTISING
The following table shows circulation and advertising information for
U.S. Magazines operations for fiscal 1999.
JUNE
ISSUES 30,1999 ADVERTISING
MAGAZINE TITLE PER CIRCULATION PAGES
YEAR RATE BASE CARRIED
------ ----------- -----------
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
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.
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 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.
JUNE
ISSUES 30,1999 ADVERTISING
MAGAZINE TITLE PER CIRCULATION PAGES
-------------- YEAR RATE BASE CARRIED
---- ----------- -----------
Reader's Digest....................... 12 12,278,585 11,729
Moneywise............................. 12 108,075 660
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.
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.
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 131,000 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.
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.
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. 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.
POSITIONS AND OFFICES WITH READER'S DIGEST
AND PRINCIPAL OCCUPATIONS DURING THE PAST
NAME AND AGE FIVE YEARS
- ------------ ----------------------------------------------
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. and Venator Group, Inc.
Lawrence R. Ricciardi (59) Mr. Ricciardi has been a member of the 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.
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:
POSITIONS AND OFFICES WITH READER'S DIGEST
AND PRINCIPAL OCCUPATIONS DURING THE PAST
NAME AND AGE FIVE YEARS
- ------------ ----------------------------------------------
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.
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 Vice President,
Business Redesign since 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.
Clifford H.R. DuPree (49) Mr. DuPree was appointed 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.
Thomas D. Gardner (41) 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.
Robert E. Raymond (43) Mr. Raymond was appointed Vice President,
Strategic Acquisitions & Alliances on 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).
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 (52) Mr. Willcox has been Senior Vice President
and Editor-in-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.
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.
PRINCIPAL STOCKHOLDERS
The following table summarizes information regarding the beneficial
ownership of our Class B voting common stock, the only outstanding class of
our voting securities, as of September 30, 1999. 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.
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS
- ----------------------------------------- ----------- ----------
DeWitt Wallace-Reader's Digest Fund, Inc. 3,108,054 25.00%
Two Park Avenue shares (sole
New York, NY 10016 (1) voting and
investment
power)
Lila Wallace-Reader's Digest Fund, Inc. 3,108,053 25.00%
Two Park Avenue shares (sole
New York, NY 10016 (1) voting and
investment
power)
State Street Bank and Trust Company, 1,716,057 13.80%
as trustee of The Reader's Digest shares (shared
Employee Ownership Plan and 401(k) voting and
Partnership(2) investment
power)
Gabelli Funds, LLC (3) 754,000 shares 6.06%
One Corporate Center (sole voting
Rye, NY 10580 and investment
power)
GAMCO Investors Inc. (3) 610,900 shares 4.91%
One Corporate Center (sole voting
Rye, NY 10580 and investment
power)
Gemini Capital Management Ltd. (3) 35,500 shares 0.29%
c/o Appleby, Spurling & Kempe (sole voting
Cedar House, 41 Cedar Avenue and investment
Hamilton HM12 Bermuda power)
- -------------------
(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 the Funds.
<PAGE>
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.
CLASS A NONVOTING COMMON STOCK BENEFICIALLY OWNED
-------------------------------------------------
BEFORE GIVING EFFECT AFTER GIVING EFFECT
TO THE OFFERING TO THE OFFERING
SELLING STOCKHOLDER(1) -------------------- --------------------
- ---------------------- SHARES % SHARES %
------ - ------ -
DeWitt Wallace-Reader's
Digest Fund, Inc.......... 9,957,523 10.6
Lila Wallace-Reader's
Digest Fund, Inc.......... 6,329,842 6.7
- -----------------
(1) The selling stockholders may include one or more of 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, The
DeWitt Wallace Fund for Memorial Sloan-Kettering Cancer Center and
Community Funds, Inc. These organizations beneficially own in the
aggregate 36,050,414 shares or about 38.3% of the outstanding Class A
nonvoting 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.
<PAGE>
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
(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, LLC 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 Funds 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, 16,287,365 shares were
owned by the Funds, and 36,050,414 shares were owned in the aggregate by
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, The DeWitt
Wallace Fund for Memorial Sloan-Kettering Cancer Center and Community
Funds, Inc. Any shares held by affiliates may be sold in accordance with
Rule 144.
The selling stockholders have agreed with the underwriters not to sell
any shares of our Class A nonvoting common stock and the Funds 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.
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 Funds 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.
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 Funds.
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.
<PAGE>
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.
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co. ...............
Lazard Freres & Co. LLC............. ----------
Total....................... 10,000,000
==========
-------------------
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.
Paid by the Selling Stockholders
--------------------------------
No Exercise Full Exercise
----------- -------------
Per Share.. $ $
Total...... $ $
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, 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 stock option 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. See
"Shares Available for Future Sale" for a discussion of certain transfer
restrictions.
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, 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.
<PAGE>
================================== ===================================
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 10,000,000 Shares
an offer to sell only the shares
offered hereby, but only under THE READER'S DIGEST
circumstances and in jurisdictions ASSOCIATION, INC.
where it is lawful to do so. The
information contained in this
prospectus is current only as of
its date.
-----------------
TABLE OF CONTENTS Class A Nonvoting Common Stock
Page (par value $0.01 per share)
----
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 [GRAPHIC OMITTED]
Management's Discussion
and Analysis of Financial
Condition and Results of -------------------
Operations................... 15
Business...................... 27
Properties.................... 38
Legal Proceedings............. 38
Management.................... 38 GOLDMAN, SACHS & CO.
Principal Stockholders........ 43
Selling Stockholders.......... 45 LAZARD FRERES & CO. LLC
Description of Capital Stock.. 46
Validity of Securities........ 48 Representatives of the Underwriters
Experts....................... 48
Underwriting.................. U-1
================================== ===================================
<PAGE>
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:
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........................................ $ *
=======
---------------
* To be provided by amendment.
The selling stockholders will bear all of such expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reader's Digest's Certificate of Incorporation 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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 (included in the signature pages to this
Registration Statement)
-----------------
* 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.
(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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The
Reader's Digest Association, Inc. has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned,
thereunto duly authorized, in Pleasantville, New York on October 8, 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
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George S. Scimone, Dorvin D. Lively
and Clifford H.R. DuPree, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution for such person and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and a
registration statement related to the offering contemplated by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same
with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as fully and to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, and any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date first above indicated:
Signature Title
--------- -----
/s/ Thomas O. Ryder Chairman of the Board and Chief Executive
- ------------------------------ Officer and Director (Principal Executive
Thomas O. Ryder Officer)
/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
/s/ Lynne V. Cheney Director
- ------------------------------
Lynne V. Cheney
/s/ M. Christine DeVita Director
- ------------------------------
M. Christine DeVita
/s/ George V. Grune Director
- ------------------------------
George V. Grune
/s/ James E. Preston Director
- ------------------------------
James E. Preston
/s/ Lawrence R. Ricciardi Director
- ------------------------------
Lawrence R. Ricciardi
/s/ C.J. Silas Director
- ------------------------------
C.J. Silas
/s/ William J. White Director
- ------------------------------
William J. White
/s/ Ed Zschau Director
- ------------------------------
Ed Zschau
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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 (included in the signature pages to
this Registration Statement)
-----------------
* To be filed by amendment.
EXHIBIT 1.1
THE READER'S DIGEST ASSOCIATION, INC.
CLASS A NONVOTING COMMON STOCK
(par value $0.01 per share)
UNDERWRITING AGREEMENT
__________, 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-_____) (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 Securities Act of 1933, as
amended (the "Act"), is hereinafter called a "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;
(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 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 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;
(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 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) 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;
(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.
(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; and
(xiv) The Company has obtained from each of the Selling
Stockholders and [list supporting organizations that are not selling
stockholders], a letter agreement to the Underwriters in which each
signatory agrees substantially to the effect of (b) (iv) below
(including with respect to the voting stock); each such letter
agreement has been delivered to the Underwriters and is in full force
and effect and the terms thereof have been complied with on and as of
the date hereof.
(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 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 [The Bank of New York,] 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 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 among the
Selling Stockholders 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 [Bonnie Greaves][Andrew 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 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
__________, 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(o) 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;
(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 described in 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;
(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,
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;
(vi) all fees, expenses and costs in connection with the marketing of the
Shares; and (vii) all other costs and expenses incident to the performance
of all obligations hereunder which are not otherwise specifically provided
for in this Section; 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 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), (vi) 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;
(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 responsive
as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder;
(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 except as
specified in paragraph (vii) above. 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;
(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 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 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 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 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 they
express 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
they believe 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 and a Custody Agreement have been
duly executed and delivered by such Selling Stockholder and constitute
valid and binding agreements of such Selling Stockholder enforceable
in accordance with their terms, subject to customary bankruptcy and
equitable principles qualifications;
(ii) This Agreement has been duly executed and delivered by
or on behalf of such Selling Stockholder;
(iii) 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 herein and 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 us to be applicable to
the Selling Stockholder or their respective properties or (iv) any
court decree or order binding upon the Selling Stockholder 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, or other agreements, instruments or court decrees or
orders (the "Specified Documents") which have been identified to such
counsel in a certificate provided by an officer of the Selling
Stockholder as material to the Selling Stockholder, (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, or 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 such Selling Stockholder and (z) such
counsel is not required to make any independent investigation as to
whether the Specified 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);
(iv) No consent, approval, authorization or order of any
United States or New York court or governmental agency or body is
required by or of such Selling Stockholder for the consummation of the
transactions contemplated by this Agreement, except for the
registration of the Shares, under the Acts 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);
(v) Assuming (A) due authorization, execution and delivery
of this Agreement by the Underwriters, (B) the certificates
representing such Shares do not contain any notation of liens or
restrictions, (C) the Underwriters acquire such Shares without notice
of any adverse claim (within the meaning of the New York UCC) and (D)
undated stock powers with respect to the certificates representing
such Shares effectively endorsed in blank are delivered to the
Underwriters, upon payment for and delivery to the Underwriters of the
Shares to be sold by each Selling Stockholder in accordance with this
Agreement, the Underwriters will acquire all of the rights of such
Selling Stockholder in such Shares and will also acquire their
interest in such Shares free of any adverse claim (within the meaning
of the New York UCC).
(vi) None of the Selling Stockholders is an "investment
company", as such term is defined in the Investment Company Act;
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, the accounting firm listed in Section 1(a)(xvi) 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;
(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 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 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, 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 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.
(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 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 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
SELLING STOCKHOLDERS
By:
------------------------------------
As Attorney-in-Fact acting on behalf
of each Selling Stockholder named in
Schedule II to this Agreement
Accepted as of the date hereof:
Goldman, Sachs & Co.
Lazard Freres & Co. LLC
By:
---------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
<PAGE>
SCHEDULE I
UNDERWRITER TOTAL NUMBER OF NUMBER OF OPTIONAL
- ----------- FIRM SHARES SHARES TO BE
TO BE PURCHASED PURCHASED IF MAXIMUM
--------------- OPTION EXERCISED
--------------------
Goldman, Sachs & Co.
Lazard Freres & Co. LLC ========== =========
Total 10,000,000 1,500,000
<PAGE>
SCHEDULE II
Total Number Number of
of Firm Optional
Shares to be Shares to
Delivered be
------------ Delivered
if Maximum
Option
Exercised
----------
The Selling Stockholders(a):
DeWitt Wallace-Reader's Digest Fund, Inc.........
Lila Wallace-Reader's Digest Fund, Inc...........
[Lila Acheson and DeWitt Wallace Fund for
Lincoln Center]...............................
[DeWitt Wallace Fund for Macalester College
Community Funds, Inc].........................
[Lila Acheson and DeWitt Wallace Fund for the
Hudson Highlands].............................
[Lila Acheson and DeWitt Wallace Fund for the
New York Zoological Society]..................
[DeWitt Wallace Fund for Memorial Sloan-Kettering
Cancer Center]................................
[DeWitt Wallace Fund for Colonial
Williamsburg].................................
[Lila Acheson Wallace Fund for The Metropolitan
Museum of Art]................................ -------------- -----------
Total.................................. 10,000,000 1,500,000
- ------------------
(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.
<PAGE>
ANNEX I
Pursuant to Section 7(f) 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 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
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.
EXHIBIT 4.1.3
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE READER'S DIGEST ASSOCIATION, INC.
The undersigned, being the Chairman of the Board of Directors and
Chief Executive Officer of The Reader's Digest Association, Inc., a
Delaware corporation,
DOES HEREBY CERTIFY:
FIRST: That resolutions of the Board of Directors of this
Corporation were duly adopted setting forth proposed amendments
to the Restated Certificate of Incorporation of this Corporation
(the "Restated Certificate") declaring said amendments to be
advisable and submitting the amendments to the stockholders of
the Corporation for their consideration. The resolutions setting
forth the proposed amendments are as follows:
RESOLVED, that subparagraph (2) of paragraph (b) of Article
V of the Restated Certificate be, and it hereby is, amended
and restated in its entirety to read as follows:
(a) To provide for the issuance, from time to time, of
the shares of stock of the Corporation, whether now or
hereafter authorized, for such consideration and on such
terms and conditions as it may lawfully fix from time to
time; and all shares so issued, the full consideration for
which has been paid, shall be deemed fully paid and
nonassessable; provided, however, that (i) authorized but
unissued shares of the capital stock of the Corporation
having any voting rights in addition to those prescribed by
law shall only be issued if such issuance is approved by
vote of the holders of shares of Class B Voting Common Stock
and (ii) issued shares of capital stock of the Corporation
having any voting rights in addition to those prescribed by
law which are owned by the Corporation shall only be sold,
assigned, transferred or otherwise disposed of by the
Corporation if such sale, assignment, transfer or other
disposition is approved by vote of the holders of shares of
Class B Voting Common Stock, except that no such approval
shall be required in the case of either clause (i) or (ii)
for (A) the issuance or sale, assignment, transfer or other
disposition of shares of Class B Voting Common Stock to the
holders of shares of Class B Voting Common Stock in payment
of a dividend or other distribution declared by the Board of
Directors upon the common stock of the Corporation that is
payable in common stock of the Corporation, or (B) the
issuance or sale, assignment, transfer or other disposition
of Preference Stock having only the voting rights described
in paragraph (k)(B)(ii) of Article IV.
SECOND: That thereafter, pursuant to resolution of its Board
of Directors, the officers of the Corporation submitted the
proposed amendments to a vote of the stockholders entitled to
vote thereon at the annual meeting of stockholders of the
Corporation.
THIRD: That the amendments were duly adopted in accordance
with the provisions of Section 242 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, the Chairman of the Board of Directors and
Chief Executive Officer of the Corporation has executed this certificate on
this ____ day of ________, 1999.
By:
Name: Thomas O. Ryder
Title: Chairman of the Board of
Directors and Chief Executive
Officer
ATTEST:
Secretary
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 7, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) 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 7, 1999
