<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1999
REGISTRATION NO. 333-88625
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE READER'S DIGEST ROAD 13-1726769
(State or other jurisdiction of PLEASANTVILLE, NY 10570-7000 (I.R.S. Employer
incorporation or organization) (914) 238-1000 Identification No.)
(Address, including zip code, and
telephone number, including area
code, of registrant's principal
executive offices)
</TABLE>
------------------------
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:
<TABLE>
<S> <C> <C>
JEFFREY BAGNER, ESQ. ANDREW B. JANSZKY, ESQ. DONALD B. BRANT, JR., ESQ.
FRIED, FRANK, HARRIS, SHEARMAN & STERLING MILBANK, TWEED,
SHRIVER & JACOBSON 599 LEXINGTON AVENUE HADLEY & MCCLOY LLP
ONE NEW YORK PLAZA NEW YORK, NEW YORK 10022 ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10004-1980 (212) 848-4000 NEW YORK, NEW YORK 10005
(212) 859-8000 (212) 530-5618
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Nonvoting Common Stock,
par value $0.01 per share......... 11,500,000 shares $28.1875 $324,156,250 $90,116
- -----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Calculated pursuant to Rule 457(c), based on the average of the high and low
prices of the Class A Nonvoting Common Stock reported on the New York Stock
Exchange Composite Tape on October 4, 1999 ($28.1875 per share).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED NOVEMBER 10, 1999.
10,000,000 Shares
THE READER'S DIGEST ASSOCIATION, INC.
Class A Nonvoting Common Stock
-------------------------
All of the shares of Class A nonvoting common stock in the offering are
being sold by the selling stockholders identified in this prospectus. Reader's
Digest will not receive any proceeds from the sale of these shares.
The Class A nonvoting common stock is listed on the New York Stock Exchange
under the symbol "RDA." The last reported price for the Class A nonvoting common
stock on November 9, 1999 was $30.75 per share.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
To the extent that the underwriters sell more than 10,000,000 shares of
Class A nonvoting common stock, the underwriters have the option to purchase up
to an additional 1,500,000 shares from the selling stockholders at the initial
public offering price less the underwriting discount.
-------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO. LAZARD FRERES & CO. LLC
-------------------------
Prospectus dated , 1999.
<PAGE> 3
ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
at the SEC's web site at http://www.sec.gov and at the public reference room of
the New York Stock Exchange, 20 Broad Street, New York, New York.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all the securities offered under this prospectus are
sold. This prospectus is part of the registration statement we filed with the
SEC.
1. Annual Report on Form 10-K for the year ended June 30, 1999;
2. Quarterly Report on Form 10-Q for quarter ended September 30, 1999;
3. Current Report on Form 8-K dated August 30, 1999;
4. Current Report on Form 8-K dated September 24, 1999;
5. Current Report on Form 8-K dated October 7, 1999;
6. Current Report on Form 8-K dated October 27, 1999;
7. Current Report on Form 8-K/A dated October 27, 1999; and
8. Current Report on Form 8-K/A dated November 9, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at The Reader's Digest Association, Inc., Reader's Digest Road,
Pleasantville, New York 10570-7000, telephone (914) 238-1000, Attention:
Investor Relations.
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PROSPECTUS SUMMARY
This summary highlights selected information we have included or
incorporated by reference in this prospectus. However, this summary does not
contain all the information that may be important to you. More detailed
information about this offering, our business and our financial and operating
data is contained elsewhere or incorporated by reference in this prospectus. We
encourage you to read this prospectus in its entirety before making an
investment decision.
Unless we indicate otherwise, references in this prospectus to "Reader's
Digest," "we," "us" and "our" are to The Reader's Digest Association, Inc. and
its consolidated subsidiaries.
READER'S DIGEST
We are a preeminent global leader in publishing and direct marketing. Our
flagship publication, Reader's Digest magazine, was first published in 1922.
Today it is the most widely read magazine in the world. Our products, which have
traditionally included magazines, books, recorded music and videos, are
primarily sold through direct mail campaigns. These campaigns are carefully
tested and target specific audiences. Our worldwide customer database includes
over 57 million households in the United States and approximately 49 million
households abroad.
We are in the midst of executing a strategy intended to strengthen our core
businesses and create opportunities for long-term, sustainable growth. To
address a period of declining operating and financial performance, in August
1997 our board of directors asked George V. Grune, a former Chairman and Chief
Executive Officer of Reader's Digest, to reassume that position on an interim
basis. Under Mr. Grune, we deployed a strategy that involved rebuilding a
management team with strong experience in direct mail marketing at Reader's
Digest. Our strategy also involved strengthening our core business by refocusing
on the fundamentals of disciplined direct marketing testing and promotion
techniques, targeted product development and more effective use of our extensive
database of customer information.
After an extensive executive search, in April 1998 Thomas O. Ryder was
elected to succeed Mr. Grune as Chairman and Chief Executive Officer. Under Mr.
Ryder, we developed a strategy that is designed to build on our progress in
re-establishing the fundamental strengths of our businesses. We intend to
implement this strategy in three phases. Phase I of our strategy, which has been
completed, involved reorganizing our business groups, restructuring our
editorial operations and reassigning selected senior executives as part of the
reorganization and restructuring. As part of our efforts in Phase I, we
redirected our resources to place a greater emphasis on our core magazine
businesses around the world. Phase II, which is ongoing, focuses on reducing
costs, re-engineering our operations to make them more streamlined and efficient
and raising capital by selling underproductive businesses and assets and
reducing our regular quarterly dividend. Phase III, which we announced in
February 1999, concentrates on achieving revenue growth via the following
principal initiatives:
- Expanding our presence in market segments that leverage Reader's Digest's
brand trust and customer base, specifically by:
c Emphasizing five key consumer interest areas: home, health, family,
finance and faith; and
c Targeting consumers' life stages from family formation onward, with a
particular focus on consumers over 50;
- Expanding our product offerings beyond publishing in these targeted
consumer interest areas and life stages;
- Continuing geographic expansion, including expanding into new countries
and expanding the products and services we offer in existing markets;
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<PAGE> 5
- Developing new marketing and distribution channels; and
- Integrating the Internet into all of our businesses by:
c Revitalizing and globalizing our current Web sites;
c Making strategic investments in existing Web sites that match our
areas of strategic interest;
c Expanding our existing U.S.-based Web sites internationally; and
c On a highly selective basis, creating and launching Web sites that
meet identified consumer needs, leverage our corporate assets and
provide us with substantial e-commerce opportunities.
RECENT DEVELOPMENTS
As part of Phase III of our strategy, we have made various investments,
formed a number of alliances and initiated new product and marketing and
distribution channel development activity as follows:
READER'S DIGEST HEALTH WEB SITE ALLIANCE AND INVESTMENT WITH WEBMD
In June 1999, we announced that we formed an alliance with WebMD, Inc. as
the first step in implementing our strategies to expand our business in the
health category and integrate the Internet into our businesses. WebMD is a
leading healthcare Web site for physicians and consumers. It offers a
comprehensive suite of Internet-based services and information for physicians as
well as healthcare information services and online communities for consumers.
The alliance includes the development of a Reader's Digest health Web site
and the exchange of health-related content between that site and the WebMD
consumer site. The Reader's Digest health site is targeted to current Reader's
Digest magazine readers. Because a significant percentage of our estimated 50
million readers in the United States are interested in health issues, about 20%
of the content of Reader's Digest magazine is health-related.
WebMD's position in the Internet health information and services arena will
enable us to move swiftly to establish our online health presence. The Reader's
Digest health Web site is scheduled to launch in the fall of 1999.
The site is expected to meet the fast-growing consumer demand for access to
credible health-related information, products and services. The site is
comprised of the following primary areas: nutrition, women's health, alternative
medicine, healthy aging, medical library and Reader's Digest features. It will
draw content from our health-related editorial products, including Reader's
Digest magazine, New Choices: Living Even Better After 50, Walking and general
books, in addition to WebMD content and tools. The site will also serve as a
platform for health-related e-commerce opportunities that are currently in
development.
As part of our business alliance, we also made a $13 million strategic
equity investment in WebMD. WebMD has reported that it has also forged strategic
partnerships with other investors, including Microsoft Corporation, E.I. duPont
de Nemours and Company, Excite, Inc., Intel Corporation, Covad Communications
Group Inc., Softbank America Inc., Dell Computer Corporation, Yahoo! Inc., CNN
and HealthSouth Corporation. WebMD has announced plans to merge with Healtheon
Corporation to create one of the largest Internet companies in the health
information arena.
The alliance also contemplates that WebMD will provide Reader's Digest
magazine to its physician service subscribers, purchasing at introductory prices
a minimum of 3,000,000 copies over five years. WebMD will also purchase
advertising in our magazines to promote the WebMD
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site. Each issue of the U.S. edition of Reader's Digest magazine will include
WebMD advertorial pages, including an "Ask WebMD" column and a calendar of
online events that will occur on both our health site and the WebMD site.
We and WebMD will cross-promote the sites through the Reader's Digest
family of general and special interest magazines and through WebMD's marketing
relationships and print advertising. There is also a plan to share advertising
revenues on the two sites under specified conditions.
BOOKS ARE FUN ACQUISITION
On October 1, 1999, we acquired Books Are Fun, Ltd. for approximately $400
million in cash, subject to adjustment. Books Are Fun sells premium-quality
books and gift items at discount prices by display marketing those products
on-site at schools and businesses in all 50 states of the United States and
across Canada.
Through approximately 700 independent representatives, Books Are Fun
displays and sells books and gift items to school teachers and school employees
through "book drops" and to corporate employees primarily through "book fairs."
Books Are Fun distributes through approximately 60,000 schools, 12,000
corporations and institutions, 9,000 day care centers and 20,000 small
businesses.
Books Are Fun sold approximately 17 million book and gift items in 1998.
Books Are Fun is the highest volume purchaser of most of the titles it buys from
over 350 publishers. An average purchase of a top title is approximately 120,000
copies. Categories include The New York Times best sellers, cookbooks,
children's books, educational, and illustrated reference works. In 1999, Books
Are Fun began to market non-book items, including gifts, music, and videos.
Buying and test marketing are keys to Books Are Fun's success. Books Are
Fun has good relationships with all major publishers and gift suppliers. All
titles are tested to ensure successful sell-through and control inventory. The
test system involves purchase of small quantities of a title, which are sold in
limited territories. Based on test results, Books Are Fun often buys over
100,000 copies of a title on a non-returnable basis, allowing it to purchase
product at 85% off of the suggested retail price.
Our acquisition of Books Are Fun is consistent with our overall corporate
strategy, and the company closely matches our acquisition criteria. It is a
successful business that we can expand by using our international expertise and
our editorial assets and that can provide us with broader and profitable
distribution channels for our existing products.
We believe that we can work with Books Are Fun to enhance its and our
businesses in six areas:
- Adding magazine subscriptions from our QSP subsidiary to the Books Are
Fun product mix;
- Increasing QSP's penetration, which is currently 20,000 schools compared
with Books Are Fun's 60,000 schools,
- Expanding distribution opportunities for Reader's Digest products,
especially books, music, and video, through Books Are Fun's distribution
infrastructure;
- Re-branding selected Books Are Fun fairs with the Reader's Digest name to
better define their position with consumers;
- Achieving cost savings through consolidating book production; and
- Expanding internationally using Reader's Digest's global infrastructure.
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FINANCIAL SERVICES MARKETING ALLIANCES AND ACQUISITIONS
In August and September 1999, we announced a series of initiatives to
realize our strategy of expanding our presence in the financial services
industry with both publishing and other products and services. These included
the acquisition of Benchmark, Ltd. and marketing alliances with Torchmark
Corporation, American International Group, Inc, and First USA Bank, N.A.
We have established, smaller scale marketing relationships in several
international markets. Additionally, we had a marketing alliance within the U.S.
insurance sector in the 1980's. Each of these limited initiatives was positive
and suggested the potential of a larger, more focused effort. Financial issues
are a frequent topic in Reader's Digest and New Choices: Living Even Better
After 50 magazines, and are the editorial basis for Moneywise magazine.
On August 10, 1999, we announced that we acquired Benchmark, Ltd., a
publisher of four related investment guide publications distributed in Hong
Kong, Taiwan and Singapore. Benchmark provides readers with reports on global
and Asian fund markets, as well as performance analysis of investment funds. The
service also operates as a Web site at www.benchmag.com.
On September 13, 1999, we announced that we formed an exclusive alliance
with Torchmark Corporation. Under this alliance, Torchmark will market life and
health insurance products to our customers in the United States and Canada. The
products will be marketed and sold by Torchmark through direct mail,
telemarketing, the Internet and advertising in our magazines. Torchmark will
underwrite policies and provide customer and claims services, while we will
contribute our brand name, customer lists and direct marketing expertise.
Initial promotion of Torchmark products will occur in the fall of 1999.
Torchmark is a publicly traded insurance and diversified financial services
company that provides individual life and supplemental health insurance,
annuities and related products. Torchmark is known for its direct marketing
expertise, and as the parent company of Globe Life and Accident Insurance
Company, a major advertiser in Reader's Digest magazine.
Also on September 13, 1999, we announced an agreement in principle with
American International Group, Inc. to develop a program under which it will
market a range of life, accident and health and general insurance products and
services to our customers in 26 countries outside the United States and Canada.
AIG member companies will manage the products and provide customer and claims
services and will provide marketing support for all products.
AIG is a leading U.S.-based international insurance organization. Its
member companies write property, casualty, marine, life and financial lines
insurance in approximately 130 countries and jurisdictions.
On September 21, 1999, we announced a five-year agreement with First USA
Bank, a subsidiary of Bank One Corporation, to market Reader's Digest-branded
MasterCard credit cards to Reader's Digest customers. First USA is among the
leading credit card issuers, offering credit cards under the First USA, First
Card and Bank One names and on behalf of more than 2,200 marketing partners.
GIFTS.COM ONLINE GIFT SHOPPING SERVICE
On September 15, 1999, we announced that, together with our Good Catalog
Company subsidiary and StarTek, Inc., we will create gifts.com, an online gift
shopping service. StarTek is a leading provider of outsourced order fulfillment
and other process services for e-commerce and high-tech companies. This is a key
step in building our Internet strategy by creating, on a highly selective basis,
Web sites that meet identified consumer needs, leverage our corporate assets,
and provide us with a substantial e-commerce opportunity.
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The site will initially feature 400 different products, including such
leading brands as Escada(R), Laura Ashley(R), Burberrys(R), Lenox(R) and
Nautica(R), as well as non-branded specialty items.* These items have been
carefully selected by gifts.com to ensure quality choices are available to gift
buyers who care about the gifts they give but often do not know what to buy and
do not have the time to shop. Consumer research indicates that this is an
appealing concept to the target market of relatively upscale, online shoppers.
The online gifts market is expected to grow from about $300 million in 1998
to $1.8 billion by 2003, according to Forrester Research, Inc. We believe there
is no dominant player in the online gifts market today.
We contributed property and equity and debt financing to the venture, which
is operated by our Good Catalog Company subsidiary. Through its Domain.com Inc.
subsidiary, StarTek contributed property, including the gifts.com domain name,
and equity and debt financing for a 19.9% equity interest in Good Catalog
Company. We own the remaining 80.1% of the equity in Good Catalog Company. We
plan to rename Good Catalog Company as Gifts.com, Inc.
Competitive advantages in the online gifts market include:
- the gifts.com domain name, which we believe will be very strong in this
market;
- the strategic focus on offering "selectivity" in this category with a
relatively limited line of quality gift ideas selected and sourced by our
merchandising experts at Good Catalog Company;
- the availability of several specialized features, including a customized
Gift Finder, which is designed to help narrow gift ideas even further
based on information about the gift recipient, a Gift Calendar, which
will provide e-mail reminders of upcoming gift occasions, and customized
gift e-cards; and
- state of the art customer service and order fulfillment to be provided by
StarTek.
We launched the gifts.com site on November 1, 1999 and have initiated a $20
million consumer marketing campaign in support of the site. This effort will
include television, radio, print, direct mail and online advertising and
promotion. Our own media vehicles, including Reader's Digest magazine, and
direct marketing vehicles will play a prominent role in the media plan.
ALLIANCE WITH BRANDDIRECT MARKETING
On October 19, 1999, we announced that we agreed to acquire an 18% equity
interest in BrandDirect Marketing Inc., an affinity membership-based direct
marketing company, for approximately $50 million. The agreement also permits us
to acquire additional equity in BrandDirect through the exercise of warrants and
other rights. BrandDirect is one of the nation's largest operators of membership
clubs. Membership clubs typically offer consumers sharing a common interest a
wide range of membership benefits, including topical information and
opportunities to purchase various goods and services at significant discounts,
for an annual membership fee. BrandDirect currently operates ten clubs which
include Field & Stream ClubSM, CTW (Children's Television Network) Kids ClubSM,
IBM Small Business SolutionsSM and Arthur Frommer Budget TravelSM.
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* Escada(R) is a registered trademark of Escada Ag, Laura Ashley(R) is a
registered trademark of Laura Ashley Limited, Burberrys(R) is a registered
trademark of Burberrys Limited, Lenox(R) is a registered trademark of Norfolk
Investments, Inc., and Nautica(R) is a registered trademark of Nautica
Apparel, Inc.
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We and BrandDirect intend to develop and market Reader's Digest-branded
membership clubs. These clubs are expected to focus on our five key consumer
interest areas: home, health, family, finance and faith. The clubs, which will
be marketed through direct mail, telemarketing and the Internet, will provide a
new marketing and distribution channel for our current products, including
books, magazines and music, as well as offer us opportunities to expand into new
product lines. We believe that BrandDirect's telemarketing and club-building
expertise combined with our worldwide infrastructure and customer database
skills will provide a strong foundation for a successful membership club
business both in the United States and through international expansion.
INVESTMENT IN HARDWARE.COM
On November 9, 1999, we announced that we are investing $5 million to
acquire a significant minority equity position in hardware.com, an Internet
startup that markets home improvement products and project advice to consumers
and contractors on the Internet. hardware.com, whose Web site was launched on
November 1, 1999, will have exclusive access to content from The Family Handyman
magazine. We are entitled to a representative on hardware.com's board of
directors.
CORE BUSINESS PRODUCT AND CHANNEL DEVELOPMENT INITIATIVES
Throughout our implementation of our Phase III growth initiatives, we have
invested and we expect to continue to invest in the development of products and
channels to support internal growth opportunities in our core businesses. For
example, in our U.S. Magazines business segment, we are continuing to redesign
the layout of Reader's Digest magazine to attract more advertising and a broader
readership. We have also devoted more resources to direct marketing that does
not include a sweepstakes feature and made a major commitment to direct response
television. Other projects include the development of new book series for our
Global Books and Home Entertainment business segment. These series are expected
to include romances, mysteries, inspirational stories and biographies. To
diversify our distribution channels for our Global Books and Home Entertainment
segment we are building on our telemarketing efforts, which we believe will
become a significantly larger part of our promotion strategy over the next
several years, and testing direct response television as a marketing option.
We also expect to continue to target acquisitions and form alliances that
leverage our core strengths.
------------------------
We are a Delaware corporation, originally incorporated in New York in 1926
and then reincorporated in Delaware in 1951. Our principal executive offices are
located at Reader's Digest Road, Pleasantville, New York 10570-7000, and our
telephone number is (914) 238-1000. We maintain a Web site at
http://www.readersdigest.com. Information contained at that Web site is not a
part of this prospectus.
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THE OFFERING
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Class A nonvoting common stock offered by
the selling stockholders................ 10,000,000 shares
Class A nonvoting common stock outstanding
before and after the offering............. 94,037,769 shares(1)(2)
Class B voting common stock outstanding
before and after the offering........... 12,432,164 shares(2)(3)
Use of proceeds........................... We will not receive any proceeds from this offering.
New York Stock Exchange symbol............ "RDA"
</TABLE>
- ---------------
(1) Based on 94,037,769 shares of our Class A nonvoting common stock outstanding
as of October 31, 1999. Does not include 10,876,764 shares of our Class A
nonvoting common stock issuable upon the exercise of outstanding employee
stock options as of that date.
(2) Gives effect to the exchange by the DeWitt Wallace-Reader's Digest Fund,
Inc. and the Lila Wallace-Reader's Digest Fund, Inc. on September 24, 1999
of a total of 9,283,893 shares of our Class B voting common stock for a
total of 8,030,567 shares of our Class A nonvoting common stock.
(3) Based on 12,432,164 shares of our Class B voting common stock outstanding as
of October 31, 1999.
Unless we otherwise specifically indicate, the information in this
prospectus assumes that the underwriters will not exercise their overallotment
option.
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SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
You should read the following summary financial information together with
our consolidated financial statements and accompanying notes, which are
incorporated by reference into this prospectus. You should also read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which appears later in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
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(UNAUDITED)
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INCOME STATEMENT DATA:
Revenues.................. $3,120.1 $3,153.2 $2,896.5 $2,691.2 $2,532.2 $579.7 $519.2
Operating profit.......... 391.9 109.3 192.8 30.2 129.1 16.6 38.8
Income before provision
for income taxes........ 422.5 137.7 210.2 41.5 211.7 4.0 45.8
Net income................ 264.0 80.6 133.5 17.9 151.9 27.8 28.6
Earnings per share:
Basic................... $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.40 $ 0.26 $ 0.26
Diluted................. 2.35 0.73 1.24 0.16 1.39 0.26 0.26
Adjusted(1)............. 2.35 2.30 1.45 0.64 0.96 0.02 0.26
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- -------------
(UNAUDITED)
<S> <C> <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 $ 670.7
Total assets................. 1,958.7 1,904.1 1,643.8 1,564.0 1,710.5 1,974.0
Long-term notes payable...... 1.7 17.2 1.7 1.7 2.2 2.1
Stockholders' equity......... 640.8 478.9 346.0 258.6 381.5 547.5
</TABLE>
- ---------------
(1) Excludes the effect of other operating items, gains on the sale of certain
assets and businesses and the cumulative effect of change in accounting
principles.
10
<PAGE> 12
REVENUES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States............................................. $1,293.9 $1,238.9 $1,159.0
International........................................... 1,612.0 1,459.4 1,378.3
Inter-area.............................................. (9.4) (7.1) (5.1)
-------- -------- --------
$2,896.5 $2,691.2 $2,532.2
======== ======== ========
</TABLE>
REVENUES AND OPERATING PROFIT BY OPERATING SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ----------------
1997(1) 1998(1) 1999(1) 1998 1999
------- ------- ------- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Global Books and Home Entertainment... $1,891.5 $1,680.2 $1,544.3 $375.4 $319.7
U.S. Magazines...................... 625.5 656.3 664.3 124.5 118.0
International Magazines............. 379.5 354.7 323.6 79.4 72.6
Other Businesses.................... -- -- -- 0.4 8.9
-------- -------- -------- ------ ------
$2,896.5 $2,691.2 $2,532.2 $579.7 $519.2
======== ======== ======== ====== ======
Operating profit (loss):
Global Books and Home
Entertainment.................... $ 161.2 $ 50.0 $ 80.8 $ 17.2 $ 40.9
U.S. Magazines...................... 67.1 64.9 101.7 4.3 3.4
International Magazines............. (0.5) (14.7) (15.5) (4.8) 0.8
Other Businesses.................... -- -- -- (0.1) (6.3)
-------- -------- -------- ------ ------
$ 227.8 $ 100.2 $ 167.0 $ 16.6 $ 38.8
======== ======== ======== ====== ======
</TABLE>
- ---------------
(1) During the first quarter of 2000, we modified our reportable segments to
include an "Other Businesses" segment. Revenues and operating profit for the
three-months ended September 30, 1998 and 1999 have been restated to conform
with our new segment structure. This modification did not materially affect
our segment disclosure for the fiscal years presented.
11
<PAGE> 13
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our Class A
nonvoting common stock in this offering.
PRICE RANGE OF CLASS A NONVOTING COMMON STOCK
AND DIVIDEND INFORMATION
Our Class A nonvoting common stock is traded on the New York Stock Exchange
under the symbol "RDA." The table below shows the high and low sales prices for
shares of our Class A nonvoting common stock on the New York Stock Exchange for
the periods indicated.
<TABLE>
<CAPTION>
DIVIDEND
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
Fiscal Year ended June 30, 1998
First Quarter................................... $ 30.5625 $ 24.50 $0.225
Second Quarter................................ 31.50 20.875 0.225
Third Quarter................................. 27.50 22.375 0.225
Fourth Quarter................................ 29.1875 24.50 0.225
Fiscal Year ended June 30, 1999
First Quarter................................. $ 29.00 $ 17.00 $0.225
Second Quarter................................ 26.1275 16.25 0.05
Third Quarter................................. 36.25 24.75 0.05
Fourth Quarter................................ 40.9375 28.1275 0.05
Fiscal Year ending June 30, 2000
First Quarter................................. $ 42.50 $ 28.75 $ 0.05
Second Quarter (through November 9, 1999)..... 33.50 26.75 $ --
</TABLE>
On November 9, 1999, the last sale price of our Class A nonvoting common
stock as reported on the New York Stock Exchange Composite Tape was $30.75.
Our Class B voting common stock, of which there were 12,432,164 shares
outstanding as of October 31, 1999, also trades on the New York Stock Exchange.
Its trading symbol is "RDB." On November 9, 1999, the last sale price of our
Class B voting common stock as reported on the New York Stock Exchange Composite
Tape was $28.00.
The trading prices of our common stock are influenced by our results of
operations, financial condition, cash requirements and future prospects and by
general economic, financial and other factors and market conditions. We cannot
assure you that the prices of our Class A nonvoting common stock will fall
within the ranges shown in the table above in the future.
We reduced the quarterly dividend on our common stock from $0.45 to $0.225,
effective the first quarter of fiscal 1998. We further reduced our quarterly
dividend from $0.225 to $0.05, effective the second quarter of fiscal 1999. Our
board of directors will determine the payment and amount of any future dividends
on the basis of our earnings, capital requirements, financial condition and
other relevant factors.
12
<PAGE> 14
CAPITALIZATION
(IN MILLIONS)
The following table sets forth our condensed consolidated capitalization as
of September 30, 1999.*
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Cash and cash equivalents................................... $ 430.6
DEBT:
Current debt.............................................. 2.2
Long-term debt............................................ 2.1
-------
Total debt........................................ $ 4.3
STOCKHOLDERS' EQUITY:
Capital stock............................................. $ 26.2
Paid-in capital........................................... 221.5
Retained earnings......................................... 978.3
Accumulated other comprehensive income.................... 83.0
Treasury stock, at cost................................... (761.5)
-------
Total stockholders' equity........................ $ 547.5
-------
Total capitalization........................................ $ 551.8
=======
</TABLE>
- ---------------
* On October 1, 1999, we acquired Books Are Fun, Ltd. for approximately $400
million in cash, subject to adjustment.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
The following selected financial information should be read together with
our consolidated financial statements and accompanying notes, which are
incorporated by reference into this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing later in
this prospectus. The selected financial data for the fiscal years ended June 30,
1995, 1996, 1997, 1998 and 1999 are derived from our consolidated financial
statements, which have been audited by KPMG LLP, independent auditors. The
selected financial data for the three months ended September 30, 1998 and 1999
are derived from our unaudited consolidated condensed financial statements. In
the opinion of our management, our unaudited consolidated condensed financial
statements have been prepared on a basis consistent with our audited
consolidated financial statements and include all adjustments, which are only
normal recurring adjustments, necessary for a fair presentation of our financial
position and results of operations for the unaudited periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................. $3,120.1 $3,153.2 $2,896.5 $2,691.2 $2,532.2 $579.7 $519.2
Product, distribution and editorial
expenses................................ 1,101.3 1,134.9 1,084.2 1,046.6 963.5 217.2 182.6
Promotion, marketing and administrative
expenses................................ 1,626.9 1,674.0 1,584.5 1,544.4 1,401.7 345.9 297.8
Other operating items..................... -- 235.0 35.0 70.0 37.9 -- --
Operating profit.......................... 391.9 109.3 192.8 30.2 129.1 16.6 38.8
Other income (expense), net............... 30.6 28.4 17.4 11.3 82.6 (12.6) 7.0
Income before provision for income
taxes................................... 422.5 137.7 210.2 41.5 211.7 4.0 45.8
Provision for income taxes................ 158.5 57.1 76.7 23.6 85.1 1.5 17.2
Cumulative effect of change in accounting
principles for pension assets, net of
tax of $15.2............................ -- -- -- -- 25.3 25.3 --
Net income................................ 264.0 80.6 133.5 17.9 151.9 27.8 28.6
Basic and diluted earnings per share:
Basic earnings per share:
Weighted-average common shares
outstanding........................... 112.0 107.9 106.7 106.5 107.3 107.2 107.4
Before cumulative effect of change in
accounting principles................. $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.16 $ 0.02 $ 0.26
Cumulative effect of change in
accounting principles................. -- -- -- -- 0.24 0.24 --
Basic earnings per share................ 2.35 0.73 1.24 0.16 1.40 0.26 0.26
Diluted earnings per share:
Adjusted weighted-average common shares
outstanding........................... 112.0 107.9 106.7 106.7 108.0 107.4 108.5
Before cumulative effect of change in
accounting principles................. $ 2.35 $ 0.73 $ 1.24 $ 0.16 $ 1.15 0.02 0.26
Cumulative effect of change in
accounting principles................. -- -- -- -- 0.24 0.24 --
Diluted earnings per share.............. 2.35 0.73 1.24 0.16 1.39 0.26 0.26
Dividends per common share................ 1.55 1.75 1.80 0.90 0.375 0.225 0.05
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- -------------
<S> <C> <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 $ 670.7
Total assets................................. 1,958.7 1,904.1 1,643.8 1,564.0 1,710.5 1,974.0
Long-term notes payable...................... 1.7 17.2 1.7 1.7 2.2 2.1
Stockholders' equity......................... 640.8 478.9 346.0 258.6 381.5 547.5
</TABLE>
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our fiscal year ends June 30. All references to 2000, 1999, 1998 and 1997
in this section are to fiscal 2000, 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
In the first quarter of 2000, we modified our segment reporting information
to include an "Other Businesses" segment. Our prior fiscal year information was
not materially affected by this change in reportable segments. Therefore,
management's discussion and analysis of fiscal year results was not restated to
incorporate the results of Other Businesses.
- Global Books and Home Entertainment publishes and markets Condensed
Books, series and general books, as well as music and video products.
- U.S. Magazines publishes Reader's Digest magazine and several special
interest magazines in the United States. These magazines and other
products are sold through direct and retail marketing, including the
activities of QSP, Inc. (QSP).
- International Magazines publishes Reader's Digest magazine in numerous
editions and languages outside the United States.
- Other Businesses includes the activities of our catalog, financial
services, Internet and other developing businesses.
The discussion of operating profit excludes the effect of other operating
items of $37.9 in 1999, $70.0 in 1998 and $35.0 in 1997.
Other operating items for 1999 include costs associated with cost-reduction
and reengineering activities, including employee retirement and severance
benefits, discontinuation of certain unproductive businesses and outsourcing
initiatives. We also recorded impairment losses as a result of reengineering
efforts, relating principally to computer hardware and software that will no
longer be used in our operations. In addition, we adjusted our remaining accrual
balances from costs originally recorded in prior years and from estimates for
certain claims against us.
Other operating items in prior years relate to costs for initiatives that
are substantially complete. These costs primarily relate to workforce
reductions, the discontinuation of certain businesses, and the realignment of
business processes and operations.
15
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ----------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Global Books and Home Entertainment... $1,544.3 $1,680.2 $1,891.5 $319.7 $375.4
U.S. Magazines...................... 664.3 656.3 625.5 118.0 124.5
International Magazines............. 323.6 354.7 379.5 72.6 79.4
Other Businesses.................... -- -- -- 8.9 0.4
-------- -------- -------- ------ ------
Total revenues........................ $2,532.2 $2,691.2 $2,896.5 $519.2 $579.7
-------- -------- -------- ------ ------
Operating profit:
Global Books and Home
Entertainment.................... $ 80.8 $ 50.0 $ 161.2 $ 40.9 $ 17.2
U.S. Magazines...................... 101.7 64.9 67.1 3.4 4.3
International Magazines............. (15.5) (14.7) (0.5) 0.8 (4.8)
Other Businesses.................... -- -- -- (6.3) (0.1)
-------- -------- -------- ------ ------
Segment operating profit.............. 167.0 100.2 227.8 38.8 16.6
Other operating items................. (37.9) (70.0) (35.0) -- --
-------- -------- -------- ------ ------
Total operating profit................ $ 129.1 $ 30.2 $ 192.8 $ 38.8 $ 16.6
-------- -------- -------- ------ ------
</TABLE>
REVENUES AND OPERATING PROFIT
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH
PERIOD ENDED SEPTEMBER 30, 1998
Revenues for the first quarter of 2000 decreased by 10% to $519.2, compared
with $579.7 in the first quarter of 1999. Excluding the adverse effect of
changes in foreign currency exchange rates, revenues decreased 8%. The reduction
in revenues was primarily attributable to the continued strategic reduction in
the number of mailings and mail quantities within mailings for Global Books and
Home Entertainment products. We also experienced a company-wide decline in sales
volumes of Reader's Digest magazines, primarily because of planned reductions in
the circulation rate base.
Operating profit for the first quarter of 2000 increased significantly to
$38.8, compared with $16.6 in the first quarter of 1999. The increase in
operating profit was primarily a result of the strategic reductions in
promotional mailings, which reduced product and promotion costs. Additionally,
overhead costs were lower on a company-wide basis, primarily because of
initiatives to re-engineer critical processes and eliminate marginally
profitable activities. Operating profit increased in Germany because of revenue
growth in music products, continued strong responses to mailings and reduced
overhead costs. In addition, our operating losses in Russia were less than
losses in the prior year quarter, because of reduced business activities there
as a result of the Russian economic crisis in August 1998.
1999 COMPARED WITH 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,
16
<PAGE> 18
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 COMPARED WITH 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 (EXPENSE), NET
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Other income (expense), net increased in the first quarter of 2000 to
income of $7.0, compared with expense of $(12.6) in the first quarter of 1999.
This increase was primarily because of:
- Reduced foreign exchange losses of $7.0, mostly resulting from the
devaluation of the Russian ruble in the first quarter of 1999.
- A gain from sale of American Health magazine of $6.5 ($4.1 after tax or
$0.04 per share) in the first quarter of 2000.
- An increase in interest income and a decrease in interest expense
amounting to a net increase in interest income of $5.8, because of higher
cash and cash equivalents balances compared with the prior year quarter.
1999 COMPARED WITH 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.
17
<PAGE> 19
1998 COMPARED WITH 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
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
For the first quarter of 2000 and 1999, the reported and overall effective
tax rates were 37.5%.
1999 COMPARED WITH 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 COMPARED WITH 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 AND EARNINGS PER SHARE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Net income was $28.6, or $0.26 per share, in the first quarter of 2000,
compared with $27.8, or $0.26 per share, in the first quarter of 1999. Excluding
the cumulative effect of change in accounting principles for pension assets in
1999, basic and diluted earnings per share were $0.02 in the first quarter of
1999.
18
<PAGE> 20
1999 COMPARED WITH 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 COMPARED WITH 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
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Revenues for Global Books and Home Entertainment decreased 15% in the first
quarter of 2000 to $319.7, compared with $375.4 in the first quarter of 1999.
Excluding the adverse effect of changes in foreign currency exchange rates,
revenues decreased 12%. This decrease was primarily attributable to the
continued strategic reduction in the number of mailings to marginal customers
for general books products mostly in the U.S. and other developed markets. These
reductions were partially offset by revenue increases from the launches of
Select Editions products in Eastern Europe and Latin America and continued
growth in Germany.
The decrease in revenues in the U.S. was mostly a result of the planned
reductions in mailings to marginally profitable customers. This decrease was
partially offset by the effect of stronger response rates to the recent Select
Editions mailing. In Europe, particularly the United Kingdom, Finland and
Benelux, re-engineering efforts to eliminate marginally profitable activities
resulted in additional declines in revenues for music and general books
products. Most of the remaining decline was attributable to the discontinuation
of marginally profitable operations in Latin America and the sale of our South
African operations.
In Eastern Europe and Latin America, revenues increased from the
introduction of Select Editions products in several markets, the expansion of
certain existing product lines, and selective price increases. Revenue growth in
Germany resulted from changes in music product offerings accompanied by
continued strong responses to mailings.
Operating profit for Global Books and Home Entertainment increased
significantly in the first quarter of 2000 to $40.9, compared with $17.2 in the
first quarter of 1999. The increase was primarily the result of improved
profitability in the United States, Germany, and Russia. In the United States,
operating profit improved from lower promotion costs through fewer mailings and
mail quantities and re-engineering efforts to reduce overhead. In Germany,
significant improvement in operating profit was driven by the increases in
revenues previously mentioned and reduced overhead costs from re-engineering
efforts. In Russia, we scaled back operations because of the economic crisis in
that country in August 1998.
1999 COMPARED WITH 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,
19
<PAGE> 21
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 COMPARED WITH 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.
20
<PAGE> 22
U.S. MAGAZINES
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Revenues for U.S. Magazines decreased 5% in the first quarter of 2000 to
$118.0, compared with $124.5 in the first quarter of 1999. The decrease in
revenues was attributable to:
- Lower subscription revenues from Reader's Digest magazine, primarily
resulting from the planned reduction in the circulation rate base to 12.5
million from 15 million a year ago.
- Lower advertising revenues from Reader's Digest magazine resulting from
fewer advertising pages sold, partially offset by a higher average rate
per page.
- A decline in revenues from American Health, which ended publication with
the October 1999 issue as a result of the sale of its subscription list.
- Slightly lower revenues at QSP.
Partially offsetting these decreases were revenues from American
Woodworker, which was acquired in the second quarter of fiscal 1999.
Operating profit for U.S. Magazines decreased 21% in the first quarter of
2000 to $3.4, compared with $4.3 in the first quarter of 1999. The decrease was
primarily the result of investment in the development of new marketing channels
for promotion, as well as lower revenues of Reader's Digest magazine from the
planned reduction in the circulation rate base. Partially offsetting these
decreases in operating profit were lower product and promotion costs for
Reader's Digest magazine primarily attributable to the circulation rate base
decline.
1999 COMPARED WITH 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 COMPARED WITH 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.
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INTERNATIONAL MAGAZINES
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Revenues for International Magazines decreased 9% in the first quarter of
2000 to $72.6, compared with $79.4 in the first quarter of 1999. Excluding the
adverse effect of changes in foreign currency exchange rates, revenues decreased
5%. We strategically reduced the circulation rate base for Reader's Digest
magazine in most markets to improve profitability.
The decline in revenues from fewer subscriptions was partially offset by
price increases in many markets. Operations in Russia were scaled back in
response to the economic crisis in that country last year and as a result, there
were 70% fewer subscribers. The discontinuation of marginally profitable
operations in Latin America and the sale of our South African operations also
contributed to the decline in revenues.
Advertising revenues decreased because of fewer advertising pages sold,
primarily as a result of the continued economic softness in Asia and circulation
rate base reductions in Germany.
Operating profit improved to $0.8 in the first quarter of 2000 from an
operating loss of $(4.8) in the first quarter of 1999, primarily a result of
subscription price increases in many markets and lower promotion costs from the
strategic reduction in promotional mailings. Reduced losses in Russia and the
discontinuation of marginally profitable operations discussed previously also
contributed to the increased operating profit.
1999 COMPARED WITH 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 COMPARED WITH 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.
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OTHER BUSINESSES
In the first quarter of 2000, we modified our segment reporting information
to include an "Other Businesses" segment. Other Businesses includes the
activities of our catalog, financial services, Internet and other developing
businesses.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
Revenues from Other Businesses amounted to $8.9 in the first quarter of
2000. These revenues were primarily generated by sales of Good Catalog Company,
which was acquired in the second quarter of 1999.
Operating losses from Other Businesses amounted to $(6.3) in the first
quarter of 2000. These losses consisted primarily of planned start-up costs for
gifts.com (our online gift shopping service), costs for other new businesses
being developed and a small seasonal loss in the first quarter results of Good
Catalog Company.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated statement of cash flows for the three-month period ended
September 30, 1999 is summarized below:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Cash and cash equivalents at June 30, 1999............... $413.4
Net change in cash from:
Operating activities..................................... 6.2
Investing activities..................................... 6.6
Financing activities..................................... (0.3)
Effect of exchange rate changes on cash and cash
equivalents............................................ 4.7
------
Net change in cash and cash equivalents.................. $ 17.2
======
Cash and cash equivalents at September 30, 1999.......... $430.6
</TABLE>
Cash and cash equivalents increased 4% to $430.6 at September 30, 1999,
compared with $413.4 at June 30, 1999. The increase was primarily a result of
proceeds from the sale of American Health magazine ($10.0) and contributions
from operating activities ($6.2).
In the first quarter of 2000, we paid a $0.05 per share dividend on our
common stock. This was a reduction from the dividend paid in the first quarter
of 1999 of $0.225 per share. At the current rate, the annualized dividend is
$0.20 per share in 2000, compared with $0.375 in 1999.
In September 1999, we executed a share exchange with the DeWitt
Wallace-Reader's Digest Fund and the Lila Wallace-Reader's Digest Fund. Under
the terms of the exchange, the DeWitt Wallace-Reader's Digest Fund and the Lila
Wallace-Reader's Digest Fund exchanged approximately 9.3 million shares of our
Class B voting stock for approximately 8.0 million shares of our Class A
nonvoting stock, at an exchange ratio of 0.865 Class A shares for each Class B
share. As a result, we exchanged Class A treasury shares at a cost of $164.9 and
a market value of $239.9, for Class B shares, resulting in additional paid-in
capital of $75.0.
As described in Note Nine to our Consolidated Financial Statements included
in our 1999 Annual Report to Stockholders and incorporated by reference in this
prospectus, we are a party to a Competitive Advance and Revolving Credit
Facility Agreement. The Credit Agreement was amended as of September 2, 1999.
Prior to the amendment, the Credit Agreement included a covenant to maintain a
minimum level of consolidated tangible net worth. The amendment
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provides borrowing flexibility by replacing this covenant with covenants to
maintain minimum levels of consolidated assets and net worth and a maximum level
of leverage.
At September 30, 1999, no borrowings were outstanding under the Credit
Agreement. However, related to the acquisition of Books Are Fun, Ltd., $120 was
drawn under the Credit Agreement on October 1, 1999. In addition, we utilized
approximately $280 of our cash on hand to fund the remaining portion of the
Books Are Fun, Ltd. purchase price.
We believe that our liquidity, capital resources, cash flow and borrowing
capacity are sufficient to fund normal capital expenditures, working capital
requirements, the payment of dividends, Year 2000 remediation costs and the
implementation of our strategic initiatives.
CURRENCY RISK MANAGEMENT
In the normal course of business, we are exposed to the effects of foreign
exchange rate fluctuations on the U.S. 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 September 30, 1999, our primary foreign currency market exposures
included the euro and the British pound. We estimate that the results of a
uniform 10% strengthening in the value of the U.S. dollar relative to the
currencies in which the option and forward contracts are denominated, with all
other variables held constant, would result in a net decrease in the fair value
of these instruments of approximately $7.0. This estimate, however, includes
changes in the fair value of forward contracts that would be substantially
offset by the related impact on the assets and liabilities being hedged. This
calculation assumes that each exchange rate would change in the same direction
relative to the U.S. dollar. Changes in exchange rates not only affect the U.S.
dollar value of the fair value, but also affect the underlying foreign
subsidiaries' income. Our sensitivity analysis as described above does not
factor in a potential change in local sales levels, local currency prices, or
amounts of option or forward contracts to cover these changes.
Additional information concerning derivative financial instruments is
available in Note 1 and Note 5 in Notes to our Consolidated Financial Statements
contained in our 1999 Annual Report to Shareholders and 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 the 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.
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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 has been substantially completed in most locations
for applications, IT equipment and non-IT embedded systems. We have conducted
formal communications with significant suppliers in all locations to determine
our third parties' plans to remediate their own Year 2000 issues in a timely
manner. We believe that most of our critical supplier base has made substantial
progress toward achieving Year 2000 compliance.
Our remediation plan for our Year 2000 issue is an ongoing process and
estimated completion dates are subject to change.
RISK OF THE YEAR 2000 ISSUE
At this time, we believe that our systems will be Year 2000 compliant in a
timely manner for several reasons:
- Most significant marketing and fulfillment systems are already compliant.
- We extensively utilize certain shared applications that have been or will
be remediated once and then deployed to all appropriate locations.
- Comprehensive testing of all critical systems is conducted in a simulated
Year 2000 environment.
- Critical fulfillment systems in the United States and several developed
international locations use a one-digit field to denote the year;
therefore, the date fields for these systems are updated every 10 years
and the year 2000 does not require separate attention.
We believe that the area of greatest risk of the Year 2000 issue relates to
significant suppliers failing to remediate their Year 2000 issues in a timely
manner. We have relationships with certain significant suppliers in most of the
locations in which we operate. These relationships may be material to some local
operations and, in the aggregate, may be material to us. We rely on suppliers to
deliver a broad range of goods and services worldwide. These include book and
magazine printing services, suppliers of promotional materials and paper,
warehouse facilities, lettershops that assemble promotional mailings, customer
service facilities, postal delivery services, banking services,
telecommunications and electricity providers. We are monitoring our suppliers'
progress toward implementing Year 2000 corrective procedures. If a number of
significant suppliers encounter Year 2000 problems, 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 finalizing our country-by-country contingency
plans. Revisions to preliminary plans will be made, as needed, during the
remainder of the calendar 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 rescheduling January
2000 activity to December 1999 or February 2000 where appropriate. If it becomes
necessary for
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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 $16.0 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. To date, approximately $12.7 of the total
cost of the remediation plan has been spent, of which approximately $1.5 was
capitalized. The remainder will be expensed as incurred.
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 have 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. We do not anticipate the 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
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software costs once certain criteria are met. This statement is not expected to
have a material impact on our results of operations, financial position or cash
flow.
CAUTIONARY STATEMENT
This prospectus includes "forward-looking statements" within the meaning of
the U.S. federal securities laws. Forward-looking statements include any
statements that address future results or occurrences. These forward-looking
statements inherently involve risks and uncertainties that could cause actual
future results and occurrences to differ materially from the forward-looking
statements. Some of these risks and uncertainties include factors relating to:
- the effect of potentially more restrictive privacy and other governmental
regulation relating to our marketing methods;
- the effect of modified and varied promotions;
- the ability to identify customer trends;
- the ability to continue to create a broadly appealing mix of new
products;
- the ability to attract and retain new and younger magazine subscribers
and product customers in view of the maturing of an important portion of
the U.S. customer base;
- the ability to attract and retain subscribers and customers in an
economically efficient manner;
- the effect of selective adjustments in pricing;
- the ability to expand and more effectively utilize our customer database;
- the ability to expand into new international markets and to introduce new
product lines into new and existing markets;
- the ability to expand into new channels of distribution;
- the ability to negotiate and implement productive acquisitions, strategic
alliances and joint ventures;
- the ability to integrate newly acquired and newly formed businesses
successfully;
- the strength of relationships of newly acquired and newly formed
businesses with their employees, suppliers and customers;
- the accuracy of the basis of forecasts relating to newly acquired and
newly formed businesses;
- the ability to contain and reduce costs, especially through global
efficiencies;
- the cost and effectiveness of reengineering of business processes and
operations;
- the accuracy of management's assessment of the current status of our
business;
- the evolution of our organizational and structural capabilities;
- the ability we have to respond to competitive pressures within and
outside the direct marketing industry, including the Internet;
- the effect of worldwide paper and postage costs;
- the effect of postal disruptions on deliveries;
- the effect of foreign currency fluctuations;
- the effect of the Year 2000 issue;
- the effect of the transition to the euro; and
- general economic conditions.
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BUSINESS
We are a preeminent global leader in publishing and direct marketing. We
create and deliver products that inform, enrich, entertain and inspire. These
products have traditionally included magazines, books, recorded music
collections and videos.
We are best known for publishing our flagship Reader's Digest magazine
which was founded by DeWitt and Lila Acheson Wallace in 1922. Today, Reader's
Digest has a worldwide circulation of about 25 million and over 100 million
readers each month. Reader's Digest is published in 48 editions and 19
languages.
Currently, our largest business unit is our global books and home
entertainment operations, which publish and market Reader's Digest Select
Editions, series books, general books, recorded music collections and series,
and video products and series.
STRATEGIC INITIATIVES
We are undertaking a three-phase strategy to build on our fundamental
strengths and create growth opportunities. In July 1998, we announced Phase I of
our strategy, which involved:
- reorganizing our business groups on a global basis;
- restructuring our editorial organization;
- establishing new reporting relationships; and
- reassigning some of our executives.
We made further refinements to our organizational structure in late fiscal
1999 to finalize the global operating segments discussed below.
We announced Phase II of our strategy in September 1998, which targets:
- reducing costs and streamlining processes;
- raising capital by selling some underproductive assets; and
- restructuring some underproductive businesses.
Actions that we have taken as part of the ongoing Phase II include:
- reducing the number of individual promotional mailings globally,
including eliminating related product development and overhead costs. The
purpose of this action is to increase response rates on continuing
mailings;
- reducing the circulation rate base for Reader's Digest in the United
States and in most international markets. The purpose of this action is
to improve the efficiency of our promotional spending;
- eliminating or redirecting some product lines, including adult and
children's retail book publishing, the Today's Best Nonfiction(R) book
series, and video or music businesses in selected international markets;
- selling our publishing operations in South Africa and closing our
operations in Chile, Colombia and Peru;
- consolidating our operations in Benelux, the Nordic countries, Germany
and Switzerland, and those in the Czech Republic and Hungary;
- selling important works from our fine art collection;
- outsourcing support functions where it is cost-effective;
- consolidating suppliers and combining purchasing efforts for greater
negotiating leverage;
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- selling international real estate holdings, including those in the United
Kingdom, Canada and Italy; and
- reducing our quarterly dividend from $0.225 per share to $0.05 per share.
We announced Phase III of our strategy in February 1999. Phase III
concentrates on achieving revenue growth via the following principal
initiatives:
- Expanding our presence in market segments that leverage Reader's Digest's
brand trust and customer base, specifically by:
c Emphasizing five key consumer interest areas: home, health, family,
finance and faith; and
c Targeting consumers' life stages from family formation onward, with a
particular focus on consumers over 50;
- Expanding our product offerings beyond publishing in these targeted
consumer interest areas and life stages;
- Continuing geographic expansion, including expanding into new countries
and expanding the products and services we offer in existing markets;
- Developing new marketing and distribution channels; and
- Integrating the Internet into all of our businesses by:
c Revitalizing and globalizing our current Web sites;
c Making strategic investments in existing Web sites that match our
areas of strategic interest;
c Expanding our existing U.S.-based Web sites internationally; and
c On a highly selective basis, creating and launching Web sites that
meet consumer needs, leverage our corporate assets and provide us with
substantial e-commerce opportunities.
Throughout our implementation of our Phase III growth initiatives, we have
invested and we expect to continue to invest in the development of products and
channels to support internal growth opportunities in our core businesses. We
also expect to target acquisitions and form alliances that leverage our core
strengths.
OPERATING SEGMENTS
Effective for the first quarter of 2000, we have four operating segments:
Global Books and Home Entertainment, U.S. Magazines, International Magazines and
Other Businesses. Financial information about each of our operating segments is
included in Note 12 in Notes to our Consolidated Financial Statements contained
in our 1999 Annual Report to Shareholders for annual segment disclosure and Note
4 in Notes to our Consolidated Condensed Financial Statements contained in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 for
interim segment disclosure. These Consolidated Financial Statements 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. For more information about how we market our products, please refer
to the section of this prospectus captioned "Direct Marketing Operations."
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SELECT EDITIONS
Reader's Digest Select Editions, which were formerly called "Condensed
Books" in many markets, are a continuing series of condensed versions of current
popular fiction. A condensed work reduces the length of an existing text, while
retaining the author's style, integrity and purpose. Today, we publish Select
Editions in 16 languages, and market them in 27 countries. Select Editions
generated worldwide revenues of $254.1 million in fiscal 1999, $260.4 million in
fiscal 1998 and $307.0 million in fiscal 1997.
International editions of Select Editions generally include some material
from the U.S. edition or from other international editions, translated and
edited as appropriate. International editions also include some condensed
versions of locally published works. Each local editorial staff determines
whether existing Select Editions selections are appropriate for their local
market.
We publish six volumes of Select Editions a year in the United States. Some
of our international subsidiaries also publish six volumes a year, while others
publish four or five.
SERIES BOOKS
We market two types of series books: reading series and illustrated series.
These book series may be either open-ended continuing series or closed-ended
series, which consist of a limited number of volumes. We publish series books in
six languages and market them in 11 countries. Series books generated worldwide
revenues of $142.8 million in fiscal 1999, $162.1 million in fiscal 1998 and
$209.5 million in fiscal 1997.
Our reading series include The World's Best Reading, which consists of
full-length editions of classic works of literature. We publish six volumes of
The World's Best Reading each year in four countries in two languages.
We publish illustrated series, which are generally closed-ended, in 10
languages and market them in 16 countries.
GENERAL BOOKS
Our general books consist primarily of reference books, cookbooks, "how-to"
and "do-it-yourself" books and children's books. We also publish books on
subjects such as history, travel, religion, health, nature and the home. We
publish some of our general books in series. We publish general books in 17
languages and market them in 39 countries. General books generated worldwide
revenues of $540.4 million in fiscal 1999, $606.0 million in fiscal 1998 and
$679.9 million in fiscal 1997.
New general books are usually original Reader's Digest books, but may also
be books acquired from other publishers. During the development period for an
original Reader's Digest book, we conduct extensive research and prepare an
appropriate marketing strategy for the book.
We sell most copies of a general book through initial bulk promotional
mailings. We also sell substantial additional copies through subsequent
promotions, through catalog sales and through the use of sales inserts in
mailings for other Reader's Digest products. We also distribute our general
books for retail sale in stores through independent distributors.
MUSIC
We publish recorded music packages on cassettes and compact discs. The
music packages are generally collections of previously recorded and newly
commissioned material by a variety of artists, although they may include
selections from our almost 18,000-selection library. The collections span a
broad range of musical styles. Our marketing strategy for music packages is
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similar to our marketing strategy for general books. In some markets, we also
sell music series, which we market in the same manner as series books.
We market music products in 33 countries. We offer different music products
in the various international markets because of diverse tastes. Music products
generated worldwide revenues of $345.5 million in fiscal 1999, $377.5 million in
fiscal 1998 and $404.2 million in fiscal 1997.
We are a member of the Recording Industry Association of America in the
United States, and we have been recognized with 49 gold, platinum and
multi-platinum certificates.
VIDEO
Our video products and series are in genres similar to our general books.
We continue to expand our video operations in the United States and in
international markets. We presently market video products in the United States
and 26 other countries. We also sell our video products through retail
establishments. Video products generated worldwide revenues of $200.5 in fiscal
1999, $215.8 million in fiscal 1998 and $243.5 million in fiscal 1997.
Most of our original programs have been licensed to cable television
networks. Several original programs have won awards of excellence, including
five Emmy awards. In May 1999, we entered into a multi-year agreement with CBS
Productions to develop television movies and mini-series based on the personal
dramas chronicled in Reader's Digest.
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.
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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.
<TABLE>
<CAPTION>
ISSUES JUNE 30,1999 ADVERTISING
PER CIRCULATION PAGES
MAGAZINE TITLE YEAR RATE BASE CARRIED
- -------------- ------ ------------ -----------
<S> <C> <C> <C>
Reader's Digest -- U.S. -- English edition............ 12 12,500,000 1,137
Reader's Digest Large Edition for Easier Reading...... 12 425,000 159
The Family Handyman................................... 10 1,100,000 638
American Health for Women............................. 10 1,000,000 571
New Choices: Living Even Better After 50.............. 10 600,000 412
Walking............................................... 6 650,000 366
American Woodworker................................... 7 324,000 187
</TABLE>
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<PAGE> 34
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.
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<PAGE> 35
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.
<TABLE>
<CAPTION>
ISSUES JUNE 30,1999 ADVERTISING
PER CIRCULATION PAGES
MAGAZINE TITLE YEAR RATE BASE CARRIED
- -------------- ------ ------------ -----------
<S> <C> <C> <C>
Reader's Digest....................................... 12 12,278,585 11,729
Moneywise............................................. 12 108,075 660
</TABLE>
We maintain the circulation rate base for Reader's Digest through annual
subscription renewals and new subscriptions. Each year, we sell approximately
three million new international Reader's Digest subscriptions to maintain the
international circulation rate base. We sell new
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<PAGE> 36
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."
OTHER BUSINESSES
Our Other Businesses operations include our catalog, financial services,
Internet and other developing businesses. Our merchandise catalog business
consists of Good Catalog Company, which markets home, garden and gift-related
products. In July 1999, we launched the www.goodcatalog.com e-commerce Web site.
The financial services, internet and other developing businesses include
those that we have acquired or invested in, or that we are developing, as part
of our Phase III strategic growth initiatives. These businesses include our
insurance marketing alliances with Torchmark Corporation and American
International Group and our credit card marketing alliance with First USA Bank,
N.A. They also include our Internet businesses, such as the Reader's Digest
health Web site alliance with and investment in WebMD and our gifts.com online
gift shopping service. These businesses are described under "Prospectus
Summary -- Recent Developments" elsewhere in this prospectus.
DIRECT MARKETING OPERATIONS
We sell magazine subscriptions, Select Editions, series books, general
books, music and video products, as well as certain other products, principally
through direct mail solicitations to households on our customer lists. Our
products and product offers are usually accompanied by sweepstakes entries and,
in some cases, premium merchandise offers. For many years, we have been
acknowledged as a pioneer and innovator in the direct mail industry.
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<PAGE> 37
As part of our growth strategy and our strategy to develop new marketing
and distribution channels, we have begun to pursue increased distribution of our
products through direct response channels other than direct mail. These other
distribution channels include direct response television, telemarketing, the
Internet, catalogs and clubs. We are also continuing to conduct tests of
non-sweepstakes promotional mailing packages in the United States. The initial
results of these tests have been encouraging.
We are adapting the editorial content and the marketing methods of our
magazines and books and home entertainment products to new technologies. In
1997, we launched Reader's Digest World, a Web site (www.readersdigest.com) that
links our 24 local and international Web sites, for shopping and information
about our products. In 1999, Reader's Digest World had over 3.5 million visitors
from around the world.
To promote the sale of our products in the United States, we usually offer
a sweepstakes in our promotional mailings. Prizes totaled about $9 million for
the 1999 edition of the sweepstakes. Generally, each of our international
subsidiaries sponsors its own sweepstakes. The mechanics of the sweepstakes vary
from jurisdiction to jurisdiction, depending upon local law.
From time to time, we are involved in legal, regulatory and investigative
proceedings concerning our sweepstakes and other direct marketing practices.
Also from time to time, jurisdictions in which we do business consider more
restrictive laws or regulations governing sweepstakes or direct marketing.
Although some of these proceedings may have negatively affected our direct
marketing business, we do not believe that these proceedings and proposed laws
and regulations will have a material adverse effect on our direct marketing
business.
We are subject to postal rate increases, which affect our product
deliveries, promotional mailings and billings. Postage is one of the largest
expenses in our promotional and billing activities. In the past, we have had
sufficient advance notice of most increases in postal rates so that we could
factor the higher rates into our pricing strategies and operating plans. Higher
postal rates or other delivery charges usually increase the total cost to the
customer, which may have a negative effect on sales. As a result, we may
strategically determine the extent, if any, to which we will pass these cost
increases on to our customers.
We rely on postal delivery service for timely delivery of our products and
promotional mailings. In the United States and most international markets,
delivery service is generally satisfactory. Some international jurisdictions,
however, experience periodic work stoppages in postal delivery service or less
than adequate postal efficiency.
In some states in the United States and in some international
jurisdictions, some or all of our products are subject to sales tax or value
added tax. Taxes, like delivery costs, are generally stated separately on bills,
where permitted by applicable law. Higher taxes increase the total cost to the
customer, which may have a negative effect on sales. In jurisdictions where
applicable tax must be included in the purchase price, we may be unable to fully
recover from customers the amount of any tax increase or new tax.
INFORMATION TECHNOLOGY AND CUSTOMER LIST ENHANCEMENT
The size and quality of our computerized customer list of current and
prospective customers in each country where we operate contributes significantly
to our business. We are constantly striving to improve our customer lists. We
believe that our U.S. list of over 57 million households -- over half the total
number of households in the country -- is one of the largest direct response
lists in the United States. Our international lists include a total of
approximately 49 million households.
We continue to make significant investments in our database list management
and related information technology to improve our operating efficiencies, to
increase the level of service we provide to our customer base and to facilitate
globalization of our operations.
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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. A subsidiary owns approximately 108,000 square
feet of office space in Fairfield, Iowa. 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 318,000
square feet of additional space for an editorial bureau, advertising sales
offices and other purposes in various cities in the United States.
We own approximately 694,000 square feet and lease approximately 528,000
square feet of space outside the United States for our international operating
subsidiaries. They use this space principally as headquarters, administrative
and editorial offices and warehouse space.
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We believe that our current facilities, together with expansions and
upgrading presently underway or planned, will meet our present and reasonably
foreseeable needs. We also believe that we will find adequate space to replace
any leased facilities whose leases expire in the near future.
LEGAL PROCEEDINGS
We and our subsidiaries are defendants in various lawsuits and claims
arising in the regular course of business. Based on the opinions of our
management and our counsel for those matters, we believe any recoveries by
plaintiffs and claimants will not materially affect our financial position or
results of operations.
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MANAGEMENT
DIRECTORS
Our board of directors currently consists of nine members who are elected
annually to hold office until our next annual meeting of stockholders or until
their successors are duly elected and qualified. Immediately preceding our 1999
annual meeting of stockholders scheduled for November 12, 1999, the size of our
board of directors will be reduced to eight members. Mr. Grune, one of our
current directors, will not be standing for re-election at that meeting. Our
board of directors is responsible for the management of our business.
The following table sets forth the name, age, present positions and offices
with Reader's Digest, the year first elected and principal occupations during
the past five years of each of our directors.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas O. Ryder (55)......... Mr. Ryder has been our Chairman of the Board and Chief
Executive Officer and one of our directors since April 28,
1998. Mr. Ryder was President, American Express Travel
Related Services International, a division of American
Express Company (travel, financial and network services),
from October 1995 to April 1998. Before October 1995, he
served as President, Establishment Services -- Worldwide of
American Express Travel Related Services.
Lynne V. Cheney (58)......... Dr. Cheney joined our board of directors in 1993. She is an
author and lecturer and has been a senior fellow of the
American Enterprise Institute for Public Policy Research
since January 1993. Prior to January 1993, she served as
Chairman of the National Endowment for the Humanities. Dr.
Cheney is also a director of IDS Mutual Fund Group,
Lockheed-Martin Corporation and Union Pacific Resources
Group, Inc.
M. Christine DeVita (49)..... Ms. DeVita has been a member of our board of directors
since 1993. She has been President of the DeWitt Wallace --
Reader's Digest Fund, Inc. and the Lila Wallace -- Reader's
Digest Fund, Inc. since June 1989.
George V. Grune (70)......... Mr. Grune is the Chairman of the DeWitt Wallace -- Reader's
Digest Fund, Inc. and the Lila Wallace -- Reader's Digest
Fund, Inc. Mr. Grune, who first joined Reader's Digest in
1960, retired as our Chairman of the Board and Chief
Executive Officer in August 1995 and August 1994,
respectively. He returned to Reader's Digest in those
capacities from August 1997 to April 1998 and remained an
employee until July 1998. He served as one of our directors
from 1976 to his retirement in 1995, and returned to our
board in August 1997. Mr. Grune is a director of Federated
Department Stores, Inc.
James E. Preston (66)........ Mr. Preston has been a member of our board of directors
since 1994. He retired as Chairman of the Board of Avon
Products, Inc. (beauty and related products) in May 1999, a
position he has held since January 1989 and was Chief
Executive Officer prior to July 1998, and President prior
to November 1993. Mr. Preston also serves on the board of
directors of Aramark, Inc., Cyberian Outpost, Inc. and
Venator Group, Inc.
</TABLE>
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<PAGE> 41
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Lawrence R. Ricciardi (59)... Mr. Ricciardi has been a member of our board of directors
since 1998. He is Senior Vice President and General Counsel
of International Business Machines Corporation, a position
he has held since May 1995. Prior to May 1995, Mr.
Ricciardi was President and General Counsel of RJR Nabisco
Holdings Corp.
C. J. Silas (67)............. Mr. Silas has been a member of our board of directors since
1992. He retired in May 1994 as Chairman and Chief
Executive Officer of Phillips Petroleum Company, positions
he had held since 1985. Mr. Silas is also director of
Halliburton Company.
William J. White (61)........ Mr. White has been a member of our board of directors since
1996. He has been a professor at the Robert R. McCormick
School of Engineering and Applied Sciences at Northwestern
University since January 1998. He retired as Chairman of
the Board of Bell & Howell Company (information access and
mail processing systems) in December 1997, a position he
had held since 1990. Mr. White also served as Chief
Executive Officer of Bell & Howell Company until March 1997
and as President until February 1995. Mr. White is also a
director of Bell & Howell Company, Ivex Packaging
Corporation and TJ International, Inc.
Ed Zschau (59)............... Mr. Zschau has been a member of our board of directors
since January 1999. He is a professor of management at the
Graduate School of Business Administration of Harvard
University, where he joined the faculty in 1996. He is also
a Visiting Professor at Princeton University. Mr. Zschau
was General Manager, IBM Corporation Storage Systems
Division of International Business Machines Corporation
from April 1993 to July 1995 and was Chairman and Chief
Executive Officer of Censtor Corp. from July 1988 to April
1993. Mr. Zschau is also a director of GenRad, Inc. and
StarTek, Inc.
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth the name, age and offices with Reader's
Digest of each of our present executive officers, the period during which each
executive officer has served in that capacity and each executive officer's
business experience during the past five years:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas O. Ryder (55)......... Mr. Ryder has been our Chairman of the Board and Chief
Executive Officer since April 1998. Mr. Ryder was
President, American Express Travel Related Services
International, a division of American Express Company
(travel, financial and network services), from October
1995 to April 1998. Before October 1995, he served as
President, Establishment Services -- Worldwide of American
Express Travel Related Services.
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
M. John Bohane (63).......... Mr. Bohane has been Senior Vice President and President,
Global Books and Home Entertainment since July 1998.
Before July 1998, he was Senior Vice President of Reader's
Digest and President International Operations, a position
he held since rejoining Reader's Digest in September 1997.
He first joined Reader's Digest in 1964 and served in a
number of executive capacities, including President,
Direct Marketing, until leaving Reader's Digest in July
1991. Mr. Bohane served as President and Chief Executive
Officer of Newfield Publications from April 1994 to July
1995 and as Vice President of Corporate Database Marketing
of Time-Warner, Inc., from April 1992 to December 1993.
Michael A. Brizel (42)....... Mr. Brizel has been Vice President and General Counsel
since July 1998. Before July 1998, he was Vice President,
Legal U.S. and Associate General Counsel, a position he
held since September 1996. Before September 1996, he was
one of our Associate General Counsel. Mr. Brizel joined
Reader's Digest in July 1989.
Elizabeth G. Chambers (36)... Ms. Chambers has been Senior Vice President, Strategy and
Business Redesign since October 26, 1999. She joined
Reader's Digest as Vice President, Business Redesign in
August 1998. She was a partner at the management
consulting firm of McKinsey & Company from June 1995 to
August 1998 and was an associate there from October 1989
to June 1995.
Gregory G. Coleman (45)...... Mr. Coleman has been a Senior Vice President and
President, U.S. Magazine Publishing since July 1998. Mr.
Coleman was Senior Vice President, Worldwide Publisher,
Reader's Digest Magazine, a position he held since October
1997. Mr. Coleman also served as Vice President and
General Manager, U.S. Magazines and Publisher, U.S.
Reader's Digest from December 1995 until October 1997,
Vice President, Publisher, U.S. Reader's Digest from
November 1991 until December 1995.
Peter J.C. Davenport (59).... Mr. Davenport has been Senior Vice President, Global
Marketing and Publishing since October 26, 1999. Prior to
that date, he was Senior Vice President, Global Marketing,
except for a temporary retirement from March to September
1997. Mr. Davenport first joined Reader's Digest in 1958.
Clifford H.R. DuPree (49).... Mr. DuPree has been Vice President, Corporate Secretary
and Associate General Counsel since July 1998. He joined
Reader's Digest in May 1992 as Associate General Counsel,
became Assistant Secretary in March 1995 and Vice
President in September 1996.
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
Thomas D. Gardner (42)....... Mr. Gardner has been Senior Vice President, Business
Planning and Development since July 1998. He was Vice
President, Marketing, Reader's Digest U.S.A. from November
1995 to July 1998, Vice President, Business Development
from April 1995 to November 1995, and a Director of
Marketing before April 1995. Mr. Gardner joined Reader's
Digest in February 1992.
Robert J. Krefting (55)...... Mr. Krefting has been Senior Vice President and President,
International Magazine Publishing since July 27, 1998.
Prior to joining Reader's Digest, Mr. Krefting was sole
proprietor of Holly Hill Publishing, a management services
corporation serving the publishing and venture capital
industries, from January 1993 to July 1998.
Albert L. Perruzza (52)...... Mr. Perruzza has been Senior Vice President, Global
Operations since October 26, 1999. He served as Vice
President, Database Management Operations from August 1998
to October 1999 and as Vice President, Customer Service
Operations from April 1995 to August 1998. He was
Director, U.S. Customer Fulfillment Services from October
1994 to April 1995. Mr. Perruzza joined Reader's Digest in
1972.
Robert E. Raymond (43)....... Mr. Raymond has been Vice President, Strategic
Acquisitions & Alliances since June 7, 1999. Before June
1999, he was Vice President and General Manager, Music,
Video, Special Channels, a position he held since April
1998. Mr. Raymond also served as Vice President Marketing,
Video/New Business from December 1997 until April 1998,
Director of Marketing, Video/New Business from July 1995
until December 1997, Marketing Director, New Business from
August 1994 until July 1995. Mr. Raymond joined Reader's
Digest in 1993.
Gary S. Rich (38)............ Mr. Rich has been Senior Vice President, Human Resources,
since August 1998. Before joining Reader's Digest, he was
Senior Vice President, Global Human Resources for A.C.
Nielsen Corporation (provider of market research,
information and analysis to the consumer products and
service industries), a position he held from June 1996 to
July 1998. Before June 1996, Mr. Rich was Vice President,
Human Resources -- Europe, Middle East and Africa, at
American Express Company (travel, financial and network
services).
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH READER'S DIGEST AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------ ------------------------------------------------
<S> <C>
George S. Scimone (52)....... Mr. Scimone has been Senior Vice President and Chief
Financial Officer since July 1998. Mr. Scimone served as
Vice President and Chief Financial Officer from September
1997 to July 1998, as Vice President and President,
Reader's Digest U.S.A. from November 1996 to September
1997 and Vice President and Corporate Controller from
September 1995 to November 1996. Prior to joining Reader's
Digest, Mr. Scimone was Business Chief Financial Officer,
Electrical Distribution and Control of General Electric
Company (appliances, aircraft engines, and other
electrical products and services).
Christopher P. Willcox Mr. Willcox has been Senior Vice President and Editor-in-
(53)....................... Chief of Reader's Digest magazine since March 1996. Before
March 1996, he served as Worldwide Executive Editor from
June 1994 to March 1996 and Executive Editor,
International from October 1991 to June 1994. He joined
Reader's Digest in 1988.
</TABLE>
Under our by-laws, our officers serve at the pleasure of our board of
directors. Our officers are elected annually to serve until their respective
successors are elected and qualified.
43
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table summarizes information as of October 31, 1999 regarding
the beneficial ownership of our Class B voting common stock, the only
outstanding class of our voting securities. The stockholders identified below
are the only stockholders we know that beneficially own more than five percent
of our Class B voting common stock. The information set forth below is based on
information reported to us by those stockholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
- ------------------------------------ ----------------------- ----------
<S> <C> <C>
DeWitt Wallace-Reader's Digest Fund, Inc.................... 3,108,054 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
Lila Wallace-Reader's Digest Fund, Inc...................... 3,108,053 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
State Street Bank and Trust Company, ....................... 1,716,057 shares 13.80%
as trustee of The Reader's Digest Employee (shared voting and
Ownership Plan and 401(k) Partnership(2) investment power)
Gabelli Funds, LLC(3)....................................... 702,000 shares 5.65%
One Corporate Center (sole voting and
Rye, NY 10580 investment power)
GAMCO Investors Inc.(3)..................................... 890,200 shares 7.16%
One Corporate Center (sole voting and
Rye, NY 10580 investment power)
Gemini Capital Management Ltd.(3)........................... 35,500 shares 0.29%
c/o Appleby, Spurling & Kempe (sole voting and
Cedar House, 41 Cedar Avenue investment power)
Hamilton HM12 Bermuda
</TABLE>
- ---------------
(1) As of October 31, 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 12.27% of our total outstanding common stock. As of October 31, 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 8.86% of our total
outstanding common stock.
(2) State Street Bank and Trust Company is trustee of the trust created by the
Trust Agreement, amended and restated as of July 1, 1992 between Reader's
Digest and State Street, as trustee, relating to The Reader's Digest
Employee Ownership Plan and the 401(k) Partnership. According to the
Schedule 13G filed with the SEC by State Street in that capacity, State
Street may be considered to have shared voting and shared dispositive power
over the shares listed, but it has disclaimed beneficial ownership of all of
those shares.
(3) As reported on a Schedule 13D filed with the SEC by Mario J. Gabelli, Marc
J. Gabelli and various entities that either one directly or indirectly
controls or for which either one acts as chief investment officer.
Each of the DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. has five members and a board consisting of
five directors. Ms. DeVita and Messrs. Silas and Grune, who are our directors,
are also members and directors of each of these funds.
44
<PAGE> 46
SELLING STOCKHOLDERS
The following table summarizes information regarding each selling
stockholder's beneficial ownership of Class A nonvoting common stock as of
October 31, 1999.
<TABLE>
<CAPTION>
CLASS A NONVOTING COMMON
STOCK BENEFICIALLY OWNED(1)
--------------------------------------
BEFORE GIVING AFTER GIVING
EFFECT TO THE EFFECT TO THE
OFFERING OFFERING
----------------- -----------------
SELLING STOCKHOLDER SHARES % SHARES %
- ------------------- ------ - ------ -
<S> <C> <C> <C> <C>
DeWitt Wallace-Reader's Digest Fund,
Inc.(2)(3)(4)(5).................................. 9,957,523 10.6 7,121,454 7.6
Lila Wallace-Reader's Digest Fund,
Inc.(2)(3)(4)(5).................................... 6,329,842 6.7 4,281,213 4.6
Lila Acheson Wallace Fund for the Metropolitan
Museum of Art(2)(3)............................... 6,826,531 7.3 5,344,736 5.7
Lila Acheson and DeWitt Wallace Fund for Lincoln
Center(2)......................................... 6,380,759 6.8 5,497,796 5.9
DeWitt Wallace Fund for Macalester College(2)(3).... 5,957,310 6.3 5,407,735 5.8
Lila Acheson and DeWitt Wallace Fund for the Hudson
Highlands(2)(3)................................... 5,510,657 5.9 4,975,220 5.3
DeWitt Wallace Fund for Colonial
Williamsburg(2)(3)................................ 2,900,346 3.1 2,270,785 2.4
Lila Acheson Wallace Fund for the New York
Zoological Society(2)(3).......................... 2,900,346 3.1 2,498,999 2.7
DeWitt Wallace Fund for Memorial Sloan-Kettering
Cancer Center(2)(3)............................... 2,320,277 2.5 1,999,199 2.1
Community Funds, Inc. .............................. 2,624,119 2.8 2,310,573 2.5
</TABLE>
- ---------------
(1) Includes up to the following number of shares of Class A nonvoting common
stock subject to forward purchase contracts entered into between the
Reader's Digest Common Exchange Security Trust and certain of the selling
stockholders in connection with the sale of $1.9336 Trust Automatic Common
Exchange Securities of the trust in February 1998: Lila Acheson and DeWitt
Wallace Fund for Lincoln Center, 2,313,009 shares; DeWitt Wallace Fund for
Macalester College, 3,425,454 shares; Lila Acheson and DeWitt Wallace Fund
for the Hudson Highlands, 3,043,937 shares; Lila Acheson Wallace Fund for
the New York Zoological Society, 1,051,368 shares; DeWitt Wallace Fund for
Memorial Sloan-Kettering Cancer Center, 841,094 shares; and Community Funds,
Inc., 1,179,634 shares. Unless certain events occur, the selling
stockholders are obligated to deliver these shares of Class A nonvoting
common stock on February 15, 2001. Under certain circumstances the selling
stockholders will be required to deliver these shares or cash in place of
these shares at an earlier date.
(2) Mr. Grune, one of our directors, is also a director and member of the DeWitt
Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest Fund,
Inc., the Lila Acheson Wallace Fund for the Metropolitan Museum of Art, the
Lila Acheson and DeWitt Wallace Fund for Lincoln Center, the DeWitt Wallace
Fund for Macalester College, the Lila Acheson and DeWitt Wallace Fund for
the Hudson Highlands, the DeWitt Wallace Fund for Colonial Williamsburg, the
Lila Acheson Wallace Fund for the New York Zoological Society and the DeWitt
Wallace Fund for Memorial Sloan-Kettering Cancer Center.
(3) Ms. DeVita, one of our directors, is also a director and member of the
DeWitt Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest
Fund, Inc., the Lila Acheson Wallace Fund for the Metropolitan Museum of
Art, the DeWitt Wallace Fund for Macalester College, the Lila Acheson and
DeWitt Wallace Fund for the Hudson Highlands, the DeWitt Wallace Fund for
Colonial Williamsburg, the Lila Acheson Wallace Fund for the New York
Zoological Society and the DeWitt Wallace Fund for Memorial Sloan-Kettering
Cancer Center.
45
<PAGE> 47
(4) Mr. Silas, one of our directors, is also a director and member of the DeWitt
Wallace-Reader's Digest Fund, Inc. and the Lila Wallace-Reader's Digest
Fund, Inc.
(5) As of October 31, 1999, the DeWitt Wallace-Reader's Digest Fund, Inc. also
owned 3,108,054 shares of our Class B voting common stock. As of October 31,
1999, the Lila Wallace-Reader's Digest Fund, Inc. also owned 3,108,053
shares of our Class B voting common stock.
We have agreed to indemnify each of the selling stockholders, their
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act.
46
<PAGE> 48
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 October 31, 1999, 94,037,769 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 October 31, 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
47
<PAGE> 49
(2) any dividend or other distribution on our common stock that is payable
in shares of common stock of any subsidiaries may be paid to holders of
our Class B voting common stock only in shares of common stock of those
subsidiaries having full voting rights and may be paid to holders of
our Class A nonvoting common stock only in shares of common stock of
those subsidiaries having no voting rights other than those prescribed
by law. If there is any split or reverse split of our common stock, the
number of shares of our Class A nonvoting common stock and the number
of shares of our Class B voting common stock must be increased or
decreased, as applicable, in the same proportion, share and share
alike.
GENERAL
No holder of our Class B voting common stock or Class A nonvoting common
stock has any preemptive right to subscribe for any of our securities. All
outstanding shares of our Class B voting common stock and Class A nonvoting
common stock are validly issued, fully paid and nonassessable.
PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION
We have proposed amendments to our certificate of incorporation that would
require us to first obtain the approval of the holders of our Class B voting
common stock if we were to issue or sell any additional shares of our Class B
voting common stock to any of our employee benefit plans. We have submitted
these amendments to a vote of our stockholders at our 1999 Annual Meeting of
Stockholders to be held on November 12, 1999.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. acts as transfer agent and
registrar for our Class A nonvoting common stock and our Class B voting common
stock.
SHARES ELIGIBLE FOR FUTURE SALE
Rule 144 under the Securities Act provides that a person (or persons whose
sales are aggregated) who is one of our affiliates, or who has beneficially
owned for at least one year shares that were issued and sold in reliance upon
exemptions from registration under the Securities Act, is entitled to sell
within any three-month period a number of those restricted shares that does not
exceed the greater of one percent of the then outstanding shares of that class
of stock or the average weekly trading volume in that class of stock during the
four calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about us. However, a person who is not considered to
have been one of our affiliates at any time during the three months preceding a
sale, and who has beneficially owned restricted shares for at least two years,
may sell those shares under Rule 144 without regard to volume limitations,
manner-of-sale provisions, notice requirements or the availability of current
public information about us.
The selling stockholders may be considered to be our affiliates depending
upon a variety of factors, including whether the selling stockholders are under
common control with us. In addition, if those stockholders are considered to be
our affiliates and act in concert in disposing of our Class A nonvoting common
stock, their sales could be aggregated for purposes of determining the number of
shares they may sell under Rule 144. As of October 31, 1999, 94,037,769 shares
of our Class A nonvoting common stock were outstanding. Of those shares,
41,659,982 shares were freely tradable without restriction or registration under
the Securities Act, 670,077 shares were owned by our directors and officers and
51,707,710 shares were owned in the aggregate by the selling stockholders. Of
the 51,707,710 shares held by the selling stockholders, up to 11,854,496 shares
are subject to forward purchase contracts entered into between the
48
<PAGE> 50
Reader's Digest Common Exchange Security Trust and certain of the selling
stockholders in connection with the sale of $1.9336 Trust Automatic Common
Exchange Securities of the Reader's Digest Automatic Common Exchange Security
Trust in February 1998. Any shares held by affiliates may be sold in accordance
with Rule 144.
Subject to certain exceptions, we and the selling stockholders have agreed
with the underwriters not to sell any shares of our Class A nonvoting common
stock or our Class B voting common stock for a period of 180 days after the
closing of the offering of our Class A nonvoting common stock, without the
underwriters' prior written consent. See "Underwriting." Our Employee Ownership
Plan and 401(k) Partnership presently plans to sell up to approximately 15% of
the Class B voting common stock that it holds, subject to market conditions.
On October 31, 1999, 12,432,164 shares of our Class B voting common stock
were outstanding. Of those shares, a total of 7,932,164 shares were held by the
DeWitt Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest
Fund, Inc. and our Employee Ownership Plan and 401(k) Partnership and could be
sold in accordance with Rule 144.
As of October 31, 1999, our employees held options to purchase a total of
10,876,764 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.
49
<PAGE> 51
UNDERWRITING
Reader's Digest, the selling stockholders and the underwriters for the
offering (the "Underwriters") named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each Underwriter has severally agreed to purchase the number of
shares of Class A nonvoting common stock indicated in the following table.
Goldman, Sachs & Co. and Lazard Freres & Co. LLC are the representatives of the
Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Lazard Freres & Co. LLC.....................................
----------
Total............................................. 10,000,000
==========
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
1,500,000 shares from the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by the selling stockholders. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase 1,500,000 additional shares.
<TABLE>
<CAPTION>
Paid by the
Selling Stockholders
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.................................... $ $
Total.............................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
Reader's Digest and the selling stockholders have agreed with the
Underwriters that, subject to certain exceptions, during the period beginning
from the date of this prospectus and continuing to and including the date 180
days after the date of this prospectus, they will not offer, sell, contract to
sell or otherwise dispose of any Class A nonvoting common stock or other
securities of Reader's Digest (other than pursuant to employee plans existing,
or on the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this prospectus) which are substantially similar to
the Class A nonvoting common stock, or which are convertible or exchangeable
into Class A nonvoting common stock or other securities which are substantially
similar to the Class A nonvoting common stock, without the prior written consent
of the representatives.
In connection with the offering, the Underwriters may purchase and sell
shares of Class A nonvoting common stock in the open market. These transactions
may include short sales, stabilizing transactions and purchases to cover
positions created by short sales. Short sales
50
<PAGE> 52
involve the sale by the Underwriters of a greater number of shares than they are
required to purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Class A nonvoting common stock while the
offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Class A nonvoting common stock. As a result, the
price of the Class A nonvoting common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the Underwriters at any time. These transactions may
be effected on the New York Stock Exchange, in the over-the-counter market or
otherwise.
The selling stockholders estimate that their share of the total expenses of
the offering, excluding underwriting discounts and commissions, will be
approximately $ .
Reader's Digest and the selling stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
Goldman, Sachs & Co. has periodically performed investment banking and
financial advisory services for us, and Lazard Freres & Co. LLC has periodically
performed investment banking and financial advisory services for the selling
stockholders and related entities.
VALIDITY OF SECURITIES
The validity of the shares of our Class A nonvoting common stock will be
passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York, and certain legal
matters will be passed upon for the underwriters by Milbank, Tweed, Hadley &
McCloy LLP, New York, New York. Laraine S. Rothenberg, a member of Fried, Frank,
Harris, Shriver & Jacobson, is a member and director of each of the DeWitt
Wallace-Reader's Digest Fund, Inc., the Lila Wallace-Reader's Digest Fund, Inc.
and the Lila Acheson and DeWitt Wallace Fund for Lincoln Center.
EXPERTS
Our financial statements as of June 30, 1999 and 1998, and for each of the
years in the three-year period ended June 30, 1999, have been incorporated by
reference in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference, and upon
the authority of that firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Books Are Fun, Ltd. as of and for the year ended December 31,
1998, included in our Current Report on Form 8-K dated October 7, 1999 and
Current Report on Form 8-K/A dated November 9, 1999, as set forth in their
reports, which are 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 reports, given on
their authority as experts in accounting and auditing.
51
<PAGE> 53
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information................ 2
Prospectus Summary.................... 3
Use of Proceeds....................... 12
Price Range of Class A Nonvoting
Common Stock and Dividend
Information......................... 12
Capitalization........................ 13
Selected Consolidated Financial
Information......................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 28
Properties............................ 37
Legal Proceedings..................... 38
Management............................ 39
Principal Stockholders................ 44
Selling Stockholders.................. 45
Description of Capital Stock.......... 47
Underwriting.......................... 50
Validity of Securities................ 51
Experts............................... 51
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,000,000 Shares
THE READER'S DIGEST
ASSOCIATION, INC.
Class A Nonvoting Common Stock
------------------------
READER'S DIGEST LOGO
------------------------
GOLDMAN, SACHS & CO.
LAZARD FRERES & CO. LLC
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses (except for the SEC registration
fee), other than underwriting discounts and commissions, to be incurred in
connection with the issuance and distribution of the securities registered under
this Registration Statement:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 90,116
Fees and expenses of qualification under state securities
laws (including legal fees)................................. 6,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 185,000
Accounting fees and expenses................................ 130,000
Miscellaneous............................................... 13,884
--------
Total............................................. $575,000
========
</TABLE>
The selling stockholders will bear substantially all of such expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reader's Digest's Restated Certificate of Incorporation, as amended,
provides that Reader's Digest shall indemnify each officer or director of
Reader's Digest to the fullest extent permitted by law, subject to the
limitations set forth in its By-Laws. The By-Laws provide that Reader's Digest
shall indemnify to the fullest extent permitted by law any person made or
threatened to be made a party to any action, suit or proceedings, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person or such person's testator or intestate is or was a director or officer of
Reader's Digest or serves or served at the request of Reader's Digest or any
other enterprise as a director or officer. Expenses incurred by any such person
in defending any such action, suit or proceeding shall be paid or reimbursed by
Reader's Digest promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is not
entitled to be indemnified by Reader's Digest. The rights of any person under
the By-Laws shall be enforceable against Reader's Digest by such person, who
shall be presumed to have relied upon them in serving or continuing to serve as
a director or officer as provided above. Notwithstanding the foregoing, and
except as otherwise provided by law, Reader's Digest may not make any payment
for indemnification pursuant to the By-Laws to any person to the extent of the
amount of such payment that would result in the imposition of an excise tax
under Chapter 42 of the Internal Revenue Code of 1986, as amended.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceedings. The Delaware General Corporation Law also provides
that Delaware corporations may purchase insurance on behalf of any director,
officer, employee or agent.
II-1
<PAGE> 55
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
4.1.1 Restated Certificate of Incorporation of The Reader's Digest
Association, Inc. filed with the State of Delaware on
February 7, 1990 (filed as Exhibit 3.1.1 to the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1993
and incorporated herein by reference).
4.1.2 Certificate of Amendment of the Certificate of Incorporation
of The Reader's Digest Association, Inc. filed with the
State of Delaware on February 22, 1991 (filed as Exhibit
3.1.2 to the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1993 and incorporated herein by
reference).
4.1.3* Proposed Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
4.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 (filed as
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1993 and incorporated herein by
reference).
5.1 Opinion of Fried, Frank, Harris, Shriver and Jacobson as to
the validity of the Class A Nonvoting Common Stock being
registered.
23.1 Consent of KPMG LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson
(included in Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 56
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 57
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Reader's
Digest Association, Inc. has duly caused this Amendment No. 2 to the
Registration Statement on Form S-3 (File No. 333-88625) to be signed on its
behalf by the undersigned, thereunto duly authorized, in Pleasantville, New York
on November 9, 1999.
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ THOMAS O. RYDER
------------------------------------
Name: Thomas O. Ryder
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-3 (File No. 333-88625) has been
signed by the following persons in the capacities and on the date first above
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THOMAS O. RYDER Chairman of the Board and Chief Executive Officer
- --------------------------------------------------- and Director (Principal Executive Officer)
Thomas O. Ryder
/s/ GEORGE S. SCIMONE Senior Vice President and Chief Financial Officer
- --------------------------------------------------- (Principal Financial Officer)
George S. Scimone
/s/ DORVIN D. LIVELY Vice President and Corporate Controller
- --------------------------------------------------- (Controller)
Dorvin D. Lively
* Director
- ---------------------------------------------------
Lynne V. Cheney
* Director
- ---------------------------------------------------
M. Christine DeVita
* Director
- ---------------------------------------------------
George V. Grune
* Director
- ---------------------------------------------------
James E. Preston
* Director
- ---------------------------------------------------
Lawrence R. Ricciardi
</TABLE>
II-4
<PAGE> 58
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
- ---------------------------------------------------
C.J. Silas
* Director
- ---------------------------------------------------
William J. White
* Director
- ---------------------------------------------------
Ed Zschau
* /s/ CLIFFORD H.R. DUPREE
- ---------------------------------------------------
Clifford H.R. DuPree
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
4.1.1 Restated Certificate of Incorporation of The Reader's Digest
Association, Inc. filed with the State of Delaware on
February 7, 1990 (filed as Exhibit 3.1.1 to the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1993
and incorporated herein by reference).
4.1.2 Certificate of Amendment of the Certificate of Incorporation
of The Reader's Digest Association, Inc. filed with the
State of Delaware on February 22, 1991 (filed as Exhibit
3.1.2 to the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1993 and incorporated herein by
reference).
4.1.3* Proposed Certificate of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.
4.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 (filed as
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1993 and incorporated herein by
reference).
5.1 Opinion of Fried, Frank, Harris, Shriver and Jacobson as to
the validity of the Class A Nonvoting Common Stock being
registered.
23.1 Consent of KPMG LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson
(included in Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 5.1
212-859-8136
November 10, 1999 (FAX: 212-859-8586)
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Ladies and Gentlemen:
We are acting as special counsel to The Reader's Digest Association,
Inc., a Delaware corporation (the "Company"), in connection with the
Registration Statement on Form S-3 (File No. 333-88625), as amended
("Registration Statement"), under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the underwritten public offering by certain
of the Company's stockholders (the "Selling Stockholders") of an aggregate of up
to 11,500,000 shares (the "Shares") of the Company's Class A Nonvoting Common
Stock, par value $.01 per share (the "Common Stock"), including up to 1,500,000
shares of Common Stock which may be sold upon the exercise of an over-allotment
option granted to the underwriters (the "Underwriters"). With your permission,
all assumptions and statements of reliance herein have been made without any
independent investigation or verification on our part except to the extent
otherwise expressly stated, and we express no opinion with respect to the
subject matter or accuracy of such assumptions or items relied upon. Capitalized
terms used herein have the meanings set forth in the Registration Statement,
unless otherwise defined herein.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, such certificates of public officials and such other documents and
(iii) received such information from officers and representatives of the Company
as we have deemed necessary or appropriate for the purposes of this opinion. In
all examinations, we have assumed the legal capacity of all natural persons, the
genuineness of all signatures, the authenticity of original and certified
documents and the conformity to original or certified documents of all copies
submitted to us as conformed or reproduction copies. As to various questions of
fact relevant to the opinions expressed herein, we have relied upon, and assume
the accuracy of, certificates and oral or written statements and other
information of or from representatives of the Company and others.
<PAGE> 2
The Reader's Digest Association -2- November 10, 1999
Based upon the foregoing and subject to the limitations, qualifications
and assumptions set forth herein, we are of the opinion that the Shares have
been validly issued and are fully paid and nonassessable.
The opinion expressed herein is limited to the General Corporation Law
of the State of Delaware, as currently in effect. The opinion expressed herein
is given as of the date hereof, and we undertake no obligation to supplement
this letter if any applicable laws change after the date hereof or if we become
aware of any facts that might change the opinion expressed herein after the date
hereof or for any other reason.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Validity of Securities" in the Prospectus forming a part of the Registration
Statement. In giving these consents, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
The opinions expressed herein are solely for the benefit of the Company
and may not be relied upon in any manner or for any purpose by any other person
or entity and may not be quoted in whole or in part without our prior written
consent.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By:_________________________________________
Jeffrey Bagner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
The Reader's Digest Association, Inc.
We consent to the use of our report on the consolidated financial statements of
The Reader's Digest Association, Inc. as of June 30, 1999 and 1998 and for each
of the years in the three-year period ended June 30, 1999, incorporated herein
by reference and to the reference to our firm under the headings "Selected
Consolidated Financial Information" and "Experts" in the prospectus.
KPMG LLP
New York, New York
November 9, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 2 to the Registration Statement (Form S-3 No. 333-88625) and related
Prospectus of The Reader's Digest Association, Inc. for the registration of
11,500,000 shares of its Class A Nonvoting Common Stock and to the incorporation
by reference therein of our report dated January 25, 1999, with respect to the
financial statements of Books Are Fun, Ltd. as of and for the year ended
December 31, 1998, included in the Current Reports of The Reader's Digest
Association, Inc. on Form 8-K dated October 7, 1999 and Form 8-K/A dated
November 9, 1999, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Des Moines, Iowa
November 9, 1999
