AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2002
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
THE READER'S DIGEST ASSOCIATION, INC.
(Exact Name of Registrant as Specified in its Charter)
<Table>
DELAWARE 2731 13-1726769
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</Table>
PLEASANTVILLE, NEW YORK 10570-7000
(914) 238-1000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
C.H.R. DUPREE, ESQ.
VICE PRESIDENT, CORPORATE SECRETARY AND ASSOCIATE GENERAL COUNSEL
PLEASANTVILLE, NEW YORK 10570-7000
(914) 238-1000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------
COPIES TO:
PATRICIA A. VLAHAKIS, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
(212) 403-1000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
satisfaction or waiver of all other conditions to the recapitalization of the
Registrant pursuant to the recapitalization agreement, dated as of April 12,
2002, described in the enclosed proxy statement/prospectus.
---------------------
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
AMOUNT TO BE AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH REGISTERED IN REGISTERED IN OFFERING PRICE OFFERING PRICE
CLASS OF RESPECT OF RESPECT OF PER SHARE PER SHARE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO CLASS A CLASS B (CLASS A (CLASS B AGGREGATE REGISTRATION
BE REGISTERED(1) STOCK(1) STOCK(1) STOCK)(2) STOCK)(2) OFFERING PRICE(4) FEE(5)
- -------------------------------------------------------------------------------------------------------------
Common Stock,
par value $.01
per share..... 87,270,139 10,906,793 $1,807,364,579 $277,359,746 $2,084,724,325 $191,795
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</Table>
(1) This Registration Statement relates to the Common Stock, par value $.01 per
share, of the Registrant ("Common Stock") that holders, prior to the
recapitalization, of Class A Nonvoting Common Stock, par value $.01 per
share, of the Registrant ("Class A Stock") and Class B Voting Common Stock,
par value $.01 per share, of the Registrant ("Class B Stock") will own
following the recapitalization. In the recapitalization, each share of Class
A Stock will be recapitalized into one share of Common Stock and each share
of Class B Stock will be recapitalized into 1.24 shares of Common Stock.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) and 457(c) of the Securities Act, based on the average of
the high and low prices of Class A Stock on June 7, 2002, as reported on the
New York Stock Exchange, Inc., at a ratio of one share of Common Stock per
share of Class A Stock.
(3) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) and 457(c) of the Securities Act, based on the average of
the high and low prices of Class B Stock on June 7, 2002, as reported on the
New York Stock Exchange, Inc., at a ratio of 1.24 shares of Common Stock per
share of Class B Stock.
(4) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) of the Securities Act, based on the sum of: (A) the
product of the estimated maximum number of shares of Common Stock to be
registered in the recapitalization in respect of shares of Class A Stock
multiplied by the proposed maximum offering price per share calculated as
described in (2) above PLUS (B) the product of the estimated maximum number
of shares of Common Stock to be registered in the recapitalization in
respect of shares of Class B Stock multiplied by the proposed maximum
offering price per share calculated as described in (3) above.
(5) Calculated by multiplying .000092 by the proposed maximum aggregate offering
price.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LETTERHEAD OF THE READER'S DIGEST ASSOCIATION, INC.]
SUBJECT TO COMPLETION; DATED JUNE 14, 2002
PRELIMINARY PROXY MATERIAL
, 2002
Dear Reader's Digest Stockholder:
I am pleased to invite you to attend a special meeting of stockholders on
, , 2002. The meeting will begin promptly at 9:00 a.m. local
time at .
The accompanying notice of meeting and proxy statement/prospectus describe
the matters to be considered and voted upon at the special meeting.
Although only holders of record of Reader's Digest's Class B Voting Common
Stock at the close of business on , 2002 are entitled to vote at the
special meeting, we invite all Reader's Digest stockholders, including the
holders of Reader's Digest Class A Nonvoting Common Stock, to attend.
We are asking you to approve a recapitalization transaction in which
- each share of Class A Nonvoting Common Stock will be recapitalized into
one share of Common Stock, entitled to one vote per share;
- each share of Class B Voting Common Stock will be recapitalized into 1.24
shares of Common Stock, entitled to one vote per share; and
- our board of directors will be divided into three classes and the ability
of stockholders to act by written consent without a meeting will be
eliminated.
In addition, under the terms of the recapitalization agreement, we have
agreed to purchase 3,636,363 shares of Class B Voting Common Stock owned by the
DeWitt Wallace-Reader's Digest Fund and the Lila Wallace-Reader's Digest Fund at
$27.50 in cash per share for an aggregate purchase price of $99,999,983.
If you are entitled to vote at the special meeting, it is important that
your shares be represented, whether or not you plan to attend the special
meeting personally. To ensure that your vote will be received and counted,
please promptly complete, date and return your proxy or voting direction card in
the enclosed return envelope, whether or not you plan to attend the meeting in
person.
Sincerely,
[SIGNATURE OF THOMAS O. RYDER]
Chairman and Chief Executive Officer
NOTE: HOLDERS OF CLASS A NONVOTING COMMON STOCK AND READER'S DIGEST PREFERRED
STOCK ARE NOT ENTITLED TO VOTE AT THE SPECIAL MEETING AND WILL NOT RECEIVE A
PROXY CARD OR VOTING DIRECTION CARD WITH THIS PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMON STOCK TO BE ISSUED UNDER
THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS
IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This proxy statement/prospectus is dated , 2002, and is first
being mailed to stockholders on or about , 2002.
THE READER'S DIGEST ASSOCIATION, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 2002
The special meeting of stockholders of The Reader's Digest Association,
Inc. will be held at at 9:00 a.m. Eastern Time on ,
, 2002 for the following purposes:
1. To adopt the Agreement and Plan of Merger, dated as of ,
2002, by and between Reader's Digest and RDA Recap Corp., providing for a
recapitalization of the company by means of a merger of RDA Recap Corp. with and
into Reader's Digest that will result in:
- the conversion of each share of our Class A Nonvoting Common Stock into
one share of Common Stock, entitled to one vote per share;
- the conversion of each share of our Class B Voting Common Stock into 1.24
shares of Common Stock, entitled to one vote per share; and
- our certificate of incorporation being amended in the merger to divide
our board of directors into three classes and to eliminate the ability of
stockholders to act by written consent without a meeting;
and, in the alternative, to approve proposed amendments to our certificate of
incorporation that would recapitalize the company by, first, reclassifying each
share of Class B Voting Common Stock into 1.24 shares of Class A Nonvoting
Common Stock, and, immediately thereafter, granting the shares of Class A
Nonvoting Common Stock the right to cast one vote per share and renaming the
Class A Nonvoting Common Stock "Common Stock;" and divide our board of directors
into three classes and eliminate the ability of stockholders to act by written
consent without a meeting.
2. To consider and act upon such other business as may properly come
before the meeting or any adjournment thereof.
Under the terms of the recapitalization agreement, we have also agreed to
purchase 3,636,363 shares of Class B Voting Common Stock owned by the DeWitt
Wallace-Reader's Digest Fund and the Lila Wallace-Reader's Digest Fund at $27.50
in cash per share for an aggregate purchase price of $99,999,983.
Holders of Class B Voting Common Stock of record at the close of business
on , 2002 are entitled to notice of and to vote at the special
meeting.
Whether or not you plan to attend the special meeting, you can vote your
shares by completing and returning the proxy card or voting direction card sent
to you. You can revoke a proxy at any time prior to its exercise by following
the instructions in the proxy statement/prospectus.
If we effect the recapitalization by means of a merger, holders of our
preferred stock will have appraisal rights, which are described in the proxy
statement/prospectus. If holders of more than $5 million in stated amount of our
preferred stock properly seek to exercise appraisal rights, we will effect the
recapitalization by amending our certificate of incorporation instead of
completing the merger and holders of our preferred stock will not be entitled to
appraisal rights. Under no circumstances are holders of Class A Nonvoting Common
Stock or Class B Voting Common Stock entitled to appraisal rights in connection
with the recapitalization.
By order of the Board of Directors,
C.H.R. DUPREE
Vice President and Corporate Secretary
, 2002
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION......................... 1
QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION............ 3
SUMMARY..................................................... 6
The Company............................................... 6
The Recapitalization Agreement............................ 6
Stockholder Approval...................................... 7
Appraisal Rights.......................................... 7
United States Federal Income Tax Consequences............. 7
Recommendation to Stockholders............................ 8
Opinion of Financial Advisor.............................. 8
Interests of Certain Persons in the Recapitalization...... 8
Conditions to the Recapitalization........................ 9
Termination of the Recapitalization Agreement............. 9
Regulatory Matters........................................ 9
Accounting Treatment...................................... 9
Amendments to By-Laws..................................... 9
Selected Historical Financial Information................. 11
Unaudited Selected Pro Forma Condensed Combined Financial
Information............................................ 13
Historical and Pro Forma Per Share Data................... 14
Comparative Per Share Market Price and Dividend
Information............................................ 15
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 16
THE SPECIAL MEETING......................................... 18
General................................................... 18
Date, Time and Place of the Special Meeting; Record
Date................................................... 18
What Will Be Voted Upon................................... 18
Quorum.................................................... 19
Vote Required for Approval................................ 19
Proxies; Revocability of Proxies; Cost of Solicitation.... 19
Voting Shares of Class B Voting Common Stock held through
the Reader's Digest 401(k) Plan........................ 20
Meeting Admittance Procedures............................. 20
Confidential Voting....................................... 21
Recommendation of Our Board of Directors.................. 21
THE RECAPITALIZATION........................................ 22
The Company............................................... 22
Structure of the Recapitalization......................... 22
Background of the Recapitalization........................ 23
Reasons for the Recapitalization.......................... 27
Recommendation of the Reader's Digest Special Committee
and the Reader's Digest Board of Directors............. 29
Opinion of Financial Advisor.............................. 29
Accounting Treatment...................................... 36
United States Federal Income Tax Consequences of the
Recapitalization....................................... 36
Appraisal Rights.......................................... 37
Federal Securities Laws Consequences...................... 39
Regulatory Matters........................................ 39
No Exchange of Stock Certificates......................... 39
Litigation Relating to the Recapitalization............... 39
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 41
</Table>
i
<Table>
<Caption>
PAGE
----
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION........ 50
THE RECAPITALIZATION AGREEMENT.............................. 51
The Share Purchase........................................ 51
The Merger................................................ 51
The Alternative Structure................................. 51
Amendments to Our Certificate of Incorporation............ 51
Representations and Warranties............................ 51
Stockholders' Meeting; Proxy Statement and Registration
Statement.............................................. 51
Funds' Agreement to Vote in Favor of Recapitalization
Proposal; Limitation on Transfer of Funds' Shares...... 52
Funds' Registration Rights................................ 52
Listing of Common Stock................................... 53
Funds' Designee........................................... 53
Conditions to Completion of the Recapitalization.......... 53
Termination............................................... 53
Fees and Expenses......................................... 54
Amendment................................................. 54
THE MERGER AGREEMENT........................................ 55
General................................................... 55
The Merger................................................ 55
Effect of Merger on Reader's Digest Capital Stock......... 55
Amendments to Our Certificate of Incorporation Effected by
the Merger............................................. 56
Share Certificates........................................ 58
Termination............................................... 58
Amendment................................................. 58
ALTERNATIVE STRUCTURE -- EFFECTING THE RECAPITALIZATION BY
AMENDING OUR CERTIFICATE OF INCORPORATION................. 59
General................................................... 59
The Certificates of Amendment to Our Certificate of
Incorporation.......................................... 59
Share Certificates........................................ 60
BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS................ 61
Principal Stockholders.................................... 61
Directors and Executive Officers.......................... 62
DESCRIPTION OF COMMON STOCK................................. 63
Authorized Capital Stock.................................. 63
Reader's Digest Common Stock.............................. 63
Anti-takeover Considerations.............................. 64
COMPARISON OF STOCKHOLDER RIGHTS............................ 66
STOCK EXCHANGE LISTING...................................... 69
INDEPENDENT ACCOUNTANTS..................................... 69
LEGAL MATTERS............................................... 69
SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS......... 69
APPENDIX A -- Recapitalization Agreement
APPENDIX B -- Agreement and Plan of Merger
APPENDIX C -- Certificates of Amendment
APPENDIX D -- Opinion of Goldman, Sachs & Co.
APPENDIX E -- Section 262 of the Delaware General Corporation Law
</Table>
ii
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
Securities and Exchange Commission's website at www.sec.gov. You may also read
and copy any document we file with the Securities and Exchange Commission at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference room. We
maintain a website at www.rd.com. The information contained in our website is
not incorporated in this proxy statement/prospectus by reference and you should
not consider it a part of this proxy statement/prospectus.
The Securities and Exchange Commission allows us to incorporate by
reference the information we file with them, 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 proxy
statement/prospectus, except for any information superseded by information in
this proxy statement/prospectus. This proxy statement/prospectus incorporates
important business and financial information about Reader's Digest that is not
included in or delivered with this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that have previously been filed with the Securities and Exchange Commission:
- our annual report on Form 10-K for the fiscal year ended June 30, 2001;
- our quarterly reports on Form 10-Q for the fiscal quarters ended
September 30, 2001, December 31, 2001 and March 31, 2002; and
- our current reports on Form 8-K filed on August 14, 2001, August 20,
2001, October 31, 2001, December 4, 2001, January 24, 2002, March 22,
2002, March 25, 2002, April 15, 2002, April 18, 2002, April 25, 2002, May
21, 2002, June 3, 2002 and June 11, 2002.
We are also incorporating by reference additional documents that we file
with the Securities and Exchange Commission pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 between the date of this
proxy statement/prospectus and the date of the special meeting.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
Investor Relations
The Reader's Digest Association, Inc.
Pleasantville, New York 10570-7000
Telephone: (914) 244-7446
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, INCLUDING ANY DOCUMENTS WE MAY
SUBSEQUENTLY FILE WITH THE SECURITIES AND EXCHANGE COMMISSION BEFORE THE SPECIAL
MEETING, PLEASE DO SO BY , 2002 SO THAT YOU WILL RECEIVE THEM BEFORE THE
SPECIAL MEETING.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither the
delivery of this proxy statement/prospectus nor any distribution of securities
pursuant to this proxy statement/prospectus shall, under any circumstances,
create any implication that there has been no change in the information set
forth or incorporated into this proxy statement/prospectus by reference or in
our affairs since the date of this proxy statement/prospectus.
1
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the matters presented to
you for your approval. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy statement/
prospectus. This proxy statement/prospectus is dated , 2002. You should
not assume that the information contained in this proxy statement/prospectus is
accurate as of any date other than such date, and neither the mailing of the
proxy statement/prospectus to stockholders nor the issuance of Common Stock in
the recapitalization shall create any implication to the contrary.
2
QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION
Q: WHY IS READER'S DIGEST PROPOSING THE RECAPITALIZATION?
A: We have proposed the recapitalization for a number of reasons:
- Alignment of Economic Interests and Voting Rights. Currently, holders of
the Class B Voting Common Stock, representing approximately 13% of the
economic interest in Reader's Digest, control 100% of the company's
voting power, while holders of the Class A Nonvoting Common Stock,
representing approximately 87% of the economic interest in Reader's
Digest, have no voting power. The recapitalization will align our
stockholders' voting rights with their economic interests in our company
by establishing a simplified one share/one vote capital structure.
- Reduce Funds' Voting Influence. The recapitalization will reduce the
combined voting power of our largest stockholders, the DeWitt
Wallace-Reader's Digest Fund and the Lila Wallace-Reader's Digest Fund
(the Funds), from 50% to approximately 14%. As a result of their reduced
voting interest, the Funds will no longer effectively control the outcome
of matters submitted to a vote of our stockholders.
- Facilitate Diversification by the Funds. For some time, the Funds have
expressed an interest in diversifying their holdings in our company. The
registration rights we will grant to the Funds under the terms of the
recapitalization agreement are intended to provide a mechanism to
facilitate diversification by the Funds in due course and in an orderly
manner, without disrupting the market for our shares.
- Elimination of Control Block. Following the recapitalization, the Funds
will not have the ability to sell effective voting control of the company
in an isolated transaction in which our other stockholders do not
participate. In addition, the elimination of dual class, voting/nonvoting
common stock will limit the possibility that a person could acquire
voting control of Reader's Digest without purchasing a majority of its
shares.
- Enhance Our Strategic Flexibility. We believe that the simplified
capital structure will likely improve our ability to structure equity
financings and acquisitions by eliminating tax concerns of the Funds
resulting from their ability to control the company.
- Improved Liquidity, Trading Efficiencies and Expanded Investor Base. We
believe that the recapitalization could result in improved liquidity,
trading efficiencies and an expanded investor base for Reader's Digest.
Q: WHAT WILL HAPPEN TO MY SHARES OF CLASS A NONVOTING COMMON STOCK IN THE
RECAPITALIZATION?
A: Each share of Class A Nonvoting Common Stock will be recapitalized into one
share of Common Stock, entitled to one vote per share.
Q: WHAT WILL HAPPEN TO MY SHARES OF CLASS B VOTING COMMON STOCK IN THE
RECAPITALIZATION?
A: Each share of Class B Voting Common Stock will be recapitalized into 1.24
shares of Common Stock, entitled to one vote per share. You will receive cash
in lieu of any fractional shares of Common Stock.
Q: WHAT DO I NEED TO DO WITH MY STOCK CERTIFICATES?
A: You do not need to do anything. Following completion of the recapitalization:
- each share certificate representing shares of Class A Nonvoting Common
Stock will represent the same number of shares of Common Stock; and
- each share certificate representing shares of Class B Voting Common Stock
will represent the number of shares of Common Stock obtained by
multiplying the number of shares of Class B Voting Common Stock shown on
the certificate by 1.24, provided that you will receive cash in lieu of
any fractional shares of Common Stock.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES.
3
Q: WHEN DOES READER'S DIGEST EXPECT TO COMPLETE THE RECAPITALIZATION?
A: We are working to complete the recapitalization as quickly as possible. We
hope to complete the recapitalization in . However, we cannot
assure you that we will complete the recapitalization by then.
Q: WHAT STOCKHOLDER APPROVALS ARE REQUIRED TO APPROVE THE RECAPITALIZATION?
A: A majority of the voting power of our shares of Class B Voting Common Stock
must approve the recapitalization and related matters. The Funds, which
together control 50% of the voting power of our shares of Class B Voting
Common Stock, have agreed to vote in favor of the recapitalization proposal.
In addition, certain executive officers and directors of Reader's Digest may
direct the voting of shares of Class B Voting Common Stock held in their
accounts in the Reader's Digest Employee Ownership Plan and 401(k)
Partnership.
Q: WHO IS ENTITLED TO VOTE ON THE RECAPITALIZATION?
A: Only holders of record of our shares of Class B Voting Common Stock at the
close of business on , 2002 may vote on the recapitalization proposal.
If you own shares of Class B Voting Common Stock on the record date through a
bank, broker or other record holder, you may vote in person at the special
meeting only if you present a letter signed by the record holder indicating
the number of shares you are entitled to vote.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: We will hold the special meeting on , 2002, at 9:00 a.m., local time, at
.
Q: IF I AM A HOLDER OF SHARES OF CLASS A NONVOTING COMMON STOCK, WHAT DO I NEED
TO DO NOW?
A: If you are a holder of shares of Class A Nonvoting Common Stock, you are not
entitled to vote at the special meeting and do not need to do anything now.
Q: IF I AM A HOLDER OF SHARES OF CLASS B VOTING COMMON STOCK, WHAT DO I NEED TO
DO NOW?
A: After carefully reading and considering the information contained in this
proxy statement/prospectus, please respond by completing, signing and dating
your proxy card and returning it in the enclosed postage paid envelope.
Please return your proxy card as soon as possible so that we may vote your
shares at the special meeting.
Q: IF I AM A HOLDER OF SHARES OF CLASS B VOTING COMMON STOCK, WHAT HAPPENS IF I
DO NOT RESPOND OR IF I RESPOND AND FAIL TO INDICATE MY VOTING PREFERENCE OR
IF I ABSTAIN FROM VOTING?
A: If you fail to respond, it will have the same effect as a vote against the
recapitalization proposal. If you respond and do not indicate your voting
preference, we will count your proxy as a vote in favor of the
recapitalization proposal. If you respond and abstain from voting, your proxy
will have the same effect as a vote against the recapitalization proposal.
Q: IF I AM A HOLDER OF SHARES OF CLASS B VOTING COMMON STOCK, CAN I CHANGE MY
VOTE AFTER I HAVE DELIVERED MY PROXY?
A: Yes. You can change your vote at any time before we vote your proxy at the
special meeting. You can do this in one of three ways. First, you can revoke
your proxy. Second, you can submit a new proxy. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy to
our corporate secretary before the special meeting. If you hold your shares
through an account at a brokerage firm or bank, you should contact your
brokerage firm or bank to change your vote. Third, if you are a holder of
record, you can attend the special meeting and vote in person.
Q: IF I HOLD SHARES OF CLASS B VOTING COMMON STOCK THROUGH THE READER'S DIGEST
401(k) PLAN, HOW DO I VOTE THESE SHARES?
A: As a participant in our 401(k) plan, you are entitled to direct the plan
trustee how to vote your shares of Class B Voting Common Stock held through
the plan. The trustee will vote your shares of Class B Voting Common Stock in
accordance with your direction. A voting direction card relating to your
shares of Class B Voting Common Stock held through the plan accompanies this
proxy statement/prospectus. After carefully reading and considering the
information contained in this proxy statement/prospectus, please respond by
completing, signing and dating your voting direction card and returning it to
the trustee in the enclosed postage paid envelope so that the
4
trustee receives it no later than 4:00 p.m., Eastern Time, on , ,
2002. You may revoke your voting direction by giving written notice to the
trustee so that it is received by the trustee no later than 4:00 p.m.,
Eastern Time, on , , 2002.
With respect to shares of Class B Voting Common Stock held through the plan
but not yet allocated to plan participants or as to which plan participants
fail to provide to the trustee timely voting directions, the trustee will
vote these shares in the same proportion as the shares as to which the
trustee receives timely voting directions.
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: Holders of shares of our Class A Nonvoting Common Stock and Class B Voting
Common Stock are not entitled to appraisal rights. Under the Delaware General
Corporation Law, if we effect the recapitalization by means of a merger,
holders of our preferred stock will have appraisal rights. Holders of our
preferred stock wishing to exercise appraisal rights must strictly comply
with the rules governing the exercise of appraisal rights or lose those
rights. We describe the procedures for exercising appraisal rights in this
proxy statement/prospectus and we attach the provisions of Delaware law that
govern appraisal rights as Appendix E to this proxy statement/prospectus.
If holders of more than $5 million in stated amount of our preferred stock
properly seek to exercise appraisal rights, we will effect the
recapitalization by amending our certificate of incorporation instead of
completing the merger. If we effect the recapitalization by amending our
certificate of incorporation, holders of our preferred stock will not be
entitled to appraisal rights under Delaware law.
Q: WHOM SHOULD I CALL IF I HAVE QUESTIONS?
A: If you have questions about the recapitalization or how to submit your proxy
card or voting direction card, or if you need additional copies of this proxy
statement/prospectus or the enclosed proxy card or voting direction card, you
should contact:
- Morrow & Co., Inc.
445 Park Avenue
5th Floor
New York, New York 10022
Telephone: (877) 366-1578
or
- The Reader's Digest Association, Inc.
Pleasantville, New York 10570-7000
Attention: Investor Relations
Telephone: (914) 244-7446
5
SUMMARY
This summary highlights selected information about the recapitalization
proposal and may not contain all of the information that is important to you. To
understand the recapitalization proposal better, you should read this entire
document carefully, as well as those additional documents to which we refer you.
See "Where You Can Find More Information" beginning on page 1.
THE COMPANY
(See Page 22)
The Reader's Digest Association, Inc.
Pleasantville, New York 10570-7000
(914) 238-1000
website: http://www.rd.com
Reader's Digest is a preeminent global leader in publishing and direct
marketing. Reader's Digest creates and delivers products that inform, enrich,
entertain and inspire, including magazines, books, recorded music collections,
and home videos. Reader's Digest is best known for publishing its flagship
Reader's Digest magazine. DeWitt and Lila Acheson Wallace founded Reader's
Digest magazine in 1922. Today, Reader's Digest has a worldwide circulation of
about 23 million and over 100 million readers each month. Reader's Digest is
published in 48 editions and 19 languages.
On May 20, 2002, Reader's Digest acquired substantially all of the assets,
and assumed various liabilities, of Reiman Holding Company, LLC, a publisher of
cooking, gardening, country lifestyle and nostalgia magazines and books in the
United States and Canada, for $760 million in cash. We refer to this transaction
throughout this proxy statement/prospectus as the "Reiman acquisition."
For additional information about Reader's Digest and its businesses, see
"The Recapitalization -- The Company" and "Where You Can Find More Information."
THE RECAPITALIZATION AGREEMENT
(See Page 51)
We have entered into a recapitalization agreement with our principal
stockholders, the DeWitt Wallace-Reader's Digest Fund and the Lila
Wallace-Reader's Digest Fund, charitable organizations established by Reader's
Digest's founders, DeWitt and Lila Wallace. Throughout this proxy
statement/prospectus, we refer to the DeWitt Wallace-Reader's Digest Fund and
the Lila Wallace-Reader's Digest Fund as the "Funds."
Under the terms of the recapitalization agreement, we have agreed to
purchase 3,636,363 shares of Class B Voting Common Stock owned by the Funds at
$27.50 in cash per share for an aggregate purchase price of $99,999,983. In
addition, we have agreed to:
- recapitalize each share of Class A Nonvoting Common Stock into one share
of Common Stock, entitled to one vote per share;
- recapitalize each share of Class B Voting Common Stock into 1.24 shares
of Common Stock, entitled to one vote per share; and
- divide our board of directors into three classes and eliminate the
ability of stockholders to act by written consent without a meeting.
Following the recapitalization, we will have a single class of Common
Stock, with each share entitled to one vote. Throughout this proxy
statement/prospectus, we refer to the transactions set forth in the
recapitalization agreement and described in the immediately preceding paragraph
as the "recapitalization."
Under the terms of the recapitalization agreement, unless holders of more
than $5 million in stated amount of our preferred stock properly seek to
exercise appraisal rights, we will effect the recapitalization through a merger
of RDA Recap Corp., our wholly-owned subsidiary, with and into Reader's Digest,
with Reader's Digest surviving. If holders of more than $5 million in stated
amount of our preferred stock properly seek to exercise appraisal rights, we
will effect the recapitalization by amending our certificate of incorporation
instead of completing the merger. If we effect the recapitalization by amending
our certificate of incorporation, the holders of our preferred stock will not
have appraisal rights. We believe that the manner in which we effect the
recapitalization will not affect holders of shares of our Class A Nonvoting
Common Stock or Class B Voting Common Stock.
6
STOCKHOLDER APPROVAL
(See Page 18)
Our holders of Class B Voting Common Stock will vote on a proposal to adopt
the merger agreement, providing for a recapitalization of the company by means
of a merger that will result in:
- the conversion of each share of our Class A Nonvoting Common Stock into
one share of Common Stock, entitled to one vote per share;
- the conversion of each share of our Class B Voting Common Stock into 1.24
shares of Common Stock, entitled to one vote per share; and
- our certificate of incorporation being amended as part of the merger to
divide our board of directors into three classes and to eliminate the
ability of stockholders to act by written consent without a meeting;
and, in the alternative, to approve proposed amendments to our certificate of
incorporation that would recapitalize the company by, first, reclassifying each
share of Class B Voting Common Stock into 1.24 shares of Class A Nonvoting
Common Stock, and, immediately thereafter, granting the shares of Class A
Nonvoting Common Stock the right to cast one vote per share and renaming the
Class A Nonvoting Common Stock "Common Stock;" and divide our board of directors
into three classes and eliminate the ability of stockholders to act by written
consent without a meeting.
Throughout this proxy statement/prospectus, we refer to the matters
described above that we are asking you to approve as the "recapitalization
proposal."
Following the recapitalization, you will own the same number of shares of
Common Stock whether we effect the recapitalization by means of a merger or by
amending our certificate of incorporation.
As of the record date, the Funds owned and were entitled to vote 6,216,082
shares (or 50%) of our Class B Voting Common Stock. The Funds have agreed to
vote in favor of the recapitalization proposal. In addition, certain executive
officers and directors of Reader's Digest may direct the voting of shares of
Class B Voting Common Stock held in their accounts in the Reader's Digest
Employee Ownership Plan and 401(k) Partnership. For additional information on
the beneficial ownership of Reader's Digest stock, see "Beneficial Ownership of
Certain Stockholders," beginning on page 61.
APPRAISAL RIGHTS
(See Page 37)
Holders of shares of our Class A Nonvoting Common Stock and Class B Voting
Common Stock are not entitled to appraisal rights. Under the Delaware General
Corporation Law, if we effect the recapitalization by means of a merger, holders
of our preferred stock will have appraisal rights. Holders of our preferred
stock wishing to exercise appraisal rights must strictly comply with the rules
governing the exercise of appraisal rights or lose those rights. We describe the
procedures for exercising appraisal rights in this proxy statement/prospectus
and we attach the provisions of Delaware law that govern appraisal rights as
Appendix E to this proxy statement/prospectus.
If holders of more than $5 million in stated amount of our preferred stock
properly seek to exercise appraisal rights, we will effect the recapitalization
by amending our certificate of incorporation instead of completing the merger.
If we effect the recapitalization by amending our certificate of incorporation,
holders of our preferred stock will not be entitled to appraisal rights under
Delaware law.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
(See Page 36)
The holders of shares of our Class A Nonvoting Common Stock and Class B
Voting Common Stock (other than the Funds) will not recognize any gain or loss
for U.S. federal income tax purposes as a result of the recapitalization. The
tax basis in the shares of Common Stock that you own immediately following the
recapitalization (including fractional share interests) will equal the basis of
the shares that you owned immediately prior to the recapitalization. The holding
period in the shares of Common Stock that you own immediately following the
recapitalization (including fractional share interests) will include the period
for which the shares that you owned immediately prior to the recapitalization
were held, provided that those shares were held as a
7
capital asset. The sale of a fractional share interest will result in capital
gain or loss measured by the difference between the cash received and the basis
in the fractional interest surrendered, provided that the interest is held as a
capital asset.
You should read "The Recapitalization -- United States Federal Income Tax
Consequences of the Recapitalization" starting on page 36 for a more complete
discussion of the federal income tax consequences of the recapitalization. You
should also consult your own tax advisor with respect to other tax consequences
of the recapitalization or any special circumstances that may affect the tax
treatment for you in the recapitalization.
RECOMMENDATION TO STOCKHOLDERS
(See Page 21)
The Reader's Digest board of directors believes that the recapitalization
agreement and the transactions contemplated thereby, including:
- the merger agreement, providing for the recapitalization of the company
by means of a merger and our certificate of incorporation being amended
in the merger to divide our board of directors into three classes and to
eliminate the ability of stockholders to act by written consent without a
meeting, and, in the alternative,
- the proposed amendments to our certificate of incorporation, providing
for the recapitalization, the division of our board of directors into
three classes and the elimination of the ability of stockholders to act
by written consent without a meeting
are advisable and fair to, and in the best interests of, our stockholders (other
than the Funds, as to which the board of directors makes no fairness
determination). Our board of directors recommends that you vote FOR the
recapitalization proposal.
OPINION OF FINANCIAL ADVISOR
(See Page 29)
In deciding to approve the recapitalization agreement and the transactions
contemplated thereby, our board of directors considered the opinion of Goldman,
Sachs & Co., that, as of the date of the opinion, based upon and subject to the
factors and assumptions set forth therein, the repurchase of 3,636,363 shares of
Class B Voting Common Stock held by the Funds for $27.50 in cash per share, or
$99,999,983 in cash in the aggregate, the recapitalization ratio of 1.24 shares
of Common Stock for each share of Class B Voting Common Stock (other than the
shares repurchased from the Funds) and the recapitalization ratio of one share
of Common Stock for each share of Class A Nonvoting Common Stock, taken as a
whole, pursuant to the recapitalization agreement, was fair from a financial
point of view to the holders of Class A Nonvoting Common Stock and Class B
Voting Common Stock (other than the Funds).
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX D TO
THIS PROXY STATEMENT/PROSPECTUS. GOLDMAN SACHS PROVIDED ITS OPINION FOR THE
INFORMATION AND ASSISTANCE OF THE READER'S DIGEST SPECIAL COMMITTEE AND THE
READER'S DIGEST BOARD OF DIRECTORS IN CONNECTION WITH THEIR CONSIDERATION OF THE
TRANSACTIONS CONTEMPLATED BY THE RECAPITALIZATION AGREEMENT AND THE OPINION DOES
NOT CONSTITUTE A RECOMMENDATION AS TO HOW ANY HOLDER OF CLASS B VOTING COMMON
STOCK SHOULD VOTE WITH RESPECT TO THE RECAPITALIZATION. WE URGE YOU TO READ THE
OPINION IN ITS ENTIRETY.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
(See Page 50)
Ms. DeVita and Mr. Silas, who are members of the board of directors of
Reader's Digest as well as members of the boards of directors of the Funds, have
interests in the recapitalization that are different from, or in addition to,
the interests of Reader's Digest stockholders. For this reason, our board of
directors appointed a special committee consisting of three directors other than
Ms. DeVita and Mr. Silas to act as disinterested negotiators on behalf of the
company and to negotiate, review and, if appropriate, recommend the
recapitalization to the entire board of directors of the company. Ms. DeVita and
Mr. Silas recused themselves from all discussions at Reader's Digest board
meetings relating to the recapitalization transaction and abstained from voting
on the recapitalization.
8
In connection with the recapitalization, Reader's Digest has agreed to
purchase 3,636,363 shares of Class B Voting Common Stock owned by the Funds at
$27.50 in cash per share for an aggregate purchase price of $99,999,983. Each
other share of Class B Voting Common Stock (including those owned by the Funds)
will be recapitalized into 1.24 shares of Common Stock and each share of Class A
Nonvoting Common Stock (including those owned by the Funds) will be
recapitalized into one share of Common Stock. Moreover, pursuant to the terms of
the recapitalization agreement, the Funds will receive registration rights with
respect to the shares of Common Stock that the Funds own following the
recapitalization. Finally, under the terms of the recapitalization agreement,
Reader's Digest has agreed to use its reasonable best efforts to cause one
designee of the Funds to be nominated and elected as a member of the Reader's
Digest board of directors until the earlier of the company's 2004 annual meeting
of stockholders and the time when the Funds jointly own less than 10% of the
outstanding shares of Common Stock.
CONDITIONS TO THE RECAPITALIZATION
(See Page 53)
Completion of the recapitalization requires, among other things:
- approval of the recapitalization proposal by the holders of a majority of
the outstanding shares of Class B Voting Common Stock;
- the absence of any law or injunction preventing the recapitalization;
- approval of the Common Stock that our stockholders will hold following
the recapitalization for listing on the New York Stock Exchange;
- compliance in all material respects by Reader's Digest and the Funds with
their covenants in the recapitalization agreement; and
- that the representations and warranties of Reader's Digest and the Funds
contained in the recapitalization agreement be true and correct in all
material respects.
TERMINATION OF THE RECAPITALIZATION AGREEMENT
(See Page 53)
Reader's Digest and the Funds may mutually agree to terminate the
recapitalization agreement at any time.
Either Reader's Digest or the Funds may terminate the recapitalization
agreement if we do not complete the recapitalization by September 30, 2002.
Reader's Digest or the Funds, as the case may be, may terminate the
recapitalization agreement if specific conditions have become incapable of being
fulfilled.
REGULATORY MATTERS
(See Page 39)
To the extent that a Reader's Digest stockholder owns shares of Common
Stock valued at $50 million or more following the recapitalization, that
stockholder may have a pre-merger notification filing obligation under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, unless the
stockholder qualifies for an exemption to the filing requirements under the Act.
ACCOUNTING TREATMENT
(See Page 36)
We will account for the recapitalization by increasing our capital stock
account based on the aggregate par value of the shares outstanding immediately
following completion of the recapitalization. The increase in capital stock will
be offset by a decrease in paid-in capital. In order to record the repurchase of
shares from the Funds, we will increase our borrowings and increase the treasury
stock caption on our balance sheet. See "Unaudited Pro Forma Condensed Combined
Financial Information" and "The Recapitalization -- Accounting Treatment."
AMENDMENTS TO BY-LAWS
In connection with the recapitalization, we will amend our by-laws to
provide that:
- a director or directors may be removed only for cause;
- the size of the company's board of directors may be fixed only by the
board of directors;
9
- any vacancy on the board of directors may be filled only by a majority
vote of the remaining directors;
- special meetings of stockholders may be called only by the chairman or
the board of directors;
- a stockholder's notice of board nominations or other business to be
brought before an annual meeting generally must be delivered no later
than the close of business on the 60th day prior to the first anniversary
of the preceding year's annual meeting and no earlier than the close of
business on the 90th day prior to the first anniversary of the preceding
year's annual meeting; and
- only business described in the company's notice of meeting may be brought
before a special meeting of stockholders.
10
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table shows our selected historical financial information for
each of the five fiscal years in the period ended June 30, 2001 and the fiscal
quarters ended March 31, 2002 and 2001. We derived the consolidated income
statement data for the fiscal years ended June 30, 2001, 2000 and 1999 and the
consolidated balance sheet data as of June 30, 2001 and 2000 from audited
consolidated financial statements contained in our annual report on Form 10-K
for the fiscal year ended June 30, 2001, incorporated in this proxy
statement/prospectus by reference. We derived the consolidated income statement
data for the fiscal years ended June 30, 1998 and 1997 and the consolidated
balance sheet data as of June 30, 1999, 1998 and 1997 from audited consolidated
financial statements not incorporated in this proxy statement/prospectus by
reference. We derived the consolidated income statement data for the periods
ended March 31, 2002 and 2001 and the consolidated balance sheet data as of
March 31, 2002 from unaudited consolidated financial statements contained in our
quarterly report on Form 10-Q for the nine-month period ended March 31, 2002,
incorporated in this proxy statement/prospectus by reference. We derived the
consolidated balance sheet data as of March 31, 2001 from unaudited consolidated
financial statements not incorporated in this proxy statement/prospectus by
reference.
Interim results are not necessarily indicative of those that would result
for the entire year.
This information is only a summary and you should read it together with the
financial information incorporated by reference in this proxy statement/
prospectus. See "Where You Can Find More Information" beginning on page 1.
<Table>
<Caption>
(IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED MARCH 31 FISCAL YEAR ENDED JUNE 30
------------------- -------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- ----------- -------- -------- --------
INCOME STATEMENT DATA RESTATED RESTATED RESTATED(5) RESTATED RESTATED RESTATED
Revenues(1)................................ $1,823.3 $1,973.7 $2,518.2 $2,484.5 $2,458.5 $2,618.5 $2,823.8
EBITDA as adjusted(2)...................... $ 175.4 $ 280.6 $ 304.2 $ 304.7 $ 210.7 $ 146.3 $ 274.6
Segment operating profit................... $ 151.1 $ 240.8 $ 247.4 $ 257.2 $ 167.0 $ 100.2 $ 227.8
Other operating items(3)................... -- $ 8.2 $ (18.4) $ (3.4) $ (37.9) $ (70.0) $ (35.0)
Operating profit........................... $ 151.1 $ 249.0 $ 229.0 $ 253.8 $ 129.1 $ 30.2 $ 192.8
Net income................................. $ 94.2 $ 154.0 $ 132.1 $ 144.7 $ 151.9 $ 17.9 $ 133.5
Weighted-average common shares outstanding
(basic).................................. 100.5 102.8 102.7 106.0 107.3 106.5 106.7
Weighted-average common shares outstanding
(diluted)................................ 100.8 103.9 103.7 107.0 108.0 106.5 106.7
Basic earnings per share................... $ 0.93 $ 1.49 $ 1.27 $ 1.35 $ 1.40 $ 0.16 $ 1.24
Diluted earnings per share................. $ 0.92 $ 1.47 $ 1.26 $ 1.34 $ 1.39 $ 0.16 $ 1.24
Dividends per common share................. $ 0.15 $ 0.15 $ 0.20 $ 0.20 $ 0.38 $ 0.90 $ 1.80
-------- -------- -------- -------- -------- -------- --------
</Table>
<Table>
<Caption>
BALANCE SHEET DATA RESTATED RESTATED RESTATED(5) RESTATED RESTATED RESTATED
Cash and cash equivalents, short-term
investments and marketable securities.... $ 57.6 $ 68.4 $ 47.3 $ 227.6 $ 437.2 $ 126.1 $ 102.4
Total assets(4)............................ $1,702.8 $1,830.0 $1,680.9 $1,736.4 $1,623.2 $1,512.5 $1,627.8
Stockholders' equity(4).................... $ 487.2 $ 478.9 $ 459.8 $ 479.4 $ 385.7 $ 265.4 $ 353.5
Book value per common share(4)............. $ 4.84 $ 4.66 $ 4.47 $ 4.52 $ 3.59 $ 2.49 $ 3.31
-------- -------- -------- -------- -------- -------- --------
</Table>
- ---------------
(1) Results for the nine months ended March 31, 2001 and fiscal years prior to
2001 were restated to reflect gross versus net presentation of revenues.
Magazine advertising agency commission costs and magazine and music product
remittances to publishers have been reclassified to present revenues net of
these costs in accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
(2) Earnings before interest, taxes, depreciation and amortization (EBITDA as
adjusted) represents segment operating profit excluding depreciation and
amortization.
(3) Other operating items represents charges related primarily to the
streamlining of our organizational structure and the strategic
repositioning of certain businesses.
11
(4) During fiscal 2002, we changed our method of accounting for inventories for
certain businesses in the United States from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. As a result, inventories
and retained earnings, net of deferred taxes were restated.
(5) During fiscal 2001, we changed our method of accounting for our investment
in BrandDirect Marketing from the cost method to the equity method of
accounting, and, as a result, fiscal 2000 (the year in which we acquired
the investment) financial information was restated to reflect equity in
losses in this affiliate.
12
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following table shows unaudited selected condensed combined financial
information for Reader's Digest on a pro forma basis, giving effect to the
Reiman acquisition and the recapitalization as if both transactions had occurred
on July 1, 2000 for the income statement information and as of March 31, 2002
for the balance sheet information.
We based the unaudited selected pro forma condensed combined financial
information on the historical consolidated financial statements of Reader's
Digest and Reiman for the respective periods. We have adjusted the historical
consolidated financial information to give effect to pro forma events that are
(1) directly attributable to the Reiman acquisition and the recapitalization,
(2) factually supportable, and (3) with respect to the income statement
information, expected to have a continuing impact on the combined results. You
should read this information in conjunction with the separate historical
consolidated financial statements and accompanying notes of Reader's Digest
included in our annual report on Form 10-K for the fiscal year ended June 30,
2001, and our quarterly report on Form 10-Q for the nine-month period ended
March 31, 2002, and the separate historical consolidated financial statements
and accompanying notes of Reiman for the year ended December 31, 2001 and the
three months ended March 31, 2002 contained in our report on Form 8-K dated June
11, 2002, all of which we incorporate in this proxy statement/prospectus by
reference.
We present the unaudited selected pro forma condensed combined financial
information for informational purposes only and do not purport to represent what
our financial position or operating results actually would have been had we
completed the Reiman acquisition and the recapitalization at the dates
indicated. In addition, the unaudited selected pro forma condensed combined
financial information does not purport to project our future operating results
or financial position.
We prepared the unaudited selected pro forma condensed combined financial
information using the purchase method of accounting with Reader's Digest treated
as the acquiror. We based the purchase accounting pro forma adjustments on
available information and assumptions that we believe are reasonable and have
made these adjustments solely for purposes of developing unaudited pro forma
condensed combined financial information.
FOR FURTHER DISCUSSION OF THE PRO FORMA ADJUSTMENTS AND MORE DETAILED PRO
FORMA FINANCIAL STATEMENTS, SEE "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION" ON PAGE 41.
<Table>
<Caption>
(IN MILLIONS, EXCEPT PER SHARE DATA)
AS OF AND FOR
THE NINE FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 JUNE 30, 2001
---------------- -----------------
INCOME STATEMENT INFORMATION
Revenues................................................. $2,061.0 $2,824.4
Operating profit......................................... 182.2 262.2
Net income............................................... 92.4 101.5
Basic earnings per share................................. $ 0.92 $ 0.99
Diluted earnings per share............................... $ 0.92 $ 0.98
BALANCE SHEET INFORMATION
Cash and cash equivalents................................ $ 39.5
Total assets............................................. 2,694.0
Long-term debt........................................... 918.0
Stockholders' equity..................................... 375.7
</Table>
13
HISTORICAL AND PRO FORMA PER SHARE DATA
The following table shows selected historical and unaudited pro forma per
share data for Reader's Digest. The pro forma data gives effect to (a) the
Reiman acquisition alone and (b) the recapitalization and the Reiman acquisition
together, in each case as if the transaction(s) had occurred on July 1, 2000 for
basic and diluted earnings per share from continuing operations and as of March
31, 2002 for book value and common dividends per share. The outstanding shares
for the historical data and for the pro forma data giving effect to the Reiman
acquisition alone are based on the aggregate number of shares of Class A
Nonvoting Common Stock and Class B Voting Common Stock outstanding for the
appropriate period. The outstanding shares of Common Stock for the pro forma
data giving effect to both the recapitalization and the Reiman acquisition
equals the sum of (1) the number of shares of Class A Nonvoting Common Stock
outstanding, PLUS (2) 1.24 multiplied by the number of shares of Class B Voting
Common Stock outstanding for the appropriate period, reduced by the 3,636,363
shares of Class B Voting Common Stock to be repurchased from the Funds
immediately prior to the recapitalization. You should read the information set
forth below in conjunction with the historical consolidated financial data of
Reader's Digest and Reiman incorporated by reference in this proxy
statement/prospectus and the unaudited pro forma condensed combined financial
information.
<Table>
<Caption>
AS OF AND FOR
THE NINE FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 JUNE 30, 2001
-------------- --------------
Basic earnings per share from continuing operations
Historical.................................................. $0.93 $1.27
(a) Pro forma (Reiman acquisition).............................. 0.93 1.07
(b) Pro forma (recapitalization and Reiman acquisition)......... 0.92 0.99
Diluted earnings per share from continuing operations
Historical.................................................. $0.92 $1.26
(a) Pro forma (Reiman acquisition).............................. 0.93 1.06
(b) Pro forma (recapitalization and Reiman acquisition)......... 0.92 0.98
Book value per share
Historical(1)............................................... $4.84 $4.47
(a) Pro forma (Reiman acquisition).............................. 4.78 4.43
(b) Pro forma (recapitalization and Reiman acquisition)......... 3.80 3.46
Common dividends per share
Historical.................................................. $0.15 $0.20
(a) Pro forma (Reiman acquisition).............................. 0.15 0.20
(b) Pro forma (recapitalization and Reiman acquisition)......... 0.15 0.20
</Table>
- ---------------
(1) Historical book value per share for June 30, 2001 has been restated to
account for our equity adjustment relative to our change from the last-in,
first-out (LIFO) method of accounting of inventory to the first-in,
first-out (FIFO) method, for certain inventories in the United States during
fiscal 2002.
14
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Our Class A Nonvoting Common Stock and Class B Voting Common Stock are
traded on the New York Stock Exchange under the symbols "RDA" and "RDB,"
respectively.
The following table shows the high and low sales prices of our Class A
Nonvoting Common Stock and our Class B Voting Common Stock as reported on the
New York Stock Exchange Composite Tape, in each case, based on published
financial sources. Cash dividends on our Class A Nonvoting Common Stock and our
Class B Voting Common Stock are identical.
<Table>
<Caption>
CLASS A CLASS A CLASS B CLASS B CASH
HIGH LOW HIGH LOW DIVIDENDS
------- ------- ------- ------- ---------
FISCAL 1999
First Quarter.................................. $29.00 $17.00 $29.25 $18.44 $.23
Second Quarter................................. 26.13 16.25 25.38 16.00 .05
Third Quarter.................................. 36.25 24.75 33.38 23.75 .05
Fourth Quarter................................. 40.94 28.13 38.00 25.50 .05
FISCAL 2000
First Quarter.................................. $42.50 $28.75 $39.13 $26.25 $.05
Second Quarter................................. 33.50 26.75 30.13 24.50 .05
Third Quarter.................................. 39.63 28.38 35.75 25.25 .05
Fourth Quarter................................. 41.13 29.69 37.75 26.00 .05
FISCAL 2001
First Quarter.................................. $41.88 $33.13 $38.00 $29.63 $.05
Second Quarter................................. 40.44 32.44 35.88 28.75 .05
Third Quarter.................................. 40.50 26.25 35.25 23.25 .05
Fourth Quarter................................. 29.98 25.50 27.10 23.00 .05
FISCAL 2002
First Quarter.................................. $28.64 $16.68 $26.40 $16.40 $.05
Second Quarter................................. 23.56 15.65 22.65 15.70 .05
Third Quarter.................................. 23.20 19.99 23.80 19.80 .05
Fourth Quarter (through June 13, 2002)......... 24.15 20.55 29.40 22.90
</Table>
The closing price for our Class A Nonvoting Common Stock was:
- $22.61 on April 12, 2002, the last trading day before we announced the
execution of the recapitalization agreement; and
- $ on , 2002, the last trading day before the date of
this proxy statement/prospectus.
The closing price for our Class B Voting Common Stock was:
- $23.00 on April 12, 2002, the last trading day before we announced the
execution of the recapitalization agreement; and
- $ on , 2002, the last trading day before the date of
this proxy statement/prospectus.
15
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. We
make forward-looking statements in this proxy statement/prospectus and in other
documents filed with the Securities and Exchange Commission to which we refer
you. These statements may include statements regarding the period following
completion of the recapitalization. For each of these "forward-looking
statements" we claim the protection of the safe harbor for "forward-looking
statements" contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include any statements that address future
results or occurrences. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"intends," "plans," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of these terms or other comparable terminology.
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 effects of potentially more restrictive privacy and other
governmental regulation relating to our marketing methods;
- the effects of modified and varied promotions;
- our ability to identify customer trends;
- our ability to continue to create and acquire a broadly appealing mix of
new products;
- our ability to attract and retain new and younger magazine subscribers
and product customers in view of the maturing of an important portion of
our U.S. customer base;
- our ability to attract and retain subscribers and customers in an
economically efficient manner;
- the effects of selective adjustments in pricing;
- our ability to expand and more effectively utilize our customer database;
- our ability to expand into new international markets and to introduce new
product lines into new and existing markets;
- our ability to expand into new channels of distribution;
- our ability to negotiate and implement productive acquisitions (including
the Reiman acquisition), strategic alliances and joint ventures;
- our ability to integrate newly acquired and newly formed businesses
successfully (including the Reiman business);
- the strength of relationships of newly acquired and newly formed
businesses (including the Reiman business) with their employees,
suppliers and customers;
- the accuracy of the basis of forecasts relating to newly acquired and
newly formed businesses (including the Reiman business);
- our ability to achieve financial savings related to restructuring
programs;
- our ability to contain and reduce costs, especially through global
efficiencies;
- the cost and effectiveness of re-engineering 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;
- our ability to respond to competitive pressures within and outside the
direct marketing industry, including the Internet;
16
- the effects of worldwide paper and postage costs;
- the effects of possible postal disruptions on deliveries of promotions,
products and payments;
- the effects of foreign currency fluctuations;
- the accuracy of management's assessment of the future effective tax rate
and the effects of initiatives to reduce the rate;
- the effects of the transition to the euro;
- the adequacy of our financial resources;
- the effects of increased leverage resulting from additional borrowings of
$950 million to finance the Reiman acquisition and the repurchase of
3,636,363 shares of Class B Voting Common Stock from the Funds;
- the effects of ratings downgrades resulting from the company's increased
leverage;
- the effects of unforeseen economic and political changes in the markets
where we compete;
- the economic effects of the September 11, 2001 terrorist attacks, the
anthrax scare and subsequent related events, especially those affecting
the direct marketing industry; and
- the effects and pace of our stock repurchase program.
17
THE SPECIAL MEETING
GENERAL
This solicitation is being made on behalf of Reader's Digest. We are
mailing this proxy statement/prospectus and the accompanying proxy card
beginning , 2002 to holders of our Class B Voting Common Stock, Class
A Nonvoting Common Stock and Reader's Digest preferred stock in connection with
the solicitation of proxies by our board of directors for use at the special
meeting. Holders of our Class A Nonvoting Common Stock and Reader's Digest
preferred stock are not entitled to vote at the special meeting and will not
receive a proxy card or voting direction card with this proxy
statement/prospectus.
We solicit proxies to give all holders of shares of Class B Voting Common
Stock on the record date an opportunity to vote on matters that will come before
the special meeting. This procedure is necessary because stockholders live in
all states and abroad and many may not be able to attend the special meeting.
Holders of our shares of Class B Voting Common Stock can vote or let us vote
your shares only if you are present in person or represented by proxy. We are
providing to holders of shares of our Class B Voting Common Stock a form of
proxy with this proxy statement/prospectus. Information with respect to the
execution and revocation of proxies is provided under "-- Proxies; Revocability
of Proxies; Cost of Solicitation."
At the special meeting, holders of shares of Class B Voting Common Stock
eligible to vote will be asked to consider and vote upon the approval of the
recapitalization proposal. For more information, see "-- What Will Be Voted
Upon."
DATE, TIME AND PLACE OF THE SPECIAL MEETING; RECORD DATE
The special meeting is scheduled to be held at 9:00 a.m., Eastern Time, on
, , 2002, at . Our board of directors has fixed the
close of business on , 2002 as the record date for determination of
holders of Class B Voting Common Stock entitled to notice of and to vote at the
special meeting. On , 2002, there were outstanding 12,432,164 shares
of Class B Voting Common Stock.
WHAT WILL BE VOTED UPON
At the special meeting, we will ask holders of our Class B Voting Common
Stock to consider and vote upon the following items:
1. To adopt the Agreement and Plan of Merger, dated as of ,
2002, by and between Reader's Digest and RDA Recap Corp., providing for a
recapitalization of the company by means of a merger of RDA Recap Corp. with and
into Reader's Digest that will result in:
- the conversion of each share of our Class A Nonvoting Common Stock into
one share of Common Stock, entitled to one vote per share;
- the conversion of each share of our Class B Voting Common Stock into 1.24
shares of Common Stock, entitled to one vote per share; and
- our certificate of incorporation being amended in the merger to divide
our board of directors into three classes and to eliminate the ability of
stockholders to act by written consent without a meeting;
and, in the alternative, to approve proposed amendments to our certificate of
incorporation that would recapitalize the company by, first, reclassifying each
share of Class B Voting Common Stock into 1.24 shares of Class A Nonvoting
Common Stock, and, immediately thereafter, granting the shares of Class A
Nonvoting Common Stock the right to cast one vote per share and renaming the
Class A Nonvoting Common Stock "Common Stock;" and divide our board of directors
into three classes and eliminate the ability of stockholders to act by written
consent without a meeting.
18
2. To transact any other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
Under the terms of the recapitalization agreement, we have also agreed to
purchase 3,636,363 shares of Class B Voting Common Stock owned by the Funds at
$27.50 in cash per share for an aggregate purchase price of $99,999,983.
Following the recapitalization, you will own the same number of shares of
Common Stock whether we effect the recapitalization by means of a merger or by
amending our certificate of incorporation.
QUORUM
The presence, either in person or by proxy, of holders of a majority of the
shares of Class B Voting Common Stock entitled to vote on the proposals to be
presented to holders of our Class B Voting Common Stock at the special meeting
is necessary to constitute a quorum at the special meeting. Shares of Class B
Voting Common Stock represented by a properly completed proxy will be treated as
present at the special meeting for purposes of determining a quorum, without
regard to whether the proxy is marked as casting a vote or abstaining. See
"-- Proxies; Revocability of Proxies; Cost of Solicitation" for more
information.
The Funds, which together control 50% of the voting power of the
outstanding shares of Class B Voting Common Stock, have granted to Reader's
Digest an irrevocable proxy to vote their shares at the special meeting. The
attendance of any additional holder of Class B Voting Common Stock will assure
the presence of a quorum at the meeting.
VOTE REQUIRED FOR APPROVAL
In order to approve the recapitalization proposal, we must receive the
affirmative vote of a majority of the outstanding shares of Class B Voting
Common Stock. Each share of Class B Voting Common Stock is entitled to one vote.
Shares of our Class A Nonvoting Common Stock and Reader's Digest preferred stock
are not entitled to be voted at the special meeting. Holders of shares of our
Class A Nonvoting Common Stock and Reader's Digest preferred stock will not
receive a proxy card.
The Funds, which together control 50% of the voting power of the
outstanding shares of Class B Voting Common Stock, have agreed to vote in favor
of the recapitalization proposal. In addition, certain executive officers and
directors of Reader's Digest may direct the voting of shares of Class B Voting
Common Stock held in their accounts in the Reader's Digest Employee Ownership
Plan and 401(k) Partnership.
PROXIES; REVOCABILITY OF PROXIES; COST OF SOLICITATION
If a holder of Class B Voting Common Stock attends the special meeting, he
or she may vote by ballot. However, many stockholders may be unable to attend
the special meeting. Therefore, our board of directors is soliciting proxies so
that each holder of our shares of Class B Voting Common Stock at the close of
business on the record date has the opportunity to vote on the recapitalization
proposal.
You may vote your shares of Class B Voting Common Stock by proxy by marking
your vote on the proxy card, signing and dating it, and mailing it in the
envelope provided. You can specify your choice by marking the appropriate box on
your proxy card. If you sign and return your proxy card without specifying a
choice, we will vote the shares as recommended by our board of directors. An
abstention marked on your proxy card is voted neither FOR nor AGAINST, but we
count these shares in determining a quorum. Since a majority of outstanding
shares of Class B Voting Common Stock is required to approve the
recapitalization proposal, an abstention has the effect of a vote against the
recapitalization proposal.
The proxy card also confers discretionary authority on the individuals
appointed by our board of directors and named on the proxy card to vote the
shares represented by the proxy card on any other matter that is properly
presented for action at the special meeting. You may revoke your proxy at any
time before it is voted
19
at the special meeting by executing a later-dated proxy by mail, by voting by
ballot at the special meeting, or by filing an instrument of revocation with the
inspectors of election in care of the corporate secretary of Reader's Digest.
IF YOU HOLD YOUR SHARES OF CLASS B VOTING COMMON STOCK THROUGH A BANK OR
BROKER, FOLLOW THE VOTING INSTRUCTIONS ON THE FORM YOU RECEIVE. BROKER NON-VOTES
ARE NOT COUNTED AS PRESENT.
WE URGE ALL HOLDERS OF SHARES OF OUR CLASS B VOTING COMMON STOCK TO VOTE BY
SIGNING AND RETURNING THE ACCOMPANYING PROXY CARD WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING. If you do attend the special meeting, you may vote
by ballot, thereby canceling any proxy previously given.
Reader's Digest will bear the cost of the solicitation of proxies through
use of this proxy statement/prospectus, including reimbursement of brokers and
other persons holding stock in their names, or in the names of nominees, at
approved rates, for their expenses for sending proxy material to principals and
obtaining their proxies. Reader's Digest has retained Morrow & Co., Inc. to
solicit proxies on behalf of management for an estimated fee of $ , plus
reimbursement of reasonable out-of-pocket expenses. In addition, regular
Reader's Digest employees may solicit proxies personally, or by mail, telephone
or electronic transmission, without additional compensation.
VOTING SHARES OF CLASS B VOTING COMMON STOCK HELD THROUGH THE READER'S DIGEST
401(K) PLAN
If you own shares of Class B Voting Common Stock through our Employee
Ownership Plan and 401(k) Partnership, you are entitled to direct the plan
trustee how to vote your shares of Class B Voting Common Stock held through the
plan. The trustee will vote your shares of Class B Voting Common Stock in
accordance with your direction.
A voting direction card relating to your shares of Class B Voting Common
Stock held through the plan accompanies this proxy statement/prospectus. After
carefully reading and considering the information contained in this proxy
statement/prospectus, please respond by completing, signing and dating your
voting direction card and returning it to the trustee in the enclosed postage
paid envelope so that the trustee receives it no later than 4:00 p.m., Eastern
Time, on , , 2002. You may revoke your voting direction card
by giving written notice to the trustee so that it is received by the trustee no
later than 4:00 p.m., Eastern Time, on , , 2002.
With respect to shares of Class B Voting Common Stock held through the plan
but not yet allocated to plan participants or as to which plan participants fail
to provide to the trustee timely voting directions, the trustee will vote these
shares in the same proportion as the shares as to which the trustee receives
timely voting directions.
MEETING ADMITTANCE PROCEDURES
Only stockholders of record on the record date, or their duly appointed
proxy holders (not to exceed one per stockholder), may attend the special
meeting. If you or your proxy holder plan to attend the special meeting, please
return the longer portion of the enclosed admission card. We will then place
your name on an admission list held at the entrance to the special meeting.
Please save the shorter portion of the admission card. You will have to present
the shorter portion of the admission card to gain entrance to the special
meeting.
If you plan to attend the special meeting and vote your shares in person,
but your shares of Class B Voting Common Stock are held in the name of a broker,
trust, bank or other nominee, you should also bring with you a proxy or letter
from the broker, trustee, bank or nominee confirming that you beneficially own
the shares.
20
CONFIDENTIAL VOTING
As a matter of Reader's Digest practice, stockholder votes at the special
meeting are tabulated on a confidential basis by independent third parties and
certain Reader's Digest employees involved in the tabulation process. Each
stockholder proxy card and ballot are kept confidential until the final vote is
tabulated. Reader's Digest may disclose proxy solicitation information, however,
if applicable law requires, if the proxy card contains a stockholder comment or
question or if the proxy solicitation is contested.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved the recapitalization proposal and
recommends that the holders of shares of our Class B Voting Common Stock vote
FOR the recapitalization proposal.
21
THE RECAPITALIZATION
The description of the material terms of the recapitalization set forth
below is not intended to be a complete description of the recapitalization. We
qualify this description by reference to the recapitalization agreement, the
merger agreement and the certificates of amendment, which we have attached as
Appendices A, B and C, respectively, to this proxy statement/prospectus and
which we incorporate in this proxy statement/prospectus by reference. We urge
all stockholders to read these documents in their entirety.
THE COMPANY
Reader's Digest is a preeminent global leader in publishing and direct
marketing. Reader's Digest creates and delivers products that inform, enrich,
entertain and inspire, including magazines, books, recorded music collections,
and home videos. Reader's Digest is best known for publishing its flagship
Reader's Digest magazine. DeWitt and Lila Acheson Wallace founded Reader's
Digest magazine in 1922. Today, Reader's Digest has a worldwide circulation of
about 23 million and over 100 million readers each month. Reader's Digest is
published in 48 editions and 19 languages.
On May 20, 2002, Reader's Digest acquired substantially all of the assets,
and assumed various liabilities, of Reiman Holding Company, LLC, a publisher of
cooking, gardening, country lifestyle and nostalgia magazines and books in the
United States and Canada, for $760 million in cash.
Our principal executive offices are located in Pleasantville, New York. Our
telephone number at our principal executive offices is (914) 238-1000.
STRUCTURE OF THE RECAPITALIZATION
We have entered into a recapitalization agreement with the Funds, our
principal stockholders. Under the terms of the recapitalization agreement, we
have agreed to purchase 3,636,363 shares of Class B Voting Common Stock owned by
the Funds at $27.50 in cash per share for an aggregate purchase price of
$99,999,983. In addition, we have agreed to:
- recapitalize each share of Class A Nonvoting Common Stock into one share
of Common Stock, entitled to one vote per share;
- recapitalize each share of Class B Voting Common Stock into 1.24 shares
of Common Stock, entitled to one vote per share; and
- divide our board of directors into three classes and eliminate the
ability of stockholders to act by written consent without a meeting.
Following the recapitalization, we will have a single class of Common Stock,
with each share entitled to one vote.
Each share of Reader's Digest preferred stock either issued and outstanding
or held by Reader's Digest as treasury stock will remain unchanged by the
recapitalization (other than shares as to which holders properly exercise
appraisal rights under Delaware law if we effect the recapitalization by means
of a merger).
Under the terms of the recapitalization agreement, we will effect the
recapitalization through a merger of RDA Recap Corp., our wholly-owned
subsidiary, with and into Reader's Digest, unless holders of more than $5
million in stated amount of our preferred stock properly seek to exercise
appraisal rights. If holders of more than $5 million in stated amount of our
preferred stock properly seek to exercise appraisal rights, we will effect the
recapitalization by amending our certificate of incorporation instead of
completing the merger. If we effect the recapitalization by amending our
certificate of incorporation, the holders of our preferred stock will not have
appraisal rights. We believe that the manner in which we effect the
recapitalization will not affect holders of shares of our Class A Nonvoting
Common Stock or Class B Voting Common Stock.
22
BACKGROUND OF THE RECAPITALIZATION
The Funds have, for some time, expressed an interest in diversifying their
holdings in the company and gaining greater liquidity. Since 1990, the Funds
have been decreasing the percentage of their assets represented by stock in our
company. In 1990, Reader's Digest stock represented 100% of the Funds' assets.
Today, Reader's Digest stock represents approximately 30% of the Funds' assets.
The Funds most recently diversified their assets in September 1999, when the
company entered into an agreement with the Funds that provided for an exchange
by the Funds of approximately 9.3 million shares of Class B Voting Common Stock
for approximately 8.0 million shares of Class A Nonvoting Common Stock issued by
the company, reducing the Funds' voting interest to 50%, as required by tax laws
applicable to private foundations. As part of the September 1999 transaction, we
agreed to register shares of Class A Nonvoting Common Stock owned by the Funds
for a secondary public offering by the Funds. In November 1999, the Funds sold
an aggregate of 5,617,402 shares of Class A Nonvoting Common Stock at $28.00 per
share (less underwriting discounts and expenses) in a registered underwritten
offering. The September 1999 transaction was negotiated on behalf of the company
by a special committee of Reader's Digest directors who were independent of the
Funds. The Funds have advised us that since the September 1999 transaction they
have continued to pursue the possibility of further diversifying their holdings.
In the fall of 2001, our management began negotiations with the owners and
management of Reiman Holding Company, LLC, a publisher of cooking, gardening,
country lifestyle and nostalgia magazines and books in the United States and
Canada, concerning the possible acquisition of substantially all of the Reiman
assets. The Reiman negotiations led to discussion and consideration of the
possible acquisition at meetings of our board of directors held during January
and February of 2002, and on March 1, 2002. The transaction under consideration
involved the purchase of substantially all of the Reiman assets for $760 million
in cash, to be financed by a new $850 million credit facility. At the March 1,
2002 meeting of the Reader's Digest board of directors, Ms. Christine DeVita, a
member of the Reader's Digest board of directors and President and director of
each of the Funds, informed the Reader's Digest board of directors that the
Funds had been, for a period of months, reviewing several alternatives regarding
their investment in the company and expected to make a proposal to the company
with respect to a possible recapitalization transaction, including the
repurchase by the company of certain shares owned by the Funds.
On March 6, 2002, Reader's Digest received a letter from the Funds
proposing that Reader's Digest:
- purchase each share of Class B Voting Common Stock owned by the Funds for
$31.25 in cash per share (or an aggregate of $194,252,563);
- recapitalize each other share of Class B Voting Common Stock into up to
1.3 shares of voting common stock or, at the election of the holder, cash
consideration in an amount based on an historical average trading price
of the Class A Nonvoting Common Stock multiplied by 1.3, subject to a
"cap" on the overall cash consideration of $450 million; and
- recapitalize each share of Class A Nonvoting Common Stock into one share
of voting common stock, or, at the election of the holder, cash
consideration in an amount based on an historical average trading price
of the Class A Nonvoting Common Stock multiplied by one, subject to the
same cap of $450 million on the overall cash consideration.
On March 8, 2002, our board of directors met with its financial and legal
advisors to continue its review of the proposal to acquire substantially all of
the assets of Reiman. The Reader's Digest board of directors also considered the
Funds' proposal. Following presentations by its legal and financial advisors and
discussions among the members of our board of directors, the board voted to
proceed with the Reiman acquisition. Ms. DeVita and Mr. Silas, members of the
Reader's Digest board of directors who are also members of the Funds' boards of
directors, recused themselves from the discussion and the vote on the Funds'
proposal and from the vote on the Reiman acquisition. One other director voted
against proceeding with the Reiman acquisition. At the meeting, the Reader's
Digest board of directors recognized that the amount of debt that the company
would incur to finance the Reiman acquisition would likely preclude a cash
repurchase from the Funds of the magnitude proposed by the Funds. The Reader's
Digest board of directors also decided that it
23
was in the interests of stockholders to determine whether the company could
negotiate a recapitalization proposal with the Funds that would result in a one
share/one vote capital structure while, at the same time, facilitating an
orderly diversification by the Funds of their holdings. The Reader's Digest
board of directors formed a special committee consisting of James E. Preston,
Lawrence R. Ricciardi and William J. White to act as disinterested negotiators
on behalf of the company and to negotiate with the Funds regarding a potential
recapitalization transaction. Following the meeting of our board of directors,
the newly formed special committee informed the Funds that Reader's Digest would
like to work with the Funds to negotiate a mutually acceptable recapitalization
transaction.
On March 12, 2002, Reader's Digest received a letter from the Funds
indicating that the Funds' had authorized their investment committee to
negotiate the terms of a potential recapitalization transaction with the
Reader's Digest special committee. Mr. White spoke with representatives of the
Funds and scheduled a meeting between the Reader's Digest special committee and
the Funds' investment committee for March 15, 2002.
On March 12, 2002, Highfields Capital Management LP, which, according to
documents publicly filed with the Securities and Exchange Commission,
beneficially owns 433,000 shares of our Class B Voting Common Stock and
8,394,762 shares of our Class A Nonvoting Common Stock, filed a Schedule 13D
with the Securities and Exchange Commission and disclosed that it had made a
written proposal, dated February 27, 2002, to the Funds to exchange each share
of Class B Voting Common Stock owned by the Funds for one share of Class A
Nonvoting Common Stock owned by Highfields plus $3.00 in cash per share. The
Highfields offer was subject to, among other conditions, receipt of any required
regulatory approvals, such as those required under the United States antitrust
laws, and the absence of acceleration of Reader's Digest indebtedness as a
result of the exchange.
On March 13, 2002, Highfields filed an amendment to its Schedule 13D with
the Securities and Exchange Commission. The amendment attached the Funds'
rejection of the Highfields proposal.
On March 14 and March 15, 2002, the Reader's Digest special committee held
telephonic meetings with its financial and legal advisors to prepare for the
March 15, 2002 meeting with the Funds' investment committee. Following
discussions among the members of the Reader's Digest special committee and its
advisors, the Reader's Digest special committee agreed to outline for the Funds
a potential transaction in which Reader's Digest would effect a limited cash
repurchase of a portion of the Funds' shares of Class B Voting Common Stock;
recapitalize all other shares of Class B Voting Common Stock into shares of
voting common stock at a premium designed to recognize the relinquishment by
holders of Class B Voting Common Stock of exclusive voting power and the
redistribution of effective control to all stockholders; and recapitalize each
share of Class A Nonvoting Common Stock into one share of voting common stock.
The Reader's Digest special committee and the Funds' investment committee
met telephonically on March 15, 2002 and the Reader's Digest special committee
described in general terms a potential recapitalization transaction based on the
concepts that the Reader's Digest special committee and its advisors had
discussed internally. The Reader's Digest special committee noted the
constraints on the amount of cash that was available to repurchase shares as a
result of the debt being incurred in connection with the Reiman acquisition. The
Funds' investment committee requested that the Reader's Digest special committee
provide greater specificity regarding its counterproposal and the two committees
agreed to meet again telephonically on March 18, 2002.
On March 18, 2002, the Reader's Digest special committee and its advisors
met telephonically to formulate a more specific counterproposal for the Funds.
Following discussion among the members of the Reader's Digest special committee
and their advisors, the Reader's Digest special committee determined that it
would propose to the Funds a transaction in which Reader's Digest would:
- repurchase for cash up to $50 million of the Funds' shares of Class B
Voting Common Stock at a 15% premium to the market price of the shares of
Class A Nonvoting Common Stock;
- recapitalize all other shares of Class B Voting Common Stock into shares
of voting common stock at a 15% premium to the market price of the shares
of Class A Nonvoting Common Stock;
24
- recapitalize each share of Class A Nonvoting Common Stock into one share
of voting common stock; and
- provide the Funds with one demand registration right, i.e., the right to
require Reader's Digest to register shares of voting common stock owned
by the Funds following the recapitalization for sale in a secondary
public offering.
The proposed $50 million cash repurchase and the registration right were
intended to facilitate the Funds' objectives of diversification and liquidity
without adversely affecting the market for our shares.
The Reader's Digest special committee conveyed the counterproposal to the
Funds' investment committee. The Funds' investment committee responded that the
counterproposal did not adequately address the Funds' goals, which included a
control premium, diversification and liquidity.
On March 26, 2002, Highfields filed an amendment to its Schedule 13D with
the Securities and Exchange Commission. The amendment attached a letter from
Highfields increasing Highfields' offer to the Funds. The revised proposal
offered to exchange each share of Class B Voting Common Stock owned by the Funds
for one share of Class A Nonvoting Common Stock owned by Highfields plus $5.00
in cash per share. The revised Highfields offer was subject to the same
conditions as the earlier Highfields offer.
On March 29, 2002, the Funds' financial advisor, Merrill, Lynch, Pierce,
Fenner & Smith Incorporated, called Goldman, Sachs & Co., financial advisor to
the Reader's Digest special committee, to discuss methods for increasing the
consideration to be received by the Funds.
On April 1 and April 2, 2002, the Reader's Digest special committee and its
advisors met telephonically to discuss the status of the negotiations. During
the call on April 2, 2002, Goldman Sachs reported that Merrill Lynch had made a
counterproposal on behalf of the Funds, pursuant to which Reader's Digest would:
- repurchase approximately $185 million (substantially all) of the Funds'
shares of Class B Voting Common Stock for $30 in cash per share,
representing an approximately 35% premium to the then current market
price of the shares of Class A Nonvoting Common Stock;
- recapitalize all other shares of Class B Voting Common Stock into shares
of voting common stock at a comparable premium;
- recapitalize each share of Class A Nonvoting Common Stock into one share
of voting common stock; and
- provide the Funds with three demand registration rights.
Following discussion with its advisors, the Reader's Digest special
committee authorized Goldman Sachs to convey to the Funds' investment committee,
through Merrill Lynch, a further revised proposal pursuant to which Reader's
Digest would:
- repurchase for cash $94 million (approximately 55%) of the Funds' shares
of Class B Voting Common Stock for $27.50 in cash per share, representing
a 24% premium to the then current market price of the shares of Class A
Nonvoting Common Stock;
- recapitalize all other shares of Class B Voting Common Stock into shares
of voting common stock at a comparable premium;
- recapitalize each share of Class A Nonvoting Common Stock into one share
of voting common stock; and
- provide the Funds with one demand registration right.
On April 5, 2002, following a meeting of the Funds' boards of directors,
Merrill Lynch called Goldman Sachs to indicate the Funds' willingness to
negotiate within the framework of Reader's Digest's latest proposal (including
the $27.50 per share cash repurchase price with respect to the Funds' shares of
Class B Voting Common Stock), provided that Reader's Digest would agree to
repurchase at least $100 million of the Funds' shares of Class B Voting Common
Stock for cash; provide the Funds with two to three demand registration
25
rights; and permit the Funds to terminate the transaction in the event that a
third party presented the Funds with a superior proposal.
On April 8, 2002, the Reader's Digest special committee and its advisors
met telephonically to discuss the Funds' April 5, 2002 counterproposal.
Following a discussion among the committee members and its advisors, the
Reader's Digest special committee authorized Goldman Sachs to contact Merrill
Lynch and agree to increase the total cash consideration to $100 million and to
agree to two demand registration rights with customary restrictions, but not to
grant the Funds a right to terminate the recapitalization agreement in favor of
a superior proposal.
On April 10, 2002, the Reader's Digest board of directors convened
telephonically to receive an update from the Reader's Digest special committee
and its advisors regarding the negotiations between Reader's Digest and the
Funds.
From April 9, 2002 through April 12, 2002, the respective financial and
legal advisors to Reader's Digest and the Funds negotiated and finalized the
terms of a recapitalization agreement.
On April 12, 2002, the Reader's Digest special committee held a meeting to
consider the proposed recapitalization. At the meeting, the Reader's Digest
special committee discussed the course of negotiations relating to the proposed
recapitalization, the potential benefits and risks of the potential
recapitalization, and the principal terms and conditions of the recapitalization
agreement. In addition, Goldman Sachs delivered the oral opinion to the Reader's
Digest special committee and to the Reader's Digest board of directors that, as
of April 12, 2002, based upon and subject to the factors and assumptions set
forth therein, the repurchase of 3,636,363 shares of Class B Voting Common Stock
held by the Funds for $27.50 in cash per share, or $99,999,983 in cash in the
aggregate, the recapitalization ratio of 1.24 shares of Common Stock for each
share of Class B Voting Common Stock (other than the shares repurchased from the
Funds) and the recapitalization ratio of one share of Common Stock for each
share of Class A Nonvoting Common Stock, taken as whole, pursuant to the
recapitalization agreement, was fair from a financial point of view to the
holders of Class A Nonvoting Common Stock and Class B Voting Common Stock (other
than the Funds).
Following discussion by the Reader's Digest special committee, and subject
to finalization of the necessary documentation, the Reader's Digest special
committee determined that the recapitalization agreement and the transactions
contemplated thereby are advisable, fair to and in the best interests of the
company and its stockholders (other than the Funds, as to which the Reader's
Digest special committee made no fairness determination) and should be approved
and declared advisable by the Reader's Digest board of directors.
On April 12, 2002, following the meeting of the Reader's Digest special
committee, the Reader's Digest board of directors held a meeting to consider the
proposed recapitalization. Ms. DeVita and Mr. Silas, members of the Reader's
Digest board of directors who are also members of the Funds' boards of
directors, did not attend this part of the meeting. The Reader's Digest special
committee reported to the full board of directors the status of the proposed
transaction with the Funds, including the recommendation of the Reader's Digest
special committee that the transaction be approved by the Reader's Digest board
of directors.
Goldman Sachs reviewed for the Reader's Digest board of directors the
financial analyses relating to the proposed recapitalization and responded to
questions from the members of the Reader's Digest board of directors. Following
its presentation, Goldman Sachs repeated its oral opinion that, as of April 12,
2002, based upon and subject to the factors and assumptions set forth therein,
the repurchase of 3,636,363 shares of Class B Voting Common Stock held by the
Funds for $27.50 in cash per share, or $99,999,983 in cash in the aggregate, the
recapitalization ratio of 1.24 shares of Common Stock for each share of Class B
Voting Common Stock (other than the shares repurchased from the Funds) and the
recapitalization ratio of one share of Common Stock for each share of Class A
Nonvoting Common Stock, taken as whole, pursuant to the recapitalization
agreement, was fair from a financial point of view to the holders of Class A
Nonvoting Common Stock and Class B Voting Common Stock (other than the Funds).
The Reader's Digest special committee and the Reader's Digest board of directors
subsequently received the written opinion of Goldman Sachs confirming its oral
opinion at the meeting of the Reader's Digest board of directors.
26
Following discussion by the members of the Reader's Digest board of
directors (including the Reader's Digest special committee), and subject to
finalization of the necessary documentation, the board of directors determined
that the recapitalization agreement and the transactions contemplated thereby
are advisable, fair to and in the best interests of the company and its
stockholders (other than the Funds, as to which the Reader's Digest board of
directors made no fairness determination). Ms. DeVita and Mr. Silas, members of
the Reader's Digest board of directors who are also members of the Funds' boards
of directors, abstained from the vote approving the recapitalization transaction
on behalf of the company.
REASONS FOR THE RECAPITALIZATION
This discussion of the information and factors that the Reader's Digest
special committee and the Reader's Digest board of directors considered in
making their decisions is not intended to be exhaustive but includes all
material factors considered by the Reader's Digest special committee and the
Reader's Digest board of directors, as applicable. In view of the wide variety
of factors considered in connection with the evaluation of the recapitalization
and the complexity of these matters, the Reader's Digest special committee and
the Reader's Digest board of directors did not find it useful to, and did not
attempt to, quantify, rank or otherwise assign relative weights to these
factors. In addition, the individual members of the Reader's Digest special
committee and the Reader's Digest board of directors may have given different
weight to different factors.
Reader's Digest Special Committee. In reaching its decision to recommend
that the Reader's Digest board of directors approve and declare advisable the
recapitalization agreement and the transactions contemplated thereby, the
Reader's Digest special committee consulted with Reader's Digest's management
and with its legal and financial advisors and carefully considered the following
material factors:
- ALIGNMENT OF ECONOMIC INTERESTS AND VOTING RIGHTS. Currently, holders of
the Class B Voting Common Stock, representing approximately 13% of the
economic interest in Reader's Digest, control 100% of the company's
voting power, while holders of the Class A Nonvoting Common Stock,
representing approximately 87% of the economic interest in Reader's
Digest, have no voting power. The recapitalization will align
stockholders' voting rights with their economic interests in Reader's
Digest by establishing a simplified one share/one vote capital structure.
- REDUCE FUNDS' VOTING INFLUENCE. The Funds currently have 50% of the
voting power of Reader's Digest and can effectively control the outcome
of any matter submitted to a vote of Reader's Digest stockholders.
Following the recapitalization, the Funds will have approximately 14% of
the voting power of Reader's Digest and will no longer have the ability
to effectively control the outcome of matters submitted to a vote of
Reader's Digest stockholders. In addition to reducing the Funds' voting
power, completion of the transactions contemplated by the
recapitalization agreement will result in a reduction of the Funds'
representation on the Reader's Digest board of directors. The Funds
currently have two representatives on the Reader's Digest board of
directors. One of the two current representatives will not stand for
re-election at the Reader's Digest 2002 annual meeting of stockholders,
having reached the mandatory retirement age. Pursuant to the
recapitalization agreement, the company has agreed to use its reasonable
best efforts to cause the second of the Funds' current representatives to
be nominated and re-elected as a member of the Reader's Digest board of
directors until the earlier of the company's 2004 annual meeting of
stockholders and the time when the Funds jointly own less than 10% of the
outstanding shares of Common Stock, after which time the company's
obligation will cease. The combination of the Funds' reduced voting power
and the reduction and ultimate elimination of the Funds' representation
on the Reader's Digest board of directors should reduce or eliminate the
Funds' ability to influence or control Reader's Digest.
- FACILITATE DIVERSIFICATION BY FUNDS. For some time, the Funds have
expressed an interest in diversifying their holdings in our company. The
registration rights we will grant to the Funds under the terms of the
recapitalization agreement are intended to provide a mechanism to
facilitate diversification by the Funds in due course and in an orderly
manner, without disrupting the market for our shares.
27
- ENHANCE OUR STRATEGIC FLEXIBILITY. The simplified capital structure of
the company following the recapitalization will likely improve the
company's ability to structure equity financings and acquisitions by
eliminating tax concerns of the Funds resulting from their ability to
control the company.
- ELIMINATION OF CONTROL BLOCK. Following the recapitalization, the Funds
will no longer have the ability to effectively sell voting control of
Reader's Digest in an isolated transaction in which the other Reader's
Digest stockholders do not participate. In addition, the elimination of
dual class, voting/nonvoting common stock will limit the possibility that
a person could acquire voting control of Reader's Digest without
purchasing a majority of its shares.
- IMPROVED LIQUIDITY, TRADING EFFICIENCIES AND INVESTOR BASE. The
recapitalization will simplify and streamline the Reader's Digest capital
structure by replacing the dual class, voting/nonvoting common stock with
a single class of voting Common Stock. The recapitalization could result
in improved liquidity, trading efficiencies and an expanded investor base
for Reader's Digest.
- GOLDMAN SACHS FAIRNESS OPINION. Goldman Sachs provided an oral opinion,
subsequently confirmed in writing, to the effect that, as of April 12,
2002, based upon and subject to the factors and assumptions set forth
therein, the repurchase of 3,636,363 shares of Class B Voting Common
Stock held by the Funds for $27.50 in cash per share, or $99,999,983 in
cash in the aggregate, the recapitalization ratio of 1.24 shares of
Common Stock for each share of Class B Voting Common Stock (other than
the shares repurchased from the Funds) and the recapitalization ratio of
one share of Common Stock for each share of Class A Nonvoting Common
Stock, taken as whole, pursuant to the recapitalization agreement, was
fair from a financial point of view to the holders of Class A Nonvoting
Common Stock and Class B Voting Common Stock (other than the Funds).
- ADDITIONAL INDEBTEDNESS. In connection with its agreement to acquire
substantially all of the assets of Reiman Holding Company, LLC, Reader's
Digest arranged committed financing of $850 million. In order to finance
the purchase of $100 million of the shares of Class B Voting Common Stock
owned by the Funds, Reader's Digest and the banks providing the financing
for the Reiman acquisition increased the committed financing to $950
million. Accordingly, the share purchase will result in a $100 million
increase in Reader's Digest's overall indebtedness following the Reiman
acquisition.
- RATINGS DOWNGRADES. Following the announcement of the Reiman
acquisition, Moody's Investors Service Inc. downgraded the company's
credit rating from Baa2 to Baa3 (negative outlook) and Standard & Poor's
downgraded the company's credit rating from BBB- to BB+ (stable outlook).
The Reader's Digest special committee took into account the possibility
that borrowing an additional $100 million could result in an incremental
negative impact on the company's credit ratings. Subsequent to
announcement of the recapitalization agreement, S&P announced that the
company would retain its BB+ rating but the outlook would be revised from
stable to negative. Moody's did not change the company's credit rating
after the announcement of the recapitalization agreement.
- DILUTION OF CLASS A NONVOTING COMMON STOCK. Because each share of Class
B Voting Common Stock would be recapitalized into Common Stock at a
premium and each share of Class A Nonvoting Common Stock would be
recapitalized into Common Stock on a one-for-one basis, the
recapitalization would be dilutive to holders of Class A Nonvoting Common
Stock.
- IMPACT OF PROPOSED GOVERNANCE CHANGES. The implementation of a
classified board of directors and the elimination of stockholder action
by written consent will have certain effects that the Reader's Digest
special committee considered desirable for the stockholders, including:
- promoting the continuity and stability of the Reader's Digest board of
directors so as to ensure that the benefits of the years of experience
of its members are available to the company; and
- making it more difficult for an opportunistic acquiror to gain control
of the company without negotiating with the Reader's Digest board of
directors.
At the same time, the implementation of a classified board of directors and
the elimination of stockholder action by written consent may have effects
that some stockholders may consider to be adverse, such as
28
delaying or impeding a change in control of Reader's Digest or the approval
of other stockholder proposals, even if the holders of a majority of the
Common Stock believe such action would be in their best interests.
Reader's Digest Board of Directors. In reaching its decision to recommend
that the holders of Class B Voting Common Stock approve the recapitalization
proposal, the Reader's Digest board of directors consulted with Reader's Digest
management as well as its legal and financial advisors and carefully considered
the following material factors:
- the conclusions and recommendation of the Reader's Digest special
committee; and
- the factors referred to above as having been taken into account by the
Reader's Digest special committee.
RECOMMENDATION OF THE READER'S DIGEST SPECIAL COMMITTEE AND THE READER'S DIGEST
BOARD OF DIRECTORS
Reader's Digest Special Committee. On April 12, 2002, the Reader's Digest
special committee determined that the recapitalization agreement and the
transactions contemplated thereby are advisable, fair to and in the best
interests of the company and its stockholders (other than the Funds, as to which
the special committee made no fairness determination) and should be approved and
declared advisable by the Reader's Digest board of directors.
Reader's Digest Board of Directors. On April 12, 2002, upon the
recommendation of the Reader's Digest special committee, the Reader's Digest
board of directors:
- declared that the recapitalization agreement and the transactions
contemplated thereby are advisable, fair to and in the best interests of
the company and its stockholders (other than the Funds, as to which the
Reader's Digest board of directors made no fairness determination);
- approved the recapitalization agreement and the merger agreement, and the
consummation of the merger and, in the alternative, the filing of
certificates of amendment to the Reader's Digest certificate of
incorporation, and the other transactions contemplated thereby; and
- directed that the merger agreement and the merger, and, in the
alternative, the amendments to the company's certificate of
incorporation, be submitted to a vote at a meeting of the holders of
Class B Voting Common Stock and recommended that the holders of shares of
Class B Voting Common Stock vote for the recapitalization proposal.
OPINION OF FINANCIAL ADVISOR
On April 12, 2002, Goldman Sachs delivered its oral opinion to the Reader's
Digest special committee and to the Reader's Digest board of directors, which
opinion was subsequently confirmed in writing, that, as of such date and based
upon and subject to the factors and assumptions set forth therein: (1) the
repurchase of 3,636,363 shares of Class B Voting Common Stock held by the Funds
for $27.50 in cash per share, or $99,999,983 in cash in the aggregate, (2) the
recapitalization ratio of 1.24 shares of Common Stock for each share of Class B
Voting Common Stock (other than the shares repurchased from the Funds) and (3)
the recapitalization ratio of one share of Common Stock for each share of Class
A Nonvoting Common Stock, taken as a whole, in each case pursuant to the
recapitalization agreement, is fair from a financial point of view to the
holders of Class A Nonvoting Common Stock and Class B Voting Common Stock (other
than the Funds, as to which Goldman Sachs expressed no opinion).
Reader's Digest informed Goldman Sachs that, pursuant to the
recapitalization agreement:
- Reader's Digest will form a wholly owned subsidiary which will merge with
and into Reader's Digest;
- upon consummation of the merger, all of the outstanding shares of Class B
Voting Common Stock (other than shares repurchased from the Funds) and
all of the outstanding shares of Class A Nonvoting Common Stock will be
recapitalized into shares of Common Stock pursuant to the
recapitalization ratios described above (subject to the recapitalization
being effected pursuant to
29
amendments to Reader's Digest's certificate of incorporation rather than
pursuant to the merger under certain circumstances); and
- immediately prior to the merger (or the amendments to the Reader's Digest
certificate of incorporation), Reader's Digest will repurchase 3,636,363
shares of Class B Voting Common Stock from the Funds for an aggregate of
$99,999,983 in cash.
Reader's Digest also informed Goldman Sachs that, as of the date of the
recapitalization agreement, the Funds held 10,664,063 shares of Class A
Nonvoting Common Stock and 6,216,082 shares of Class B Voting Common Stock and
that the recapitalization agreement was the result of arms'-length negotiations
between the Reader's Digest special committee and the Funds.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED APRIL 12,
2002, WHICH SETS FORTH ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS
CONTAINED IN APPENDIX D TO THIS PROXY STATEMENT/PROSPECTUS. THE ADVISORY
SERVICES AND OPINION OF GOLDMAN SACHS WERE PROVIDED FOR THE INFORMATION AND
ASSISTANCE OF THE READER'S DIGEST SPECIAL COMMITTEE AND THE READER'S DIGEST
BOARD OF DIRECTORS IN CONNECTION WITH THEIR CONSIDERATION OF THE TRANSACTIONS
CONTEMPLATED BY THE RECAPITALIZATION AGREEMENT AND DO NOT CONSTITUTE A
RECOMMENDATION AS TO HOW ANY HOLDER OF CLASS B VOTING COMMON STOCK SHOULD VOTE
WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE RECAPITALIZATION AGREEMENT.
WE URGE YOU TO READ THE OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the recapitalization agreement;
- Annual Reports to Stockholders and Annual Reports on Form 10-K of
Reader's Digest for the five fiscal years ended June 30, 2001;
- certain interim reports to stockholders and Quarterly Reports on Form
10-Q of Reader's Digest;
- certain other communications from Reader's Digest to its stockholders;
and
- certain internal financial projections for Reader's Digest prepared by
the management of Reader's Digest.
Goldman Sachs also held discussions with members of the senior management
of Reader's Digest regarding the past and current business operations, financial
condition and future prospects of Reader's Digest. In addition, Goldman Sachs
held discussions with members of the senior management of Reader's Digest and
the Reader's Digest special committee regarding their assessment of the
strategic rationale for, and the potential benefits of, the transactions
contemplated by the recapitalization agreement. Goldman Sachs also:
- reviewed the reported prices and trading activities for the Class A
Nonvoting Common Stock and Class B Voting Common Stock;
- compared certain financial and stock market information for Reader's
Digest with similar information for certain other companies the
securities of which are publicly traded;
- reviewed the financial terms of certain other transactions, including
transactions in which a controlling stockholder group effectively
relinquished voting control;
- reviewed the financial terms of certain recent business combinations in
the consumer publishing industry specifically and in other industries
generally; and
- performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied on the accuracy and completeness of all of the
financial, accounting and other information discussed with or reviewed by it and
assumed such accuracy and completeness for purposes of rendering its opinion.
Goldman Sachs assumed with Reader's Digest's consent that the financial
projections for Reader's Digest prepared by the management of Reader's Digest
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of Reader's Digest. Goldman Sachs did not make an
independent evaluation or appraisal of the assets and liabilities of Reader's
Digest or any of its
30
subsidiaries and was not furnished with any such evaluation or appraisal.
Goldman Sachs also noted the determination of the Reader's Digest special
committee that all holders of Class B Voting Common Stock (not just the Funds)
would receive the benefit of the recapitalization ratio of 1.24 shares of Common
Stock for each share of Class B Voting Common Stock. In addition, Goldman Sachs
took into account the fact that neither the Funds nor any other party would have
voting control of Reader's Digest upon consummation of the transactions
contemplated by the recapitalization agreement. Goldman Sachs expressed no view
as to the price at which the Common Stock may trade following completion of the
transactions contemplated by the recapitalization agreement or as to the
relative fairness of the recapitalization to the holders of Class A Nonvoting
Common Stock as compared to the holders of Class B Voting Common Stock.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion. The following summary,
however, does not purport to be a complete description of the analyses performed
by Goldman Sachs. The order of the analyses described and the results of these
analyses do not represent relative importance or weight given to those analyses
by Goldman Sachs. Except as otherwise noted, the following quantitative
information, to the extent that it is based on market data, is based on market
data as it existed on or before April 11, 2002, and is not necessarily
indicative of current market conditions.
THE FOLLOWING SUMMARY OF FINANCIAL ANALYSES INCLUDES INFORMATION PRESENTED
IN TABULAR FORMAT. YOU SHOULD READ THESE TABLES TOGETHER WITH THE TEXT OF EACH
SUMMARY.
Analysis of Trading Prices and Implied Transaction Premiums. Goldman Sachs
reviewed the historical closing prices of the Class A Nonvoting Common Stock and
the Class B Voting Common Stock over the year prior to April 11, 2002 and
calculated the average daily closing prices of each of the Class A Nonvoting
Common Stock and the Class B Voting Common Stock over the fifteen days, thirty
days, three months, six months and one year prior to the announcement of the
recapitalization agreement.
Goldman Sachs then calculated and compared the premiums of the $27.50 per
share repurchase price over the average daily closing prices of each of the
Class A Nonvoting Common Stock and the Class B Voting Common Stock for the
selected periods. The results of these calculations are summarized below:
<Table>
<Caption>
CLOSING READER'S IMPLIED PREMIUM
DIGEST PRICE BASED ON THE $27.50
($/SHARE) PRICE PER SHARE(%)
------------------ --------------------
TRADING PERIOD CLASS A CLASS B CLASS A CLASS B
- -------------- ------- ------- -------- --------
April 11, 2002................................... $22.28 $22.90 23.4% 20.1%
15-Day Average(a)................................ $22.15 $22.97 24.1% 19.7%
30-Day Average(b)................................ $22.33 $22.88 23.2% 20.2%
Three-Month Average(c)........................... $21.62 $21.69 27.2% 26.8%
Six-Month Average(d)............................. $21.21 $21.01 29.7% 30.9%
One-Year Average(e).............................. $22.69 $21.82 21.2% 26.0%
</Table>
- ---------------
(a) 15-Day Average incorporates trading days from 3/22/2002 through 4/11/2002.
(b) 30-Day Average incorporates trading days from 3/1/2002 through 4/11/2002.
(c) Three-Month Average incorporates trading days from 1/10/2002 through
4/11/2002.
(d) Six-Month Average incorporates trading days from 10/10/2001 through
4/11/2002.
(e) One-Year Average incorporates trading days from 4/11/2001 through 4/11/2002.
Goldman Sachs also calculated historical price ratios of Class B Voting
Common Stock divided by Class A Nonvoting Common Stock on April 11, 2002 and for
the respective average daily closing prices over the thirty days, three months,
six months, one year, two years and three years ending April 11, 2002. Goldman
Sachs then calculated and compared the implied premiums of the 1.24 Class B
recapitalization ratio over these historical price ratios.
31
The results of these calculations are as follows:
<Table>
<Caption>
IMPLIED PREMIUM BASED ON
PRICE RATIOS OF THE 1.24 CLASS B
TRADING PERIOD CLASS B/CLASS A RECAPITALIZATION RATIO(%)
- -------------- --------------- -------------------------
April 11, 2002.................................. 1.028x 20.6%
30-Day Average(a)............................... 1.025x 21.0%
Three-Month Average(b).......................... 1.003x 23.6%
Six-Month Average(c)............................ 0.991x 25.2%
One-Year Average(d)............................. 0.962x 29.0%
Two-Year Average(e)............................. 0.915x 35.5%
Three-Year Average(f)........................... 0.910x 36.2%
</Table>
- ---------------
(a) 30-Day Average incorporates trading days from 3/1/2002 through 4/11/2002.
(b) Three-Month Average incorporates trading days from 1/10/2002 through
4/11/2002.
(c) Six-Month Average incorporates trading days from 10/10/2001 through
4/11/2002.
(d) One-Year Average incorporates trading days from 4/11/2001 through 4/11/2002.
(e) Two-Year Average incorporates trading days from 4/11/2000 through 4/11/2002.
(f) Three-Year Average incorporates trading days from 4/12/1999 through
4/11/2002.
Analysis of Selected Companies and Selected Transactions. Goldman Sachs
also calculated and compared the implied enterprise values as multiples of
latest twelve months, or LTM, earnings before interest, taxes, depreciation and
amortization, or EBITDA, for Reader's Digest and for selected companies in the
consumer publishing industry, specifically, EMAP plc, Meredith Corporation,
Scholastic Corporation, Primedia Inc. and Martha Stewart Living Omnimedia, Inc.,
using each of the respective companies' closing stock prices as of April 11,
2002. Although none of the selected companies is directly comparable to Reader's
Digest, the companies included were chosen because they are publicly traded
companies with operations that for purposes of analysis may be considered
similar to certain operations of Reader's Digest. In addition, Goldman Sachs
calculated implied enterprise values as multiples of LTM EBITDA for selected
merger transactions in the consumer publishing industry. Goldman Sachs also
calculated the implied enterprise value of Reader's Digest as a multiple of LTM
EBITDA, using $27.50 per share for all shares of Class A Nonvoting Common Stock
and all shares of Class B Voting Common Stock both on a stand-alone basis prior
to the closing of the Reiman acquisition and on a pro forma basis following the
Reiman acquisition, which resulted in multiples of 14.7x and 13.6x,
respectively. Goldman Sachs then compared these Reader's Digest multiples on a
stand-alone basis and a pro forma basis to the multiples derived for the
selected companies and for the selected merger transactions in the consumer
publishing industry. The range of implied enterprise values as multiples of LTM
EBITDA that Goldman Sachs calculated are summarized below:
<Table>
<Caption>
CONSUMER PUBLISHING PUBLIC MARKET MULTIPLES
---------------------------------------------------
READER'S READER'S CONSUMER PUBLISHING MERGER
DIGEST DIGEST PRO TRANSACTION MULTIPLES
STAND- FORMA FOR --------------------------
ALONE REIMAN MEAN MEDIAN HIGH LOW MEAN MEDIAN HIGH LOW
-------- ---------- ---- ------ ---- ---- ---- ------ ---- ---
ENTERPRISE VALUE/LTM
EBITDA..................... 12.0x 11.7x 18.1x 18.1x 25.6x 11.7x 14.1x 14.3x 19.9x 8.7x
---- ---- ---- ---- ---- ---- ---- ---- ---- ---
</Table>
Discounted Cash Flow Analyses. Goldman Sachs performed discounted cash
flow, or DCF, analyses of Reader's Digest, using projections that took into
account the completion of the Reiman acquisition, both prior to and after giving
effect to the transactions contemplated by the recapitalization agreement. These
analyses were based upon forecasts provided by Reader's Digest management.
Goldman Sachs calculated a range of implied per share values for the common
stock of Reader's Digest prior to the recapitalization, without distinguishing
between Class A Nonvoting Common Stock and Class B Voting Common Stock. The
implied per share values were based on the sum of: (1) the implied present value
of the unlevered, free cash flows (operating income less income taxes, plus
depreciation and amortization, less
32
increases in working capital and less capital expenditures) that Reader's Digest
expects to generate over a six-year period from 2002 through 2007, using a range
of discount rates between 10.0% and 12.0%, and (2) the implied present value of
the terminal value of Reader's Digest's future cash flows as of June 30, 2007,
calculated by multiplying the EBITDA estimated for fiscal year 2007 by a range
of multiples of 9.0x to 11.0x and discounting the result over a six-year period
using a range of discount rates between 10.0% and 12.0%. This analysis yielded
implied per share present values of the Reader's Digest common stock, ranging
from $31.74 to $41.77, based on the number of shares outstanding as of April 11,
2002, as provided by the management of Reader's Digest.
Goldman Sachs also performed a discounted cash flow analysis of Reader's
Digest after giving effect to the recapitalization to reflect the implied effect
of the recapitalization on the per share values of Reader's Digest common stock
to the holders of the Class A Nonvoting Common Stock and Class B Voting Common
Stock other than the Funds. Goldman Sachs calculated a range of implied per
share values for the Common Stock after the recapitalization, based on the sum
of: (1) the implied present value of the estimated unlevered, free cash flows
that Reader's Digest expects to generate over a six-year period from 2002
through 2007, using a range of discount rates between 10.0% and 12.0%, and (2)
the implied present value of the terminal value of Reader's Digest's future cash
flows as of June 30, 2007, calculated by multiplying the EBITDA estimated for
fiscal year 2007 by a range of multiples of 9.0x to 11.0x and discounting the
result over a six-year period using a range of discount rates between 10.0% and
12.0%. This analysis yielded the following range of implied per share present
values of the Common Stock: (1) $31.31 to $41.50, with respect to all holders of
Class A Nonvoting Common Stock other than the Funds, (2) $38.82 to $51.46, with
respect to all holders of Class B Voting Common Stock other than the Funds, and
(3) $31.87 to $42.24 with respect to all holders of Class A Nonvoting Common
Stock and all holders of Class B Voting Common Stock, taken as a whole, other
than the Funds. This analysis indicated that, on a pro forma basis, the
recapitalization would have a slightly dilutive effect on the implied DCF value
per share to all holders of Class A Nonvoting Common Stock other than the Funds,
an accretive effect on the implied DCF value per share to all holders of Class B
Voting Common Stock other than the Funds, and a slightly accretive effect on the
implied DCF value per share to all holders of Class A Nonvoting Common Stock and
all holders of Class B Voting Common Stock, taken as a whole, other than the
Funds.
Pro Forma Earnings Per Share Analysis. Using projections for Reader's
Digest that were prepared by management, Goldman Sachs prepared pro forma
analyses of the impact of the recapitalization on the earnings per share for
estimated fiscal years 2003 through 2006 on all holders of Class A Nonvoting
Common Stock and all holders of Class B Voting Common Stock other than the
Funds, assuming completion of the Reiman acquisition. Goldman Sachs' analysis
indicated that, on a pro forma basis, in each of the projected fiscal years 2003
through 2006, the recapitalization would have a slightly dilutive effect on the
earnings per share of all holders of Class A Nonvoting Common Stock other than
the Funds, an accretive effect on the earnings per share of all holders of Class
B Voting Common Stock other than the Funds, and a slightly accretive effect on
the earnings per share of all holders of Class A Nonvoting Common Stock and all
holders of Class B Voting Common Stock, taken as a whole, other than the Funds.
Historical Premiums Paid in Selected Dual-Class Transactions. Goldman
Sachs calculated the aggregate implied value of the premium to holders of Class
B Voting Common Stock by subtracting the closing price of the Class B Voting
Common Stock on April 11, 2002 from a per share value of $27.50 based on the
$27.50 per share repurchase price and the value per share implied by the Class B
recapitalization ratio as of April 11, 2002, and then multiplying the result by
the total number of Class B Voting Common Stock shares outstanding as of April
11, 2002. Goldman Sachs performed this analysis to determine the percentage of
that premium over the total equity market capitalization of Reader's Digest as
of April 11, 2002, based on the closing prices and shares outstanding as of
April 11, 2002 for all of the shares of Class A Nonvoting Common Stock and Class
B Voting Common Stock. This analysis indicated an aggregate premium over the
total equity market capitalization of Reader's Digest of 2.6%.
Goldman Sachs then identified and analyzed a group of 17 transactions that
were announced during the period January 1989 to March 2002, involving companies
that, prior to the announcement, had two or more classes of publicly traded
common stock with different voting rights and that had entered into a
transaction to
33
create one class of stock with the same voting rights for all stockholders.
Goldman Sachs divided these transactions into two groups: (1) change in control
transactions in which, as a result of the transaction, the voting power held by
a stockholder was reduced from over 50% of the company to less than 50%, and (2)
transactions not involving a change in control in which either (a) a stockholder
having over 50% of the voting power of a company reduced its voting power, but
to a level still exceeding 50% of the voting power of the company, or (b) there
was no stockholder with greater than 50% of the voting power of the company.
Goldman Sachs examined the following eight change in control transactions
involving the following companies:
- SAP AG (SAP Corporation Systems, Applications and Products in Data
Processing);
- Continental Airlines, Inc.;
- Network Solutions, Inc.;
- Remington Oil and Gas Corporation;
- Forcenergy Inc.;
- Laidlaw Inc.;
- Fischer & Porter Company; and
- Bergen Brunswig Corporation.
Goldman Sachs examined the exchange ratio of high-vote stock to low-vote or
no-vote stock in the eight change in control transactions. The exchange ratio of
the high-vote stock to the low-vote or no-vote stock was greater than 1 to 1, or
1.00x, in five of the eight transactions and ranged from 1.15x to 9.53x in those
five transactions. Of the eight change in control transactions examined by
Goldman Sachs, there were three where both the high-vote stock and the low-vote
or no vote stock were publicly traded. For those three transactions, Goldman
Sachs calculated the historical price ratios of the high-vote stock divided by
the low-vote or no-vote stock for the respective average daily closing prices
over the thirty days, six months and one year periods prior to the announcement
of the three transactions. Goldman Sachs then calculated and compared the
implied premiums of the transaction exchange ratios in each of these
transactions over these historical price ratios. These premiums ranged from 7.0%
to 24.5%. Goldman Sachs also calculated the premiums paid in the change in
control transactions to holders of high-vote stock, taken as a percentage of the
total equity market capitalization of the company in the eight transactions,
based on the closing stock price of the respective company one day prior to
announcement of the transaction. These premiums ranged from 2.1% to 15.0%.
Goldman Sachs also examined the following nine transactions not involving a
change in control:
- Conoco Inc.;
- Waddell & Reed Financial, Inc.;
- Raytheon Company;
- Mitchell Energy and Development Corp.;
- The Reader's Digest Association, Inc. (1999);
- InfoUSA Inc.;
- The Cherry Corporation;
- Scott Technologies, Inc.; and
- Base Ten Systems, Inc.
The exchange ratio of high-vote stock to low-vote stock was 1 to 1, or
1.00x in seven of the nine recapitalization transactions and 0.87x and 1.50x in
the remaining two transactions, respectively.
34
Historical Premiums Paid in Acquisitions of Companies with Dual Class
Stock. Goldman Sachs identified and analyzed a group of 32 acquisition
transactions that were announced between 1988 and 2000 involving companies that,
at the time of the transaction, had two or more classes of publicly traded
common stock with different voting rights. For each transaction, Goldman Sachs
calculated the premium indicated by the consideration paid per share to the
holders of the high-vote stock divided by the consideration paid per share to
the holders of the low-vote or no-vote stock. The analysis indicated that a
premium was paid in eight transactions. In these eight transactions, the
premiums ranged from 4.5% to 67.0% and the average premium for all 32
transactions was 5.0%.
Publishing Industry Historical Control Premiums Paid. Goldman Sachs
identified and analyzed a group of 28 merger transactions in the publishing
industry, involving consideration of cash, stock, or a combination of cash and
stock in excess of $100 million that were announced between February 19, 1998
and August 20, 2001. Using the most recent publicly available information,
Goldman Sachs calculated and compared the premiums paid one day, one week and
four weeks prior to the respective dates of announcement of such transactions.
The results of this analysis are summarized below:
<Table>
<Caption>
PREMIUM/(DISCOUNT) PREMIUM/(DISCOUNT) PREMIUM/(DISCOUNT)
1 DAY PRIOR TO 1 WEEK PRIOR TO 4 WEEKS PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
------------------ ------------------ ------------------
MEAN........................... 35.9% 38.7% 49.0%
MEDIAN......................... 36.5% 41.3% 39.8%
HIGH........................... 98.2% 94.3% 143.3%
LOW............................ (19.4)% (21.4)% (14.8)%
</Table>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary described above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all the analyses and did not attribute
any particular weight to any factor or analysis considered by it. Rather,
Goldman Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the results of all the
analyses. No company used in the above analyses as a comparison is directly
comparable to Reader's Digest, and no transaction used is directly comparable to
the transactions contemplated by the recapitalization agreement.
Goldman Sachs prepared these analyses for the purpose of providing an
opinion to the Reader's Digest special committee and to the Reader's Digest
board of directors as to the fairness from a financial point of view of the
repurchase of 3,636,363 shares of Class B Voting Common Stock held by the Funds
for $27.50 in cash per share, or $99,999,983 in cash in the aggregate, the
recapitalization ratio of 1.24 shares of Common Stock for each share of Class B
Voting Common Stock (other than the shares repurchased from the Funds) and the
recapitalization ratio of one share of Common Stock for each share of Class A
Nonvoting Common Stock, taken as a whole. These analyses do not purport to be
appraisals or to necessarily reflect the prices at which the business or
securities actually may be sold. Analyses based upon forecasts of future results
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these analyses. Because
these analyses are inherently subject to uncertainty and are based upon numerous
factors or events beyond the control of Reader's Digest and Goldman Sachs,
neither Reader's Digest nor Goldman Sachs assumes responsibility if future
results are materially different from those forecast.
As described above, the opinion of Goldman Sachs was one of many factors
taken into consideration by the Reader's Digest board of directors in making its
determination to approve the recapitalization agreement. The summary above does
not purport to be a complete description of the analyses performed by Goldman
Sachs.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. Goldman Sachs is familiar with Reader's
35
Digest and the Funds, having provided investment banking services to Reader's
Digest from time to time, including the following:
- having acted as sole and lead and book-running manager with respect to
the sale of 11,851,496 shares of Class A Nonvoting Common Stock held by
certain Reader's Digest stockholders through an offering of hybrid equity
securities exchangeable into shares of Class A Nonvoting Common Stock in
February 1998;
- having acted as Reader's Digest's financial advisor in connection with
its acquisition of Books Are Fun, Ltd. in August 1999;
- having acted as financial advisor to the Reader's Digest special
committee in connection with the exchange of a portion of the shares of
Class B Voting Common Stock held by the Funds into shares of Class A
Nonvoting Common Stock in September 1999;
- having acted as sole and lead and book-running manager with respect to
the secondary public offering of 11,500,000 shares of Class A Nonvoting
Common Stock (including shares held by the Funds) in November 1999;
- having provided a fairness opinion to Reader's Digest in connection with
the Reiman acquisition which was announced in March 2002;
- having acted as financial advisor to the Reader's Digest special
committee in connection with, and having participated in certain of the
negotiations leading to, the recapitalization agreement; and
- acting as co-lead arranger of the bank facility used to fund the Reiman
acquisition and that is expected to be used to fund the cash portion of
the recapitalization.
The Reader's Digest special committee selected Goldman Sachs as its
financial advisor because Goldman Sachs is an internationally recognized
investment banking firm that has substantial experience in transactions similar
to the transactions contemplated by the recapitalization agreement. In addition,
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold positions in securities, including derivative
securities, of Reader's Digest for its own account and for the accounts of
customers.
The Reader's Digest special committee engaged Goldman Sachs to act as its
financial advisor as of March 7, 2002 pursuant to a letter agreement in
connection with a potential strategic transaction involving Reader's Digest.
Pursuant to this letter agreement, Reader's Digest agreed to pay Goldman Sachs a
customary transaction fee, a substantial portion of which is payable upon
completion of the recapitalization. Reader's Digest has also agreed to reimburse
Goldman Sachs for its reasonable out-of-pocket expenses, including attorneys'
fees and disbursements, and to indemnify Goldman Sachs against certain
liabilities, including certain liabilities under the federal securities laws. In
addition, in connection with the bank facility described above, Reader's Digest
has paid Goldman Sachs customary fees with respect to that facility.
ACCOUNTING TREATMENT
We will account for the recapitalization by increasing our capital stock
account based on the aggregate par value of the shares outstanding immediately
following completion of the recapitalization. The increase in capital stock will
be offset by a decrease in paid-in capital. In order to record the repurchase of
shares from the Funds, we will increase our borrowings and increase the treasury
stock caption on our balance sheet.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE RECAPITALIZATION
We have summarized below certain federal income tax consequences to the
company and our stockholders resulting from the recapitalization. This summary
is based on existing U.S. federal income tax law, which may change, even
retroactively. This summary does not discuss all aspects of federal income
taxation that may be important to you in light of your individual circumstances.
Many stockholders (such as financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, and foreign persons) may be subject to
special tax rules. Other stockholders may also be subject to special tax rules,
including but not limited to: stockholders who received Reader's Digest stock as
compensation for services or pursuant to the exercise of an employee stock
option, or stockholders who have held, or will hold, stock as part of a
36
straddle, hedging, or conversion transaction for federal income tax purposes. In
addition, this summary does not discuss any state, local, foreign, or other tax
considerations. This summary assumes that you are a U.S. citizen and have held,
and will hold, your shares as capital assets for investment purposes under the
Internal Revenue Code of 1986, as amended, which we refer to throughout this
section as the "Code." You should consult your tax advisor as to the particular
federal, state, local, foreign, and other tax consequences, in light of your
specific circumstances.
We believe that the recapitalization will be treated as a tax-free
"recapitalization" for federal income tax purposes. This will result in no
material federal income tax consequences to the company.
We believe that the recapitalization of shares of Class A Nonvoting Common
Stock and Class B Voting Common Stock into shares of Common Stock pursuant to
the merger or, in the alternative, by amending our certificate of incorporation,
will be treated as a tax-free recapitalization under Section 368(a)(1)(E) of the
Code and, therefore (other than with respect to the Funds as to which we offer
no opinion), (a) will not result in the recognition of any gain or loss by the
holders of Class A Nonvoting Common Stock or Class B Voting Common Stock, (b)
the basis of the Common Stock (including fractional share interests) owned
immediately following the recapitalization will be the same as the stockholder's
basis in the Class A Nonvoting Common Stock or Class B Voting Common Stock, as
the case may be, owned immediately prior to the recapitalization, and (c) the
holding period of the Common Stock (including fractional share interests) owned
by a stockholder immediately following the recapitalization will include that
stockholder's holding period for the Class A Nonvoting Common Stock or Class B
Voting Common Stock, as the case may be, owned immediately prior to the
recapitalization, provided that each share of Class A Nonvoting Common Stock or
Class B Voting Common Stock, as the case may be, held on the date of the
recapitalization is a capital asset as defined in Section 1221 of the Code. The
sale of a fractional share of Common Stock will result in capital gain or loss
measured by the difference between the cash received and the basis in the
fractional interest surrendered, provided that the interest is held as a capital
asset as defined in Section 1221 of the Code.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR FEDERAL, STATE,
LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE RECAPITALIZATION, IN LIGHT OF
YOUR SPECIFIC CIRCUMSTANCES.
APPRAISAL RIGHTS
Under no circumstances are holders of Class A Nonvoting Common Stock or
Class B Voting Common Stock entitled to appraisal rights in connection with the
recapitalization.
The following summary of the provisions of Section 262 of the Delaware
General Corporation Law is not intended to be a complete statement of the
provisions and is qualified in its entirety by reference to the full text of
Section 262 of the Delaware General Corporation Law, a copy of which is attached
to this proxy statement/prospectus as Appendix E and is incorporated into this
summary by reference.
Under the Delaware General Corporation Law, if we effect the
recapitalization by means of a merger, holders of Reader's Digest preferred
stock will be entitled to appraisal rights. Holders of Reader's Digest preferred
stock wanting to exercise appraisal rights must strictly comply with the rules
governing the exercise of appraisal rights or lose those rights.
IF HOLDERS OF MORE THAN $5 MILLION IN STATED AMOUNT OF OUR PREFERRED STOCK
PROPERLY SEEK TO EXERCISE APPRAISAL RIGHTS, WE WILL EFFECT THE RECAPITALIZATION
BY AMENDING OUR CERTIFICATE OF INCORPORATION INSTEAD OF COMPLETING THE MERGER.
IF WE EFFECT THE RECAPITALIZATION BY AMENDING OUR CERTIFICATE OF INCORPORATION,
HOLDERS OF OUR PREFERRED STOCK WILL NOT BE ENTITLED TO APPRAISAL RIGHTS UNDER
DELAWARE LAW.
As of May 31, 2002, Reader's Digest had outstanding and issued the
following amounts of preferred stock:
- 29,720 shares of First Preferred Stock ($4.00 per annum dividend; $100.00
per share liquidation preference);
- 103,720 shares of Second Preferred Stock ($4.00 per annum dividend;
$100.00 per share liquidation preference); and
37
- 155,022 shares of Third Preferred Stock ($5.00 per annum dividend;
$100.00 per share liquidation preference).
None of the shares of Reader's Digest preferred stock is entitled to vote on the
recapitalization proposal. Other than shares as to which holders properly
exercise appraisal rights under Delaware law, each share of Reader's Digest
preferred stock either issued and outstanding or held by Reader's Digest as
treasury stock will remain unchanged by the recapitalization.
If the merger is completed, each holder of Reader's Digest preferred stock
who (1) files written notice with Reader's Digest of an intention to exercise
rights to appraisal of his, her or its shares prior to the Reader's Digest
special meeting, and (2) follows the procedures set forth in Section 262, will
be entitled to be paid by Reader's Digest the fair value in cash of his or her
shares of Reader's Digest preferred stock. The fair value of shares of Reader's
Digest preferred stock will be determined by the Delaware Court of Chancery,
exclusive of any element of value arising from the merger. The shares of
Reader's Digest preferred stock with respect to which holders have perfected
their appraisal rights in accordance with Section 262 and have not effectively
withdrawn or lost their appraisal rights are referred to in this proxy
statement/prospectus as the "dissenting preferred shares."
Within ten days after the effective date of the merger, Reader's Digest, as
the surviving corporation in the merger, must mail a notice to all Reader's
Digest preferred stockholders who have complied with (1) above notifying the
Reader's Digest preferred stockholders of the effective date of the merger.
Within 120 days after the effective date, holders of shares of Reader's Digest
preferred stock may file a petition in the Delaware Court of Chancery for the
appraisal of their shares, although they may, within 60 days of the effective
date, withdraw their demand for appraisal. Within 120 days of the effective
date, the holders of dissenting preferred shares may also, upon written request,
receive from Reader's Digest a statement setting forth the aggregate number of
shares with respect to which demands for appraisals have been received.
Appraisal rights are available only to the record holder of shares of
Reader's Digest preferred stock. If you wish to exercise appraisal rights but
have a beneficial interest in shares of Reader's Digest preferred stock that are
held of record by or in the name of another person, such as a broker or nominee,
you should act promptly to cause the record holder to follow the procedures set
forth in Section 262 to perfect your appraisal rights.
A demand for appraisal should be signed by or on behalf of the Reader's
Digest preferred stockholder exactly as the Reader's Digest preferred
stockholder's name appears on the Reader's Digest preferred stockholder's stock
certificates. If the shares of Reader's Digest preferred stock are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian, the
demand should be executed in that capacity, and if the shares of Reader's Digest
preferred stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a record holder; however, in the
demand, the agent must identify the record owner or owners and expressly
disclose that the agent is executing the demand as an agent for the record owner
or owners. A record holder such as a broker who holds shares of Reader's Digest
preferred stock as nominee for several beneficial owners may exercise appraisal
rights for the shares of Reader's Digest preferred stock held for one or more
beneficial owners and not exercise rights for the shares of Reader's Digest
preferred stock held for other beneficial owners. In this case, the written
demand should state the number of shares of Reader's Digest preferred stock for
which appraisal rights are being demanded. When no number of shares of Reader's
Digest preferred stock is stated, the demand will be presumed to cover all
shares of Reader's Digest preferred stock held of record by the broker or
nominee.
If any holder of shares of Reader's Digest preferred stock who demands
appraisal of his or her shares of Reader's Digest preferred stock under Section
262 fails to perfect, or effectively withdraws or loses the right to appraisal,
his or her shares of Reader's Digest preferred stock will remain outstanding and
unaffected by the recapitalization. Dissenting preferred shares lose their
status as dissenting preferred shares if:
- the merger is abandoned, which will be the case if holders of more than
$5 million in stated amount of our preferred stock properly seek to
exercise appraisal rights;
38
- neither Reader's Digest nor any stockholder who has complied with the
requirements therefor has filed a petition for appraisal with the
Delaware Court of Chancery within 120 days after the effective date of
the merger; or
- the stockholder delivers to Reader's Digest, as the surviving
corporation, within 60 days of the effective date of the merger, or
thereafter with Reader's Digest's approval, a written withdrawal of the
stockholder's demand for appraisal of the dissenting preferred shares,
although no appraisal proceeding in the Delaware Court of Chancery may be
dismissed as to any stockholder without the approval of the court.
Failure to follow the steps required by Section 262 of the Delaware General
Corporation Law for perfecting appraisal rights may result in the loss of
appraisal rights, in which event a Reader's Digest preferred stockholder will
continue to hold the shares of Reader's Digest preferred stock, which will
remain outstanding and unchanged as a result of the merger. In view of the
complexity of the provisions of Section 262 of the Delaware General Corporation
Law, holders of Reader's Digest preferred stock who are considering objecting to
the merger should consult their own legal advisors.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Common Stock held by our stockholders following the
recapitalization will be freely transferable, except that shares of Common Stock
held by persons who are deemed to be "affiliates" of Reader's Digest under the
Securities Act of 1933, as amended, at the time of the special meeting may be
resold by them only in transactions permitted by Rule 145 under the Securities
Act, or as otherwise permitted under the Securities Act. Persons who may be
deemed to be affiliates of Reader's Digest for such purposes generally include
individuals or entities that control, are controlled by or are under common
control with Reader's Digest and include directors and executive officers of
Reader's Digest.
REGULATORY MATTERS
To the extent that a Reader's Digest stockholder owns shares of Common
Stock valued at $50 million or more following the recapitalization, that
stockholder may have a pre-merger notification filing obligation under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, unless the
stockholder qualifies for an exemption to the filing requirements under the Act.
NO EXCHANGE OF STOCK CERTIFICATES
Following completion of the recapitalization:
- each share certificate representing shares of Class A Nonvoting Common
Stock will represent the same number of shares of Common Stock; and
- each share certificate representing shares of Class B Voting Common Stock
will represent the number of shares of Common Stock obtained by
multiplying the number of shares of Class B Voting Common Stock shown on
the certificate by 1.24, provided that you will receive cash in lieu of
any fractional shares of Common Stock.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES.
LITIGATION RELATING TO THE RECAPITALIZATION
Reader's Digest and its directors, along with the Funds, have been named as
defendants in a purported stockholder class action filed in the Court of
Chancery, County of New Castle, State of Delaware. The action is brought on
behalf of a purported class consisting of holders of Class A Nonvoting Common
Stock not affiliated with any of the defendants. The complaint in the action
alleges, among other things, that the recapitalization: will provide a premium
to holders of the Class B Voting Common Stock and "no financial benefit or gain"
to the holders of the Class A Nonvoting Common Stock; will result in
"entrenchment" of the
39
defendants at the expense of holders of shares of Class A Nonvoting Common
Stock; and will cause earnings and voting dilution to the holders of shares of
Class A Nonvoting Common Stock. The complaint in the action further alleges that
the individual defendants and the Funds have breached their fiduciary duties and
that the recapitalization is "the product of unfair dealing." As relief, the
complaint seeks, among other things, a preliminary and permanent injunction
against consummation of the transactions; if the recapitalization is completed,
rescission of the recapitalization or an award of rescissory damages in an
unspecified amount and an order "directing defendants to account to Class
members for their damages and defendants' profits resulting from the wrongs" set
forth in the complaint. Reader's Digest believes that the allegations in the
complaint are entirely without merit and intends to defend the action
vigorously.
40
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following tables show unaudited condensed combined financial
information for Reader's Digest on a pro forma basis, giving effect to (1) the
Reiman acquisition alone and (2) the Reiman acquisition and the recapitalization
together as if the transaction(s) had occurred on July 1, 2000 for the
statements of income and as of March 31, 2002 for the balance sheet.
We based the unaudited pro forma condensed combined financial information
on the historical consolidated financial statements of Reader's Digest and
Reiman for the respective periods. We have adjusted the historical consolidated
financial information to give effect to pro forma events that are (1) directly
attributable to the Reiman acquisition and the recapitalization, (2) factually
supportable, and (3) with respect to the statements of income, expected to have
a continuing impact on the combined results. You should read this information in
conjunction with the separate historical consolidated financial statements and
accompanying notes of Reader's Digest that we include in our annual report on
Form 10-K for the fiscal year ended June 30, 2001, and our quarterly report on
Form 10-Q for the nine-month period ended March 31, 2002, and the separate
historical consolidated financial statements and accompanying notes of Reiman
for the year ended December 31, 2001 and the three months ended March 31, 2002
contained in our report on Form 8-K dated June 11, 2002, all of which we
incorporate in this proxy statement/prospectus by reference.
We present the unaudited pro forma condensed combined financial information
for informational purposes only and do not purport to represent what our
financial position or operating results actually would have been had we
completed the Reiman acquisition and the recapitalization at the dates
indicated. In addition, the unaudited pro forma condensed combined financial
information does not purport to project our future operating results or
financial position.
We prepared the unaudited pro forma condensed combined financial
information using the purchase method of accounting with Reader's Digest treated
as the acquiror. We based the purchase accounting pro forma adjustments on
available information and assumptions that we believe are reasonable and have
made these adjustments solely for purposes of developing unaudited pro forma
condensed combined financial information.
41
THE READER'S DIGEST ASSOCIATION, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 2001
<Table>
<Caption>
HISTORICAL
INFORMATION
--------------------
READER'S REIMAN READER'S READER'S DIGEST,
DIGEST REIMAN ACQUISITION DIGEST AND RECAPITALIZATION REIMAN, AND
JUNE 30, JUNE 30, PRO FORMA REIMAN PRO FORMA RECAPITALIZATION
2001 2001 ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------- ---------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues........................ $ 2,518.2 $ 311.4 $ (0.4)(a) $ 2,824.4 $ -- $ 2,824.4
(2.1)(b)
(2.7)(f)
Product, distribution and
editorial expenses............ (971.2) (197.1) 0.4(a) (1,070.6) -- (1,070.6)
96.5(b)
0.8(f)
Promotion, marketing and
administrative expenses....... (1,299.6) (93.8) (94.4)(b) (1,473.2) -- (1,473.2)
48.4(c)
(33.5)(d)
1.3(f)
(1.6)(g)
Other operating items and
impairment losses............. (18.4) -- -- (18.4) -- (18.4)
--------- ------- ------ --------- ----- ---------
OPERATING PROFIT.............. 229.0 20.5 12.7 262.2 -- 262.2
Other (expense) income, net..... (41.2) (29.0) 29.3(c) (109.7) (9.1)(i) (122.7)
(68.8)(e) (3.9)(k)
--------- ------- ------ --------- ----- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES................ 187.8 (8.5) (26.8) 152.5 (13.0) 139.5
Provision for income taxes...... (55.7) 0.2 13.9(h) (41.6) 3.6(j) (38.0)
--------- ------- ------ --------- ----- ---------
NET INCOME.................... $ 132.1 $ (8.3) $(12.9) $ 110.9 $(9.4) $ 101.5
========= ======= ====== ========= ===== =========
BASIC EARNINGS PER SHARE:
Weighted-average common
shares...................... 102.7 102.7 101.2
--------- --------- ---------
PRO FORMA BASIC EARNINGS PER
SHARE....................... $ 1.27 $ 1.07 $ 0.99
========= ========= =========
DILUTED EARNINGS PER SHARE:
Adjusted weighted-average
common shares............... 103.7 103.7 102.2
--------- --------- ---------
PRO FORMA DILUTED EARNINGS PER
SHARE....................... $ 1.26 $ 1.06 $ 0.98
========= ========= =========
</Table>
The accompanying notes to Unaudited Pro Forma Condensed Combined Statement of
Income are an integral part of this statement.
42
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)
We derived the financial information for Reader's Digest for the twelve
months ended June 30, 2001 from our 2001 annual report on Form 10-K,
incorporated in this proxy statement/prospectus by reference. We obtained the
unaudited financial information for Reiman for the twelve months ended June 30,
2001 by combining unaudited financial data for Reiman for the six months ended
December 31, 2000 with unaudited financial data for the six months ended June
30, 2001.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME:
We calculated the adjustments to the unaudited pro forma condensed combined
statement of income for the twelve months ended June 30, 2001 assuming the
Reiman acquisition and the recapitalization took place on July 1, 2000. The
adjustments are as follows:
(a) To eliminate revenues and expenses related to transactions between Reiman
and Reader's Digest.
(b) To reclassify amounts derived from Reiman's historical financial statements
to conform to Reader's Digest's presentation. These costs include:
- Promotion costs of $96.5, reclassified from product, distribution and
editorial expenses to promotion, marketing and administrative expenses.
- Bad debt expense of $2.8, reclassified from promotion, marketing and
administrative expenses to revenues.
- Agent commissions of $0.7, reclassified from revenues to promotion,
marketing and administrative expenses.
(c) To eliminate:
- Compensation expense of $1.7 related to put options which Reader's
Digest did not assume.
- Interest expense of $29.3 related to Reiman's debt which Reader's Digest
did not assume.
- Amortization expense of $46.7 related to Reiman's historical intangible
assets.
(d) To record amortization related to the acquired subscriber list intangible
assets. These subscriber lists are being amortized over their estimated
useful lives, between three and six years. Reader's Digest has determined
that the acquired tradename intangible assets have an indefinite life.
(e) To record incremental interest expense related to the $850.0 of debt
incurred by Reader's Digest to consummate the Reiman acquisition, pay
related financing and transaction costs, and refinance existing working
capital obligations (see Note (b) in the Notes to Unaudited Pro Forma
Condensed Combined Balance Sheet as of March 31, 2002). This amount
includes amortization of deferred financing fees of $14.2. For purposes of
the pro forma financial information, we assume the interest rate on these
borrowings is set each quarter using the three-month LIBOR on the first day
of the quarter, and minimum quarterly principal repayments of $7.1.
(f) To conform Reiman's magazine revenue recognition policy to Reader's
Digest's policy.
(g) To conform Reiman's policies for capitalization and amortization of direct
response advertising costs to Reader's Digest's policies.
(h) To record income tax expense for pro forma adjustments as well as adjust
Reiman's historical income tax expense.
(i) To record interest expense related to borrowings of $100.0 that we will
use to repurchase shares from the Funds as contemplated by the
recapitalization agreement.
(j) To record the tax benefit from the additional interest expense on the
$100.0 referred to in Note (i).
43
(k) To record the fees associated with the recapitalization.
Not included in pro forma net income is a non-cash compensation charge,
relating to our outstanding Class A Nonvoting Common Stock employee option
awards, that we will incur concurrent with, and as a result of, the completion
of the recapitalization (the "new measurement date"). We will calculate the
total charge by multiplying the number of shares of stock underlying the options
outstanding at the new measurement date by the excess of the market price of the
stock on that date over the option exercise price (the "intrinsic value") less
any original intrinsic value recorded at the date of grant. Accordingly, a
determining factor in the total charge is the market price of the stock on the
date we complete the recapitalization. The total non-cash charge consists of:
(1) an immediate nonrecurring charge based on the number of vested options
outstanding at the new measurement date and (2) a charge, based on the number of
unvested options outstanding at the new measurement date, which we will record
ratably over the remaining vesting periods.
The actual total charge that we will record on the date of the
recapitalization depends upon the market price of the underlying stock, the
number of shares of stock underlying the options outstanding on that date and
the exercise price of the options. Assuming the recapitalization took place on
March 31, 2002 (utilizing the closing market price of $22.50 for the Class A
Nonvoting Common Stock on the trading date closest to March 31, 2002), the total
charge would have been $8.2. We would immediately upon completion of the
recapitalization record a nonrecurring, non-cash charge of $4.4 related to our
vested options. We would record the remaining non-cash charge of $3.8 related to
unvested options ratably over the remaining vesting periods.
Given that the total charge is dependent on factors that are not within our
control (most significantly the market price of the underlying stock on the date
we complete the recapitalization), we have provided the following table to
illustrate how the total charge relating to the options outstanding at March 31,
2002 may vary. The table below assumes that there are no forfeitures,
cancellations, terminations, or additional grants of options from March 31, 2002
to the date we complete the recapitalization.
<Table>
Market price of stock (dollars per
share).................................. $20.00 $25.00 $30.00 $35.00 $40.00
Nonrecurring non-cash compensation charge
(vested options)........................ $ 1.1 $ 8.9 $ 22.9 $ 40.6 $ 59.9
Non-cash compensation charge (unvested
options)................................ $ 0.5 $ 10.6 $ 24.4 $ 40.9 $ 58.7
Total non-cash compensation charge........ $ 1.6 $ 19.5 $ 47.3 $ 81.5 $118.6
</Table>
44
THE READER'S DIGEST ASSOCIATION, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2002
<Table>
<Caption>
HISTORICAL INFORMATION
-----------------------
READER'S REIMAN READER'S READER'S DIGEST,
DIGEST REIMAN ACQUISITION DIGEST AND RECAPITALIZATION REIMAN AND
MARCH 31, MARCH 31, PRO FORMA REIMAN PRO FORMA RECAPITALIZATION
2002 2002 ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ---------------- ----------------
(IN MILLIONS)
ASSETS:
Cash and cash equivalents......... $ 40.9 $ 4.7 $ -- $ 45.6 $ (6.1)(f) $ 39.5
Accounts receivable, net.......... 308.1 25.7 -- 333.8 -- 333.8
Inventories, net.................. 153.6 10.2 -- 163.8 -- 163.8
Prepaid and deferred promotion
costs........................... 87.6 4.2 6.6(e) 142.1 -- 142.1
43.7(c)
Prepaid expenses and other current
assets.......................... 190.7 1.9 (0.7)(a) 197.6 -- 197.6
5.7(e)
-------- ------- ------- -------- ------- ---------
Total current assets............ 780.9 46.7 55.3 882.9 (6.1) 876.8
Property, plant and equipment,
net............................. 158.9 10.2 -- 169.1 -- 169.1
Goodwill and other intangible
assets, net..................... 402.8 509.9 (509.9)(a) 1,257.3 -- 1,257.3
206.8(a)
647.7(a)
Other noncurrent assets........... 360.2 67.5 (0.7)(a) 389.5 1.3(b) 390.8
14.2(b)
(51.7)(c)
-------- ------- ------- -------- ------- ---------
Total assets.................... $1,702.8 $ 634.3 $ 361.7 $2,698.8 $ (4.8) $ 2,694.0
======== ======= ======= ======== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans and notes payable........... $ 154.1 $ 33.4 $ (33.4)(a) $ 113.9 $ 3.4(f) $ 117.3
(68.8)(b)
28.6(b)
Accounts payable.................. 83.9 13.9 -- 97.8 -- 97.8
Accrued expenses.................. 260.3 2.7 (0.4)(a) 263.4 0.6(f) 264.0
0.8(a)
Income taxes payable.............. 56.1 -- -- 56.1 -- 56.1
Unearned revenues................. 306.3 2.1 116.5(d) 443.3 -- 443.3
18.4(e)
Other current liabilities......... 3.4 -- -- 3.4 -- $ 3.4
-------- ------- ------- -------- ------- ---------
Total current liabilities....... 864.1 52.1 61.7 977.9 4.0 981.9
Unearned revenues................. 66.6 183.4 (116.5)(d) 133.5 -- 133.5
Other noncurrent liabilities...... 284.9 206.6 (206.6)(a) 1,106.3 96.6(f) 1,202.9
821.4(b)
-------- ------- ------- -------- ------- ---------
Total liabilities............... 1,215.6 442.1 560.0 2,217.7 100.6 2,318.3
Stockholders' equity
Capital and preferred stock....... 25.1 281.2 (281.2)(a) 25.1 0.1(g) 25.2
Paid-in capital................... 225.3 82.0 (82.0)(a) 225.3 (0.1)(g) 225.2
Excess purchase price over
predecessor basis............... -- (61.1) 61.1(a) -- -- --
Retained earnings (accumulated
deficit)........................ 1,270.4 (109.9) 109.9(a) 1,264.3 (3.9)(f) 1,260.4
(6.1)(e)
Accumulated other comprehensive
loss............................ (80.1) -- -- (80.1) -- (80.1)
Treasury stock, at cost........... (953.5) -- -- (953.5) (101.5)(f) (1,055.0)
-------- ------- ------- -------- ------- ---------
Total stockholders' equity...... 487.2 192.2 (198.3) 481.1 (105.4) 375.7
-------- ------- ------- -------- ------- ---------
Total liabilities and
stockholders' equity.......... $1,702.8 $ 634.3 $ 361.7 $2,698.8 $ (4.8) $ 2,694.0
======== ======= ======= ======== ======= =========
</Table>
The accompanying notes to Unaudited Pro Forma Condensed Combined Balance Sheet
are an integral part of this balance sheet.
45
THE READER'S DIGEST ASSOCIATION, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MARCH 31, 2002
<Table>
<Caption>
HISTORICAL INFORMATION
-----------------------
READER'S REIMAN READER'S READER'S DIGEST,
DIGEST REIMAN ACQUISITION DIGEST AND RECAPITALIZATION REIMAN, AND
MARCH 31, MARCH 31, PRO FORMA REIMAN PRO FORMA RECAPITALIZATION
2002 2002 ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ---------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES...................... $ 1,823.3 $ 245.9 $ (0.1)(h) $ 2,061.0 $ -- $ 2,061.0
(3.4)(i)
(4.7)(m)
Product, distribution and
editorial expenses.......... (725.6) (150.4) 0.1(h) (805.2) -- (805.2)
69.3(i)
1.4(m)
Promotion, marketing and
administrative expenses..... (946.6) (68.7) (65.9)(i) (1,073.6) -- (1,073.6)
31.9(j)
(25.1)(k)
1.3(m)
(0.5)(n)
Other operating items and
impairment losses........... -- -- -- -- -- --
--------- ------- ------ --------- ----- ---------
OPERATING PROFIT............ 151.1 26.8 4.3 182.2 -- 182.2
Other (expense) income, net... (5.7) (13.8) 13.9(j) (36.0) (3.8)(p) (39.8)
(30.4)(l)
--------- ------- ------ --------- ----- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES.............. 145.4 13.0 (12.2) 146.2 (3.8) 142.4
Provision for income taxes.... (51.2) 0.6 (0.9)(o) (51.5) 1.5(q) (50.0)
--------- ------- ------ --------- ----- ---------
NET INCOME.................. $ 94.2 $ 13.6 $(13.1) $ 94.7 $(2.3) $ 92.4
========= ======= ====== ========= ===== =========
BASIC EARNINGS PER SHARE:
Weighted-average common
shares.................... 100.5 100.5 98.9
--------- --------- ---------
Pro forma basic earnings per
share..................... $ 0.93 $ 0.93 $ 0.92
========= ========= =========
DILUTED EARNINGS PER SHARE:
Adjusted weighted-average
common shares............. 100.8 100.8 99.2
--------- --------- ---------
Pro forma diluted earnings
per share................. $ 0.92 $ 0.93 $ 0.92
========= ========= =========
</Table>
The accompanying notes to Unaudited Pro Forma Condensed Combined Statement of
Income are an integral part of this statement.
46
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
AS OF, AND FOR THE NINE MONTHS ENDED, MARCH 31, 2002
(IN MILLIONS, EXCEPT PER SHARE DATA)
We derived the financial information for Reader's Digest as of, and for the
nine months ended, March 31, 2002 from our unaudited quarterly report on Form
10-Q, incorporated in this proxy statement/prospectus by reference. Unaudited
financial information for Reiman is as of, and for the nine months ended, March
31, 2002. We obtained the financial information for Reiman for the nine months
ended March 31, 2002 by combining unaudited financial data for Reiman for the
six months ended December 31, 2001 with unaudited financial data for the three
months ended March 31, 2002.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET:
We calculated the adjustments to the unaudited pro forma condensed combined
balance sheet as of March 31, 2002 assuming the Reiman acquisition and the
recapitalization took place on March 31, 2002. The adjustments are as follows:
(a) To eliminate historical balances of Reiman that are excluded from the
assets acquired and liabilities assumed in accordance with the Reiman asset
purchase agreement, and to record the preliminary allocation of the excess
of the purchase price over the net assets acquired and identified
intangible assets as follows:
<Table>
Cash paid to finance the Reiman acquisition................. $760.0
Add:
Liabilities assumed in excess of assets acquired and
opening balance sheet adjustments...................... 87.5
Transaction costs......................................... 7.0
------
Total purchase price........................................ 854.5
Less identified intangibles:
Trademarks and subscriber lists........................... 206.8
------
Excess of cost over net assets acquired..................... $647.7
======
</Table>
(b) To record debt incurred by Reader's Digest to finance the Reiman
acquisition and the recapitalization.
In order to finance the Reiman acquisition, pay related financing and
transaction costs, finance the recapitalization, and refinance existing
working capital obligations, on May 20, 2002 Reader's Digest borrowed
$950.0 under new term loans. Because $100.0 of the total borrowings related
to the recapitalization is not directly attributable to the Reiman
acquisition, we have reflected that amount in a separate column in the
accompanying unaudited pro forma condensed combined balance sheet.
Accordingly, the Reader's Digest and Reiman pro forma column in the
accompanying unaudited pro forma condensed combined balance sheet and
income statements reflects borrowings which include only the $850.0
necessary to finance the Reiman acquisition, pay related transaction and
debt financing fees, and refinance a portion of existing working capital
obligations.
Concurrent with the $950.0 borrowing, Reader's Digest amended and restated
its existing five-year revolving credit facility to conform it to the new
term loan agreement. Also, concurrent with the $950.0 borrowing, Reader's
Digest terminated its previously existing 364-day revolving credit
facility. The term loans bear interest at either the Alternate Base Rate,
as defined in the term loan agreement, or LIBOR, at Reader's Digest's
election, plus a spread based upon Reader's Digest's credit rating at the
time the rate is established. At the beginning of each borrowing period,
Reader's Digest may reset the interest rate at intervals between three and
six months. Interest on loans under the five-year revolving credit facility
is calculated in substantially the same manner as interest under the term
loan agreement. The term loan agreement requires quarterly principal
payments to be made ($28.6 related to the Reiman acquisition, and $3.4
related to the recapitalization, is the current portion of long term debt
and is classified in loans and notes payable in the accompanying unaudited
pro forma condensed combined balance sheet), and is secured by
substantially all of the assets of Reader's Digest. The final principal
payment is due on May 20, 2008.
47
For Reader's Digest and Reiman unaudited pro forma condensed combined
balance sheet purposes, the use of proceeds from the term loan of $950.0 is
as follows:
<Table>
Total borrowings............................................ $950.0
Less:
Amounts related to the recapitalization................... 100.0
------
Borrowings related to Reiman acquisition.................... 850.0
Less:
Debt financing fees....................................... 14.2
Transaction costs......................................... 7.0
Refinancing existing working capital obligations.......... 68.8
------
To finance the Reiman acquisition......................... $760.0
======
</Table>
We will use the $100.0 in borrowings related to the recapitalization to
finance the repurchase of shares from the Funds (see Note (f) below). We
assume payment in cash of the related financing fees of $1.3.
(c) To reclassify deferred promotion costs derived from Reiman's historical
financial statements to conform to Reader's Digest's presentation and
conform Reiman's policies for capitalization and amortization of direct
response advertising costs to Reader's Digest's policies.
(d) To reclassify the portion of unearned revenue that we will recognize prior
to March 31, 2003 as a current liability, consistent with Reader's Digest's
presentation.
(e) To conform Reiman's magazine revenue recognition policy to Reader's
Digest's policy.
(f) To record the additional $100.0 of debt borrowed under the loan agreements
that we will use to repurchase shares from the Funds as contemplated in the
recapitalization agreement (see Note (b) above) and the fees associated
with consummating the repurchase ($3.4 is the current portion of long term
debt and is classified in loans and notes payable in the accompanying
unaudited pro forma condensed combined balance sheet). Of the total $4.8 in
fees, upon completion of the recapitalization, we will expense $3.3 and we
will include $1.5 as part of the cost of treasury shares. In addition, we
have reflected $0.6 as expenses associated with the cost of providing
registration rights to the Funds in accordance with the recapitalization
agreement.
(g) To record an increase in the number of shares outstanding as a result of
the recapitalization.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME:
We have calculated the adjustments to the unaudited pro forma condensed
combined statement of income for the nine months ended March 31, 2002 assuming
the Reiman acquisition and the recapitalization took place on July 1, 2000. The
adjustments are as follows:
(h) To eliminate revenues and expenses related to transactions between Reiman
and Reader's Digest.
(i) To reclassify amounts derived from Reiman's historical financial statements
to conform to Reader's Digest's presentation. These costs include:
- Promotion costs of $69.3, reclassified from product, distribution and
editorial expenses to promotion, marketing and administrative expenses.
- Bad debt expense of $4.0, reclassified from promotion, marketing and
administrative expenses to revenues.
- Agent commissions of $0.6, reclassified from revenues to promotion,
marketing and administrative expenses.
(j) To eliminate:
- Compensation expense of $1.6 related to put options which Reader's Digest
did not assume.
- Interest expense of $13.9 related to Reiman's debt which Reader's Digest
did not assume.
- Amortization expense of $30.3 related to Reiman's historical intangible
assets.
(k) To record amortization related to the acquired subscriber list intangible
assets. These subscriber lists are being amortized over their estimated
useful lives between three and six years. Reader's Digest has determined
that the acquired tradename intangible assets have an indefinite life.
48
(l) To record incremental interest expense related to the $850.0 of debt
incurred by Reader's Digest to consummate the Reiman acquisition, pay
related financing and transaction costs, and refinance existing working
capital obligations (see Note (b) in the Notes to Unaudited Pro Forma
Condensed Combined Balance Sheet as of March 31, 2002). This amount
includes amortization of deferred financing fees of $14.2. For purposes of
the pro forma financial information, we assume the interest rate on these
borrowings is set each quarter using the three-month LIBOR on the first day
of the quarter, and minimum quarterly principal repayments of $7.1.
(m) To conform Reiman's magazine revenue recognition policy to Reader's
Digest's policy.
(n) To conform Reiman's policies for capitalization and amortization of direct
response advertising costs to Reader's Digest's policies.
(o) To record income tax expense for pro forma adjustments as well as adjust
Reiman's historical income tax expense.
(p) To record interest expense related to borrowings of $100.0 that we will use
to repurchase shares from the Funds as contemplated in the recapitalization
agreement.
(q) To record the tax benefit from the additional interest expense on the
$100.0 referred to in Note (p).
Not included in pro forma net income is a non-cash compensation charge,
relating to our outstanding Class A Nonvoting Common Stock employee option
awards, that we will incur concurrent with, and as a result of, the completion
of the recapitalization (the "new measurement date"). We will calculate the
total charge by multiplying the number of shares of stock underlying the options
outstanding at the new measurement date by the excess of the market price of the
stock on that date over the option exercise price (the "intrinsic value") less
any original intrinsic value recorded at the date of grant. Accordingly, a
determining factor in the total charge is the market price of the stock on the
date we complete the recapitalization. The total non-cash charge consists of:
(1) an immediate nonrecurring charge based on the number of vested options
outstanding at the new measurement date and (2) a charge, based on the number of
unvested options outstanding at the new measurement date, which we will record
ratably over the remaining vesting periods.
The actual total charge that we will record on the date of the
recapitalization depends upon the market price of the underlying stock, the
number of shares of stock underlying the options outstanding on that date and
the exercise price of the options. Assuming the recapitalization took place on
March 31, 2002 (utilizing the closing market price of $22.50 for the Class A
Nonvoting Common Stock on the trading date closest to March 31, 2002), the total
charge would have been $8.2. We would immediately upon completion of the
recapitalization record a nonrecurring, non-cash charge of $4.4 related to our
vested options. We would record the remaining non-cash charge of $3.8 related to
unvested options ratably over the remaining vesting periods.
Given that the total charge is dependent on factors that are not within our
control (most significantly the market price of the underlying stock on the date
we complete the recapitalization), we have provided the following table to
illustrate how the total charge relating to the options outstanding at March 31,
2002 may vary. The table below assumes that there are no forfeitures,
cancellations, terminations, or additional grants of options from March 31, 2002
to the date we complete the recapitalization.
<Table>
Market price of stock (dollars per
share).................................. $20.00 $25.00 $30.00 $35.00 $40.00
Nonrecurring non-cash compensation charge
(vested options)........................ $ 1.1 $ 8.9 $ 22.9 $ 40.6 $ 59.9
Non-cash compensation charge (unvested
options)................................ $ 0.5 $ 10.6 $ 24.4 $ 40.9 $ 58.7
Total non-cash compensation charge........ $ 1.6 $ 19.5 $ 47.3 $ 81.5 $118.6
</Table>
49
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
When considering the recommendation of the Reader's Digest board of
directors, you should be aware that two members of the Reader's Digest board of
directors -- Ms. DeVita and Mr. Silas -- are also members of the Funds' boards
of directors and may have interests in the recapitalization that are different
from or are in addition to yours. For this reason, the Reader's Digest board of
directors appointed a special committee consisting of three directors other than
Ms. DeVita and Mr. Silas to act as disinterested negotiators on behalf of the
company and to review, negotiate, and, if appropriate, recommend the
recapitalization to the entire board of directors of Reader's Digest. In
addition, Ms. DeVita and Mr. Silas recused themselves from all discussions at
Reader's Digest board meetings relating to the recapitalization transaction and
abstained from voting on the recapitalization transaction.
In connection with the recapitalization, Reader's Digest has agreed to
purchase 3,636,363 shares of Class B Voting Common Stock owned by the Funds at
$27.50 in cash per share for an aggregate purchase price of $99,999,983. No
other stockholders will receive cash in the recapitalization, other than cash in
lieu of fractional shares of Common Stock. Each other share of Class B Voting
Common Stock (including those owned by the Funds) will be recapitalized into
1.24 shares of Common Stock and each share of Class A Nonvoting Common Stock
(including those owned by the Funds) will be recapitalized into one share of
Common Stock. Moreover, pursuant to the terms of the recapitalization agreement,
the Funds will receive registration rights with respect to the shares of Common
Stock that the Funds own following the recapitalization. Finally, under the
terms of the recapitalization agreement, Reader's Digest has agreed to use its
reasonable best efforts to cause one designee of the Funds to be nominated and
elected as a member of the Reader's Digest board of directors until the earlier
of the company's 2004 annual meeting of stockholders and the time when the Funds
jointly own less than 10% of the outstanding shares of Common Stock.
50
THE RECAPITALIZATION AGREEMENT
We believe this summary describes the material terms of the
recapitalization agreement. However, we recommend that you read carefully the
complete agreement for the precise legal terms of the recapitalization agreement
and other information that may be important to you. The recapitalization
agreement is included in this proxy statement/prospectus as Appendix A and is
incorporated in this proxy statement/prospectus by reference.
THE SHARE PURCHASE
The recapitalization agreement provides that on the earliest practicable
date (but no later than the fifth business day) following the satisfaction or
waiver of the conditions to the recapitalization contained in the
recapitalization agreement, Reader's Digest will purchase from the Funds
3,636,363 shares of Class B Voting Common Stock for an aggregate of $99,999,983,
or $27.50 in cash per share.
THE MERGER
The recapitalization agreement provides that immediately after Reader's
Digest purchases the shares of Class B Voting Common Stock from the Funds,
Reader's Digest will file with the Secretary of State of the State of Delaware a
certificate of merger, effecting the recapitalization by causing the merger of
RDA Recap Corp. with and into Reader's Digest with Reader's Digest surviving.
The merger agreement is included in this proxy statement/prospectus as Appendix
B and is incorporated in this proxy statement/prospectus by reference. We
provide a more detailed description of the merger agreement and the merger under
"The Merger Agreement."
THE ALTERNATIVE STRUCTURE
If holders of more than $5 million in the aggregate of stated or
liquidation value of Reader's Digest preferred stock properly seek to exercise
appraisal rights with respect to the merger, Reader's Digest will effect the
recapitalization by amending its certificate of incorporation, rather than
completing the merger. The certificates of amendment are included in this proxy
statement/prospectus as Appendix C and are incorporated in this proxy
statement/prospectus by reference. We provide a more detailed description of the
certificates of amendment under "Alternative Structure -- Effecting the
Recapitalization by Amending Our Certificate of Incorporation."
AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION
Under the terms of the recapitalization agreement, as part of the
recapitalization, Reader's Digest's certificate of incorporation will be amended
- to divide the Reader's Digest board of directors into three classes; and
- to eliminate the ability of stockholders to act by written consent
without a meeting.
For a more detailed description of these amendments, see "The Merger
Agreement -- Amendments to Our Certificate of Incorporation Effected by the
Merger."
REPRESENTATIONS AND WARRANTIES
Reader's Digest and the Funds have each made customary representations and
warranties to one another in the recapitalization agreement.
STOCKHOLDERS' MEETING; PROXY STATEMENT AND REGISTRATION STATEMENT
Reader's Digest has agreed in the recapitalization agreement that it will
call and hold a meeting of its stockholders to consider the recapitalization
proposal as promptly as practicable and will use its reasonable best efforts to
hold the meeting as soon as practicable following the filing of a definitive
proxy statement relating to the meeting. In addition, Reader's Digest has agreed
to prepare and file as soon as practicable a
51
registration statement (including the proxy statement referred to above)
relating to the shares of Common Stock that our stockholders will own following
the recapitalization.
FUNDS' AGREEMENT TO VOTE IN FAVOR OF RECAPITALIZATION PROPOSAL; LIMITATION ON
TRANSFER OF FUNDS' SHARES
The Funds have agreed to vote all shares of Class B Voting Common Stock
owned by them in favor of the recapitalization proposal and have granted to
Reader's Digest an irrevocable proxy with respect to the vote on the
recapitalization proposal. In addition, the Funds have agreed not to:
- cause or encourage any other person to vote against the recapitalization
proposal;
- grant any proxies or enter into any voting trust or other agreement or
arrangement with respect to the voting of any shares of their Class B
Voting Common Stock, without Reader's Digest's prior written consent; or
- acquire, dispose of or encumber any shares of Class B Voting Common Stock
or, other than transactions that comply with Rule 144 of the Securities
Act of 1933, as amended, Class A Nonvoting Common Stock, during the term
of the recapitalization agreement, without Reader's Digest's prior
written consent.
FUNDS' REGISTRATION RIGHTS
Reader's Digest has granted to the Funds registration rights with respect
to the shares of Common Stock that the Funds will own immediately following the
recapitalization. This description of the registration rights is qualified by
the complete terms of the registration rights as set forth in Exhibit B to the
recapitalization agreement, which is included as Appendix A to this proxy
statement/prospectus and is incorporated in this proxy statement/prospectus by
reference.
After September 3, 2002, on two separate occasions, the Funds may require
Reader's Digest to register shares of Common Stock owned by the Funds for sale
in a secondary public offering. The registration rights expire on the earliest
of
- April 12, 2004;
- the time when the Funds own fewer than 2,250,000 shares of Common Stock;
and
- the time when the Funds can sell all of their remaining shares of Common
Stock under Rule 144 under the Securities Act.
The Funds' registration rights are generally subject to postponement by the
company for a reasonable period of time
- to permit Reader's Digest to conduct equity offerings for its own
account; and
- if Reader's Digest determines in good faith that conducting an offering
at the requested time would reasonably be expected to
-- adversely affect a pending or contemplated significant transaction; or
-- require the company to make public disclosure of nonpublic information
that would be adverse to the company in a material respect.
Subject to limitations, Reader's Digest may generally sell securities for
its own account in an offering pursuant to a Funds' demand. Similarly, for so
long as the Funds have registration rights, if Reader's Digest proposes to
register shares of Common Stock for its own account, the Funds may generally
participate in the registration, subject to limitations.
Under the terms of the registration rights, the Funds may generally block
Reader's Digest from conducting a registration of Common Stock between September
3, 2002 and November 1, 2002 if the Funds choose to exercise a demand
registration during this period.
52
In connection with any requested registration, the Funds will pay (on a pro
rata basis, based upon the number of shares of Common Stock being offered by
each Fund compared to the total number of shares being offered) all underwriting
discounts and commissions relating to the shares of the Funds being registered,
filing fees, printing fees, fees and expenses of complying with "blue sky" or
state securities laws and reasonable fees and expenses relating to "road show"
investor presentations. Each party will pay the fees and expenses of its legal
counsel, accountants and other advisors incurred in connection with a
registration statement governed by the Funds' registration rights.
LISTING OF COMMON STOCK
Reader's Digest has agreed to use its reasonable best efforts to cause the
shares of Common Stock that our stockholders will own following the
recapitalization to be listed for trading on the New York Stock Exchange,
subject to official notice of issuance, prior to the completion of the
recapitalization.
FUNDS' DESIGNEE
Effective upon completion of the recapitalization, and until the earlier of
- the company's 2004 annual meeting of stockholders; and
- the time when the Funds jointly own less than 10% of the outstanding
shares of Common Stock,
Reader's Digest has agreed to use its reasonable best efforts to cause one
designee of the Funds to be nominated and elected as a member of the Reader's
Digest board of directors.
CONDITIONS TO COMPLETION OF THE RECAPITALIZATION
Completion of the recapitalization requires:
- approval of the recapitalization proposal by the holders of a majority of
the outstanding shares of our Class B Voting Common Stock;
- the absence of any law or injunction preventing the recapitalization;
- approval of the Common Stock that our stockholders will own following the
recapitalization for listing on the New York Stock Exchange;
- compliance in all material respects by Reader's Digest and the Funds with
their covenants in the recapitalization agreement; and
- that the representations and warranties of Reader's Digest and the Funds
contained in the recapitalization agreement be true and correct in all
material respects.
TERMINATION
The recapitalization agreement may be terminated under the following
circumstances:
- Reader's Digest and the Funds may mutually agree to terminate the
recapitalization agreement at any time.
- Either Reader's Digest or the Funds may terminate the merger agreement if
we do not complete the recapitalization by September 30, 2002.
- Reader's Digest may terminate the recapitalization agreement if the Funds
fail to perform in any material respect any agreement that they are
required to perform before the completion of the recapitalization or if
the Funds' representations and warranties in the recapitalization
agreement are not true in all material respects as of the date of the
closing of the recapitalization agreement.
- The Funds may terminate the recapitalization agreement if Reader's Digest
fails to perform in any material respect any agreement that it is
required to perform before the completion of the recapitaliza-
53
tion or if Reader's Digest's representations and warranties in the
recapitalization agreement are not true in all material respects as of
the date of the closing of the recapitalization.
FEES AND EXPENSES
Except with respect to registration rights, all costs and expenses incurred
in connection with the recapitalization agreement and the transactions
contemplated thereby are the responsibility of and will be paid by the party
incurring the fees or expenses, whether or not the transactions contemplated by
the recapitalization agreement are completed.
AMENDMENT
The recapitalization agreement may not be altered, amended or supplemented
except by an agreement in writing signed by each of the parties thereto and, in
the case of Reader's Digest, approved by the Reader's Digest directors who are
unaffiliated with the Funds.
54
THE MERGER AGREEMENT
We believe this summary describes the material terms of the merger
agreement. However, we recommend that you read carefully the complete agreement
for the precise legal terms of the merger agreement and other information that
may be important to you. The merger agreement is included in this proxy
statement/prospectus as Appendix B and is incorporated in this proxy
statement/prospectus by reference.
GENERAL
Under the terms of the recapitalization agreement, unless holders of more
than $5 million in stated amount of our preferred stock properly seek to
exercise appraisal rights, we will effect the recapitalization through a merger
pursuant to the merger agreement.
THE MERGER
The merger agreement provides that RDA Recap Corp., a wholly-owned
subsidiary of Reader's Digest, will be merged with and into Reader's Digest
immediately following the purchase by Reader's Digest of 3,636,363 shares of
Class B Voting Common Stock owned by the Funds at $27.50 in cash per share for
an aggregate purchase price of $99,999,983. As a result of the merger, the
separate corporate existence of RDA Recap Corp. will cease and Reader's Digest
will continue as the surviving corporation.
The merger agreement provides that:
- the directors and officers of Reader's Digest immediately before the
effective time of the merger will be the directors and officers of
Reader's Digest at the effective time of the merger until their
resignation, removal or succession;
- the certificate of incorporation of Reader's Digest immediately before
the effective time of the merger, amended as contemplated by the merger
agreement, will be the certificate of incorporation of Reader's Digest
from and after the effective time of the merger; and
- the by-laws of Reader's Digest immediately before the effective time of
the merger will be the by-laws of Reader's Digest from and after the
effective time of the merger.
EFFECT OF MERGER ON READER'S DIGEST CAPITAL STOCK
At the effective time of the merger, by virtue of the merger and without
any action on the part of the holder thereof:
- Each share of Class A Nonvoting Common Stock either issued and
outstanding or held by the company as treasury stock immediately prior to
the effective time of the merger will automatically convert into one
fully-paid and nonassessable share of Common Stock.
- Each share of Class B Voting Common Stock either issued and outstanding
or held by the company as treasury stock immediately prior to the
effective time of the merger will automatically convert into 1.24
fully-paid and nonassessable shares of Common Stock, provided that
Reader's Digest will not issue fractional shares of Common Stock to any
holder, and that instead of issuing fractional shares of Common Stock
-- Reader's Digest's transfer agent or other agent will aggregate all
fractional interests;
-- the shares resulting from the aggregation will be sold; and
-- the net proceeds received from the sale will be allocated and
distributed among the holders of the fractional interests in cash.
- Each share of Reader's Digest preferred stock either issued and
outstanding or held by Reader's Digest as treasury stock immediately
prior to the effective time of the merger will remain issued and
55
outstanding or held as treasury stock, as the case may be, and will be
unaffected by the merger (other than shares as to which holders properly
exercise appraisal rights under Delaware law).
AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION EFFECTED BY THE MERGER
As part of the merger, the company's certificate of incorporation will be
amended
- to divide the Reader's Digest board of directors into three classes; and
- to eliminate the ability of stockholders to act by written consent
without a meeting.
Classified Board. The proposed classified board provisions would divide
the Reader's Digest board of directors into three classes of directors and
provide for a minimum of three and a maximum of twelve directors, with the
actual number of directors established by the board of directors in accordance
with our by-laws. Following the recapitalization, the three class of directors,
the members of each class and their respective term expiration dates would be as
follows:
<Table>
<Caption>
CLASS CLASS MEMBERS TERM EXPIRATION DATE
- ----- ------------- --------------------
Class 1.................................. Jonathan B. Bulkeley 2002 Annual Meeting
Herman Cain of Stockholders
C.J. Silas
Ed Zschau
Class 2.................................. James E. Preston 2003 Annual Meeting
Lawrence R. Ricciardi of Stockholders
William J. White
Class 3.................................. Lynne V. Cheney 2004 Annual Meeting
M. Christine DeVita of Stockholders
Thomas O. Ryder
</Table>
At each subsequent annual meeting of stockholders, the successors to the
directors whose terms expire that year will be elected to hold office for a term
of three years, so that the term of office of one class of directors will expire
in each year. Following the recapitalization, with a classified board of
directors, it would generally require a stockholder holding a majority of the
outstanding shares of Common Stock two annual meetings of stockholders, rather
than one, to elect a majority of the Reader's Digest board of directors.
The Reader's Digest board of directors believes that implementing a
classified board is in the best interests of the company and its stockholders
because it should enhance the continuity and stability of the company's board of
directors. At any given time, at least two-thirds of the directors will have one
or more years of experience as directors of the company. New directors would,
therefore, have an opportunity to become familiar with the affairs of the
company and to benefit from the experience of other members of the Reader's
Digest board of directors. Although the Reader's Digest board of directors
believes the company has not experienced problems with continuity and stability
of leadership and policy in the past, it hopes to avoid the potential for these
problems in the future. The continuity and quality of leadership that results
from a classified board of directors should, in the opinion of the Reader's
Digest board of directors, promote the long-term value of the company.
The Reader's Digest board of directors also believes that the classified
board provisions are in the best interests of the company and its stockholders
because they should, if adopted, reduce the possibility that a third party could
effect a sudden or surprise change in control of the Reader's Digest board of
directors. With a classified board, it is more likely that a potential acquirer
will initiate any attempt to acquire control of the company through arm's-length
negotiations with the Reader's Digest board of directors. The classified board
provisions would help to ensure that the Reader's Digest board of directors, if
confronted by a hostile tender offer, proxy contest or other surprise proposal
from a third party, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in a manner that it believes
to be in the best interests of the company and its stockholders.
56
Delaware law provides that, except in the case of a classified board of
directors or where cumulative voting applies, a director, or the entire board of
directors, of a corporation may be removed, with or without cause, by the
affirmative vote of a majority of the shares of the corporation entitled to vote
at an election of directors. Following the recapitalization, as a result of the
classified board, under Delaware law, the directors will be removable only for
cause. Allowing stockholders to remove a director without cause could be used to
subvert the protections afforded by the creation of a classified board of
directors. One method employed by takeover bidders to obtain control of a board
of directors is to seek to acquire a significant percentage of a corporation's
outstanding shares through a tender offer or open market purchases and, at the
same time, to wage a proxy contest seeking to replace the incumbent board with
the hand-picked designees of the bidder who would be more willing to approve the
terms of a merger or other business combination on terms that might be less
favorable to the other stockholders of the corporation than those that would
have been approved by the removed directors. Requiring cause to remove a
director precludes the use of this strategy, thereby encouraging potential
takeover bidders to obtain the cooperation of the existing board of directors
before attempting a takeover. The classified board provisions will not prevent a
negotiated acquisition of Reader's Digest with the cooperation of the Reader's
Digest board of directors.
In connection with the recapitalization, the Reader's Digest board of
directors will amend the Reader's Digest by-laws to require that any vacancies
and newly created directorships will be filled exclusively by the vote of a
majority of the directors then in office, even if not constituting a quorum. Any
director so elected by the board of directors to fill a vacancy would become a
member of the same class as the director he or she succeeds and would hold
office for the remainder of the term of that class and until his or her
successor is duly elected and qualified.
The classified board provisions may make more difficult changes in control
of the Reader's Digest board of directors, even if the holders of a majority of
the Common Stock believe the changes would be in their best interests. For
example, classifying the Reader's Digest board of directors would operate to
increase the time required for someone to obtain control of the company without
the cooperation or approval of the incumbent board of directors, even if that
person holds or acquires a majority of the voting power. Furthermore,
elimination of the right of stockholders to remove directors without cause will
make the removal of any director more difficult, even if a majority of
stockholders believe removal is in their best interests. As a result, there is
an increased likelihood that the classified board provisions could have the
effect of making it easier for directors to remain in office. The classified
board provisions may discourage certain tender offers and other attempts to
change control of the company, even though stockholders might feel those
attempts would be beneficial to them or the company. Because tender offers for
control usually involve a purchase price higher than the prevailing market
price, the classified board provisions may have the effect of preventing or
delaying a bid for the company's shares that could be beneficial to the company
and its stockholders.
At this time, no offer has been made to the company to acquire control of
the company and the board of directors does not know of any effort to remove any
director, either for cause or without cause.
Elimination of Action by Written Consent. Under the Delaware General
Corporation Law, unless otherwise provided in a Delaware corporation's
certificate of incorporation, any action required or permitted to be taken by
stockholders of a corporation may be taken without a meeting and without a
stockholder vote if a written consent setting forth the action to be taken is
signed by the holders of shares of outstanding stock having the requisite number
of votes that would be necessary to authorize the action at a meeting of
stockholders and is delivered in accordance with the procedures set forth under
the Delaware General Corporation Law. The Reader's Digest certificate of
incorporation is currently silent on the matter of stockholder action by written
consent and therefore currently permits action by written consent.
Eliminating action by stockholders by written consent will:
- ensure that all stockholders have advance notice of any proposed major
corporate action by stockholders;
- ensure that all stockholders have an equal opportunity to participate at
the meeting of stockholders where such action is being considered;
57
- enable the company to set a record date for any stockholder voting, which
would reduce the possibility of disputes or confusion regarding the
validity of purported stockholder action; and
- encourage a potential acquirer to negotiate directly with the Reader's
Digest board of directors.
The Reader's Digest board of directors believes that eliminating action by
written consent would give all stockholders the opportunity to have their views
taken into account and thereby prevent a stockholder or group of stockholders
that acquires a majority of voting power from using a written consent to take a
significant corporate action without a meeting of the stockholders. In addition,
the board of directors believes that this proposal is desirable because it
preserves the opportunity for a greater number of stockholders to be heard
before any stockholder action is taken.
The Reader's Digest board of directors also believes that the elimination
of stockholder action by written consent would help to avoid an ill-advised
stockholder action in a context that might not permit the stockholders to have
the full benefit of the knowledge, advice and participation of the company's
management and board of directors. Finally, the Reader's Digest board of
directors believes that the elimination of stockholder action by written consent
would promote negotiations concerning any proposed acquisition of the company.
A provision in the certificate of incorporation that effectively requires a
potential acquirer to negotiate with the company's management and the board
could be characterized as increasing the board of directors' ability to retain
their positions with the company and to resist a transaction that may be
considered advantageous by a majority of the stockholders. For this reason, this
proposal may have the effect of impeding or discouraging efforts by potential
bidders to obtain control of the company.
At this time, no offer to acquire control of the company has been made to
the company and the board of directors of the company does not know of any
effort by any stockholder to take action by written consent.
SHARE CERTIFICATES
Following the effective time of the merger:
- each share certificate representing shares of Class A Nonvoting Common
Stock will represent the same number of shares of Common Stock; and
- each share certificate representing shares of Class B Voting Common Stock
will represent the number of shares of Common Stock obtained by
multiplying the number of shares of Class B Voting Common Stock shown on
the certificate by 1.24, provided that you will receive cash in lieu of
any fractional shares of Common Stock.
TERMINATION
The merger agreement may be terminated prior to the effective time of the
merger at any time after:
- the termination of the recapitalization agreement; or
- the alternative method of effecting the recapitalization becomes
effective.
AMENDMENT
The merger agreement may not be amended except by an agreement in writing
signed by Reader's Digest and RDA Recap Corp. and, in the case of Reader's
Digest, approved by the Reader's Digest directors who are unaffiliated with the
Funds.
58
ALTERNATIVE STRUCTURE -- EFFECTING THE RECAPITALIZATION BY AMENDING OUR
CERTIFICATE OF INCORPORATION
We believe this summary describes the material terms of the amendments to
our certificate of incorporation that would effect the recapitalization if we do
not effect the recapitalization by completing the merger. However, we recommend
that you read carefully the complete text of the certificates of amendment for
the precise legal terms of the certificates of amendment and other information
that may be important to you. The certificates of amendment are included in this
proxy statement/prospectus as Appendix C and are incorporated in this proxy
statement/prospectus by reference.
GENERAL
Under the terms of the recapitalization agreement, if holders of more than
$5 million in stated amount of our preferred stock properly seek to exercise
appraisal rights, we will effect the recapitalization by filing two certificates
of amendment to our certificate of incorporation in the form attached as
Appendix C to this proxy statement/prospectus instead of as a merger.
The results of effecting the recapitalization by filing certificates of
amendment to our certificate of incorporation should be identical in all
material respects to a recapitalization implemented by means of the merger,
provided, however, that if the company effects the recapitalization by filing
certificates of amendment to our certificate of incorporation, holders of
Reader's Digest preferred stock will not be entitled to appraisal rights under
Delaware law.
THE CERTIFICATES OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION
The First Certificate of Amendment. If we effect the recapitalization by
filing certificates of amendment to our certificate of incorporation,
immediately following the purchase of the 3,636,363 shares of Class B Voting
Common Stock from the Funds, we will file a certificate of amendment with the
Secretary of State of the State of Delaware and without any action on the part
of the holder thereof, each share of Class B Voting Common Stock either issued
and outstanding or held by the company as treasury stock immediately prior to
filing the certificate of amendment will automatically be reclassified into 1.24
fully-paid and nonassessable shares of Class A Nonvoting Common Stock, provided
that Reader's Digest will not issue fractional shares of Class A Nonvoting
Common Stock to any holder, and that instead of issuing fractional shares of
Class A Nonvoting Common Stock
- Reader's Digest's transfer agent or other agent will aggregate all
fractional interests;
- the shares resulting from the aggregation will be sold; and
- the net proceeds received from the sale will be allocated and distributed
among the holders of the fractional interests in cash.
The Second Certificate of Amendment. If we effect the recapitalization by
filing certificates of amendment to our certificate of incorporation,
immediately following the filing of the first certificate of amendment with the
Secretary of State of the State of Delaware, we will file a second certificate
of amendment with the Secretary of State of the State of Delaware which will
amend the certificate of incorporation such that:
- Each share of Class A Nonvoting Common Stock will be entitled to cast one
vote per share and the Class A Nonvoting Common Stock will be renamed
"Common Stock."
- Our board of directors will be divided into three classes and the ability
of stockholders to act by written consent without a meeting will be
eliminated. The effect of these provisions is described under "The Merger
Agreement -- Amendments to Our Certificate of Incorporation Effected by
the Merger."
- Each share of Reader's Digest preferred stock either issued and
outstanding or held by Reader's Digest as treasury stock immediately
prior to the filing of the certificate of amendment will remain issued
and
59
outstanding or held as treasury stock, as the case may be, and will be
unaffected by the filing of the certificate of amendment.
SHARE CERTIFICATES
If we effect the recapitalization by filing certificates of amendment to
our certificate of incorporation, following the filing of the certificates of
amendment with the Secretary of State of the State of Delaware:
- each share certificate representing shares of Class A Nonvoting Common
Stock will represent the same number of shares of Common Stock; and
- each share certificate representing shares of Class B Voting Common Stock
will represent the number of shares of Common Stock obtained by
multiplying the number of shares of Class B Voting Common Stock shown on
the certificate by 1.24, provided that we will pay cash in lieu of any
fractional shares of Common Stock.
60
BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
The following table shows, based on information reported to Reader's Digest
by or on behalf of such persons, the ownership, as of May 31, 2002, of Reader's
Digest's voting securities by the only persons known to Reader's Digest to be
the beneficial owners of more than five percent of the Class B Voting Common
Stock, the only class of voting securities of Reader's Digest outstanding:
<Table>
<Caption>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ -------------------- ----------------
DeWitt Wallace-Reader's Digest Fund, Inc. .................. 3,108,041 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
Lila Wallace-Reader's Digest Fund, Inc. .................... 3,108,041 shares 25.00%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
State Street Bank and Trust Company,
as trustee of The Employee Ownership Plan and The
401(k) Partnership of The Reader's Digest
Association, Inc.(2)........................................ 1,584,307 shares
3 Pinehill Drive (shared voting
Quincy, MA 02169 and investment 12.74%
power)
GAMCO Investors, Inc.(3).................................... 1,514,996 shares 12.19%
One Corporate Center (1,382,196 sole
Rye, NY 10580 voting power and
1,514,996 sole
investment power)
Gabelli Funds, LLC(3)....................................... 750,000 shares 6.03%
One Corporate Center (sole voting and
Rye, NY 10580 investment power)
</Table>
- ---------------
(1) As of May 31, 2002, the DeWitt Wallace-Reader's Digest Fund, Inc. also owned
6,693,094 shares of Class A Nonvoting Common Stock, which, together with its
holding of Class B Voting Common Stock, represented 9.83% of the total
Reader's Digest common stock outstanding. The Lila Wallace-Reader's Digest
Fund, Inc. also owned 3,970,969 shares of Class A Nonvoting Common Stock,
which, together with its holding of Class B Voting Common Stock, represented
7.10% of the total Reader's Digest common stock outstanding. Ms. DeVita and
Mr. Silas are members and directors of each of the Funds.
(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 The Reader's
Digest Association, Inc. and State Street, as trustee, relating to the
Reader's Digest Employee Ownership Plan and 401(k) Partnership. According to
the Schedule 13G filed with the Securities and Exchange Commission by State
Street Bank and Trust in such capacity, State Street Bank and Trust may be
deemed to have shared voting and shared dispositive power over the shares
listed, but has disclaimed beneficial ownership of all such shares. The
Trust also owned 148,030 shares of Class A Nonvoting Common Stock, which,
together with its holding of Class B Voting Common Stock, represented 1.74%
of the total Reader's Digest common stock outstanding.
(3) As reported on a Schedule 13D filed with the Securities and Exchange
Commission 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.
61
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as to the directors, the named executive
officers and the directors and executive officers of Reader's Digest as a group,
the equity securities of Reader's Digest that were beneficially owned by them as
of May 31, 2002 (except as otherwise noted below).
<Table>
<Caption>
SHARES OF CLASS A
NONVOTING
NAME OF BENEFICIAL OWNER(1)(2) COMMON STOCK
- ------------------------------ -----------------
Thomas O. Ryder............................................. 1,601,809(3)(4)
Jonathan B. Bulkeley........................................ 3,750
Herman Cain................................................. 3,250
Lynne V. Cheney............................................. 6,780
M. Christine DeVita......................................... 6,600
James E. Preston............................................ 13,600
Lawrence R. Ricciardi....................................... 8,750
C.J. Silas.................................................. 8,600
William J. White............................................ 12,600
Ed Zschau................................................... 7,450
Eric W. Schrier............................................. 60,894(3)
Peter J.C. Davenport........................................ 143,929(3)
All current directors and executive officers as a group (22
persons).................................................. 2,593,264(3)(4)
</Table>
- ---------------
(1) "Beneficial ownership" has been determined in accordance with rule 13d-3
under the Securities Exchange Act of 1934. Each director or officer had sole
voting and investment power over the shares shown, except as noted below.
Mr. Ryder beneficially owned 1.84% of the total outstanding shares of Class
A Nonvoting Common Stock. Each other director or executive officer
beneficially owned less than 1% of the total outstanding shares of Class A
Nonvoting Common Stock. All directors and executive officers as a group
owned 2.97% of the total outstanding shares of Class A Nonvoting Common
Stock.
(2) Other than as indicated in footnote 3 below, no director or executive
officer holds any shares of Class B Voting Common Stock or any shares of
preferred stock of Reader's Digest. Ms. DeVita and Mr. Silas are members and
directors of the Funds, which together beneficially own 12.22% of the Class
A Nonvoting Common Stock and 50.00% of the outstanding Class B Voting Common
Stock. See "-- Principal Stockholders."
(3) Includes shares of Class A Nonvoting Common Stock underlying presently
exercisable stock options as follows: Mr. Ryder, 1,222,500; Mr. Schrier,
40,000; Mr. Davenport, 130,250; and all directors and current executive
officers, 1,956,000. Includes restricted shares of Class A Nonvoting Common
Stock as follows: Mr. Ryder, 89,501; Mr. Schrier, 17,439; and all directors
and current executive officers, 207,642. Does not include 2,607 shares of
Class A Nonvoting Common Stock and 34,620 shares of Class B Voting Common
Stock held in the accounts of members of the group under the Reader's Digest
Employee Ownership Plan and 401(k) Partnership. The members of the group may
direct the voting of the shares of Class B Voting Common Stock held in their
accounts.
(4) Includes 470,000 shares underlying options held by The Thomas O. Ryder 1998
Family Trusts.
62
DESCRIPTION OF COMMON STOCK
The following description of the Common Stock, par value $.01 per share,
that our stockholders will own following the recapitalization is not meant to be
complete and is qualified by reference to the certificate of incorporation of
Reader's Digest, as amended in connection with the recapitalization, the by-laws
of Reader's Digest, as amended in connection with the recapitalization, and the
Delaware General Corporation Law. Copies of the certificate of incorporation and
the by-laws of Reader's Digest are incorporated by reference in this proxy
statement/prospectus and will be forwarded to you upon request. See "Where You
Can Find More Information."
AUTHORIZED CAPITAL STOCK
If the holders of Class B Voting Common Stock approve the recapitalization
proposal, following the recapitalization, we will have one class of common
stock, entitled Common Stock, and the total number of shares of authorized
capital stock will be 225,390,000, comprised as follows:
- 200,000,000 shares of Common Stock, par value $.01 per share;
- 40,000 shares of First Preferred Stock, par value $1.00 per share;
- 120,000 shares of Second Preferred Stock, par value $1.00 per share;
- 230,000 shares of Third Subordinated Preferred Stock, par value $1.00 per
share; and
- 25,000,000 shares of Preference Stock, par value $.01 per share, issuable
in series.
Based on shares of Class A Nonvoting Common Stock and Class B Voting Common
Stock held on May 31, 2002, following the recapitalization, we expect Reader's
Digest to have approximately 98,176,932 shares of Common Stock issued and
outstanding. As of May 31, 2002, Reader's Digest had outstanding and issued the
following amounts of preferred stock and preference stock:
- 29,720 shares of First Preferred Stock ($4.00 per annum dividend; $100.00
per share liquidation preference);
- 103,720 shares of Second Preferred Stock ($4.00 per annum dividend;
$100.00 per share liquidation preference);
- 155,022 shares of Third Preferred Stock ($5.00 per annum dividend;
$100.00 per share liquidation preference); and
- no shares of Preference Stock.
READER'S DIGEST COMMON STOCK
The following is a description of the Common Stock that our stockholders
will own following the recapitalization.
Dividend Rights. Holders of shares of our Common Stock will be entitled to
receive dividends as declared by the Reader's Digest board of directors.
However, no dividend will be declared or paid on the shares of Common Stock
until Reader's Digest has paid (or declared and set aside funds for payment of)
all dividends that have accrued on all classes of Reader's Digest preferred
stock and preference stock.
Voting Rights.
- Each share of our Common Stock will be entitled to one vote per share.
- Holders of shares of our Common Stock will not be permitted to act by
written consent in lieu of a meeting of stockholders.
- In general, approval of matters submitted to a vote, other than the
election of directors, will require the affirmative vote of a majority of
the shares of Common Stock present in person or by proxy.
63
- In general, directors will be elected by a plurality of the shares of
Common Stock present in person or by proxy.
Classified Board. The Reader's Digest board of directors will be divided
into three classes of directors, initially comprised of four, three and three
directors, respectively. Directors will hold office for staggered terms of three
years each, so that the term of one class expires at each annual meeting.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of Reader's Digest, after payments to holders of Reader's Digest
preferred stock and preference stock of preferential amounts plus any accrued
dividends, Reader's Digest's remaining assets will be divided among holders of
shares of our Common Stock.
Preemptive or Other Subscription Rights. Holders of shares of our Common
Stock will not have any preemptive rights to subscribe to any additional issue
or sale of the capital stock of Reader's Digest or to acquire any security
convertible into capital stock of Reader's Digest.
Conversion, Redemption, Sinking Fund and Other Rights. No conversion,
redemption or sinking fund provisions will apply to shares of our Common Stock,
and shares of our Common Stock will not be liable to further call or assessment
by Reader's Digest. All issued and outstanding shares of our Common Stock will
be fully paid and nonassessable.
Restrictions on Alienability. There will be no restrictions on the
alienability of shares of our Common Stock.
ANTI-TAKEOVER CONSIDERATIONS
The Delaware General Corporation Law, the Reader's Digest certificate of
incorporation (as amended in connection with the recapitalization) and the
Reader's Digest by-laws (as amended in connection with the recapitalization)
contain provisions that could serve to discourage or to make more difficult a
change in control of Reader's Digest without the support of the Reader's Digest
board of directors or without meeting various other conditions.
Extraordinary Corporate Transactions. Delaware law provides that the
holders of a majority of the shares entitled to vote must approve any
fundamental corporate transactions such as mergers, sales of all or
substantially all of a corporation's assets and dissolutions.
State Takeover Legislation. Section 203 of the Delaware General
Corporation Law, in general, prohibits a business combination between a
corporation and an interested stockholder within three years of the time the
stockholder became an interested stockholder, unless (a) prior to such time, the
board of directors of the corporation approved either the business combination
or the transaction that resulted in the stockholder becoming an interested
stockholder, (b) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, exclusive of shares owned by directors who are also
officers and by certain employee stock plans or (c) at or subsequent to such
time, the business combination is approved by the board of directors and
authorized by the affirmative vote at a stockholders' meeting of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. The restrictions of Section 203 of the Delaware General Corporation
Law do not apply to corporations that have elected, in the manner provided
therein, not to be subject to Section 203 of the Delaware General Corporation
Law or, with certain exceptions, that do not have a class of voting stock that
is listed on a national securities exchange or authorized for quotation on
Nasdaq or held of record by more than 2,000 stockholders. Reader's Digest has
elected to be governed by Section 203 of the Delaware General Corporation Law.
Rights of Dissenting Stockholders. Delaware law does not afford appraisal
rights in a merger transaction to holders of shares that are either listed on a
national securities exchange, quoted on Nasdaq or held of record by more than
2,000 stockholders, provided that those shares will be converted into stock of
the surviving corporation or stock of another corporation that is listed on a
national securities exchange, quoted on Nasdaq
64
or held of record by more than 2,000 stockholders. In addition, Delaware law
denies appraisal rights to stockholders of the surviving corporation in a merger
if the surviving corporation's stockholders were not required to approve the
merger.
Stockholder Action by Written Consent. Delaware law provides that, unless
otherwise stated in the certificate of incorporation, any action which may be
taken at an annual meeting or special meeting of stockholders may be taken
without a meeting, if a consent in writing is signed by the holders of the
outstanding stock having the minimum number of votes necessary to authorize the
action at a meeting of stockholders. Following the recapitalization, the
Reader's Digest certificate of incorporation will prohibit stockholder action by
written consent.
Special Meetings of Stockholders. Following the recapitalization, the
Reader's Digest by-laws will provide that special meetings of the stockholders
may be called at any time only by the chairman of the board or the board of
directors and that only business described in the company's notice of meeting
may be brought before a special meeting of stockholders.
Cumulative Voting. Delaware law permits stockholders to cumulate their
votes and either cast them for one candidate or distribute them among two or
more candidates in the election of directors only if expressly authorized in a
corporation's charter. The Reader's Digest certificate of incorporation does not
authorize cumulative voting.
Removal of Directors. Delaware law provides that, except in the case of a
classified board of directors or where cumulative voting applies, a director, or
the entire board of directors, of a corporation may be removed, with or without
cause, by the affirmative vote of a majority of the shares of the corporation
entitled to vote at an election of directors. Following the recapitalization,
Reader's Digest will have a classified board. As a result, the directors will be
removable only for cause.
Vacancies. Delaware law provides that vacancies and newly created
directorships resulting from a resignation or any increase in the authorized
number of directors elected by all of the stockholders having the right to vote
as a single class may be filled by a majority of the directors then in office or
by a majority of the stockholders of the corporation entitled to vote, unless
the governing documents of a corporation provide otherwise.
Following the recapitalization, the Reader's Digest by-laws will provide
that any vacancy on the board of directors, whether arising from death,
resignation, removal, disability, an increase in the number of directors or any
other cause, may be filled only by a majority vote of the remaining directors,
though less than a quorum.
65
COMPARISON OF STOCKHOLDER RIGHTS
Following the recapitalization, the rights of each holder of shares of
Common Stock will be identical in all material respects to the rights of each
holder of shares of Class A Nonvoting Common Stock and Class B Voting Common
Stock prior to the recapitalization, except with respect to the matters
specified below:
<Table>
<Caption>
PRE-RECAPITALIZATION POST-RECAPITALIZATION
CLASS A NONVOTING COMMON STOCK
CLASS B VOTING COMMON STOCK COMMON STOCK
------------------------------ ------------------------------
CAPITAL STRUCTURE: Two classes of Common Stock: One class of Common Stock.
Class A Nonvoting Common
Stock and Class B Voting
Common Stock.
VOTING: Shares of Class A Nonvoting Each share of Common Stock
Common Stock generally not entitled to one vote per
entitled to vote. share.
Each share of Class B Voting
Common Stock entitled to one
vote per share.
ACTION BY WRITTEN CONSENT: Permitted. Not permitted.
ORGANIZATION OF Ten member board, with each Ten member board, divided into
BOARD OF DIRECTORS: director elected for a one three classes of four, three
year term. Governing documents and three directors,
permit a minimum of five and a respectively. In general,
maximum of fifteen directors. directors will hold office for
staggered terms of three years
each, so that the term of one
class expires at each annual
meeting. Governing documents
permit a minimum of three and
a maximum of twelve directors.
REMOVAL OF DIRECTORS: Any director or the entire A director or directors may be
board of directors may be removed only for cause.
removed, either with or
without cause, at any time by
the vote of the holders of a
majority of the issued and
outstanding shares of stock
entitled to vote in the
election of directors.
VACANCIES ON THE Any vacancy on the board of Any vacancy on the board of
BOARD OF DIRECTORS: directors may be filled either directors may be filled only
by a majority vote of the by a majority vote of the
remaining directors, though remaining directors, though
less than a quorum, or by the less than a quorum.
vote of the stockholders of
the company entitled to vote
present in person or by proxy.
CHANGING THE SIZE OF The number of directors may be The number of directors may be
THE BOARD OF DIRECTORS: fixed from time to time by the fixed from time to time only
vote of the stockholders by the board of directors.
entitled to vote or by the
board of directors.
</Table>
66
<Table>
<Caption>
PRE-RECAPITALIZATION POST-RECAPITALIZATION
CLASS A NONVOTING COMMON STOCK
CLASS B VOTING COMMON STOCK COMMON STOCK
------------------------------ ------------------------------
CALLING SPECIAL MEETINGS OF A special meeting of the A special meeting of the
STOCKHOLDERS: stockholders for any purpose stockholders for any purpose
or purposes may be called at or purposes may be called at
any time by the chairman, by any time only by the chairman
the board of directors or by or by the board of directors.
stockholders or their proxies
holding of record in the
aggregate at least 40% of the
outstanding shares of the
stock of the company entitled
to vote.
NOTICE OF STOCKHOLDER NOMINATIONS OF To be timely, nominations made To be timely, nominations made
MEMBERS OF THE BOARD OF DIRECTORS: by stockholders must be made by stockholders must be
by notice in writing, received delivered to the secretary of
by the secretary of the the company no later than the
company not less than 14 days close of business on the 60th
nor more than 50 days prior to day prior to the first
any meeting of stockholders anniversary of the preceding
called for the election of year's annual meeting and no
directors; provided, however, earlier than the close of
that if less than 21 days' business on the 90th day prior
notice of the meeting is given to the first anniversary of
to stockholders, the written the preceding year's annual
notice must be delivered or meeting; provided, however,
mailed to the secretary of the that in the event that the
company not later than the date of the annual meeting is
close of business on the fifth more than 30 days before or
business day following the day more than 60 days after the
on which notice of the meeting anniversary date, notice by
called for the election of the stockholder must be
directors was given to delivered no earlier than the
stockholders by the close of business on the 90th
corporation. day prior to the annual
meeting and no later than the
close of business on the later
of the 60th day prior to the
annual meeting or the 10th day
following the day on which
public announcement of the
date of the meeting is first
made by the company.
In the event that the number
of directors is increased and
there is no public
announcement by the company
naming all of the nominees for
director or specifying the
size of the increased board of
directors at least 70 days
prior to the first anniversary
of the preceding year's annual
meeting, a stockholder's
notice will also be considered
timely, but only with respect
to nominees for any new
positions created by the
increase, if the notice is
delivered to the secretary of
the company no later than the
close of business on the 10th
day following the day on
</Table>
67
<Table>
<Caption>
PRE-RECAPITALIZATION POST-RECAPITALIZATION
CLASS A NONVOTING COMMON STOCK
CLASS B VOTING COMMON STOCK COMMON STOCK
------------------------------ ------------------------------
which the public announcement
is first made by the company.
NOTICE OF STOCKHOLDER BUSINESS AT To be timely, a stockholder's To be timely, nominations made
ANNUAL MEETINGS: notice must be received by the by stockholders must be
secretary of the company not delivered to the secretary of
less than 120 days prior to the company no later than the
the first anniversary of the close of business on the 60th
date on which notice of the day prior to the first
previous year's annual meeting anniversary of the preceding
was given to stockholders. year's annual meeting and no
earlier than the close of
business on the 90th day prior
to the first anniversary of
the preceding year's annual
meeting; provided, however,
that in the event that the
date of the annual meeting is
more than 30 days before or
more than 60 days after the
anniversary date, notice by
the stockholder must be
delivered no earlier than the
close of business on the 90th
day prior to the annual
meeting and no later than the
close of business on the later
of the 60th day prior to the
annual meeting or the 10th day
following the day on which
public announcement of the
date of the meeting is first
made by the company.
NOTICE OF STOCKHOLDER BUSINESS AT To be timely, a stockholder's Only business described in the
SPECIAL MEETINGS: notice must be received by the company's notice of meeting
secretary of the company not may be brought before a
later than the close of special meeting of
business on the fifth business stockholders.
day following the day on which
notice of the special meeting
was given to stockholders.
</Table>
68
STOCK EXCHANGE LISTING
It is a condition to the recapitalization that the shares of Common Stock
that our stockholders will own following the recapitalization be approved for
listing on the New York Stock Exchange, subject to official notice of issuance.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of The Reader's Digest Association,
Inc. as of June 30, 2001 and 2000 and for each of the fiscal years in the
three-year period ended June 30, 2001 have been incorporated by reference in
this proxy statement/prospectus in reliance upon the report of KPMG LLP,
independent accountants, incorporated by reference in this proxy
statement/prospectus and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Reiman Holding Company, LLC as of
and for the years ended December 31, 2001 and 2000 incorporated by reference in
this proxy statement/prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report therein incorporated by
reference in this proxy statement/prospectus in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Common Stock that our stockholders will own following
the recapitalization will be passed upon by C.H.R. DuPree, Esq., Vice President,
Corporate Secretary and Associate General Counsel of Reader's Digest. Mr. DuPree
is a participant in Reader's Digest's stock incentive plans and various other
stock benefit plans offered to employees of Reader's Digest.
SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS
Pursuant to Securities and Exchange Commission rules and Reader's Digest's
by-laws, proposals of stockholders intended to be submitted at the 2002 Annual
Meeting of Stockholders must have been received by Reader's Digest at its
principal executive offices on or before May 30, 2002 to be eligible for
inclusion in Reader's Digest's notice of meeting, proxy statement and
accompanying proxy card for that meeting or to be introduced from the floor at
that meeting.
Reader's Digest's by-laws, as currently in effect, also provide that notice
of proposed stockholder nominations for election of directors must be given to
the Corporate Secretary of Reader's Digest not less than 14 nor more than 50
days prior to a meeting called to elect directors. The notice must contain
specified information about each proposed nominee including age, business and
residence addresses, principal employment, number of shares of Class B Voting
Common Stock beneficially owned (with evidence of such ownership) and any other
information as would be required in a proxy statement soliciting proxies for the
election of the proposed nominee, and a signed consent of the nominee to serve
as a director if elected.
69
APPENDIX A
RECAPITALIZATION AGREEMENT
This RECAPITALIZATION AGREEMENT (the "Agreement") is made and entered into
as of this 12th day of April, 2002, by and among the DeWitt Wallace-Reader's
Digest Fund, Inc., a New York not-for-profit corporation (the "DeWitt Wallace
Fund"), the Lila Wallace-Reader's Digest Fund, Inc., a New York not-for-profit
corporation (the "Lila Wallace Fund;" each of the DeWitt Wallace Fund and the
Lila Wallace Fund is hereinafter referred to as a "Fund" and, together are
hereinafter referred to as the "Funds"), and The Reader's Digest Association,
Inc., a Delaware corporation (the "Company").
WHEREAS, the Company and the Funds have agreed to effect a series of
transactions pursuant to which, as provided herein: (1) all shares of voting and
nonvoting common stock of the Company will be recapitalized (the
"Recapitalization") into one class of voting stock by means of a merger of a
wholly-owned subsidiary of the Company into the Company, which merger the Funds
have agreed to support, (2) in consideration for the recapitalization, the
Company has agreed to repurchase certain of the shares of voting stock held by
the Funds for cash, at a premium, (3) all remaining shares of voting stock will
be converted in the merger at the same premium and (4) the Company will grant
registration rights to the Funds.
WHEREAS, as of March 31, 2002, the Company had issued and there were
outstanding: 12,432,164 shares of Class B Voting Common Stock, par value $.0l
per share (the "Class B Stock"), and 87,223,289 shares of Class A Nonvoting
Common Stock, par value $.0l per share (the "Class A Stock").
WHEREAS, the DeWitt Wallace Fund owns 3,108,041 shares of Class B Stock
(constituting approximately 25.0%) of the outstanding Class B Stock; the Lila
Wallace Fund owns 3,108,041 shares of Class B Stock (constituting approximately
25.0%) of the outstanding Class B Stock; the DeWitt Wallace Fund owns 6,693,094
shares of Class A Stock (constituting approximately 7.7%) of the outstanding
Class A Stock and the Lila Wallace Fund owns 3,970,969 shares of Class A Stock
(constituting approximately 4.6%) of the outstanding Class A Stock.
WHEREAS, prior to the mailing of the Proxy Statement (as defined herein),
the Company shall form a wholly-owned subsidiary ("Merger Sub") with which it
shall enter into a merger agreement (the "Merger Agreement") substantially in
the form attached as Exhibit A hereto, pursuant to which, among other things,
Merger Sub shall merge with and into the Company with the Company surviving (the
"Merger").
WHEREAS, immediately prior to the Merger, the Company will purchase and the
DeWitt Wallace Fund will sell to the Company 1,818,182 shares of Class B Stock
(the "DWF Sale Shares") for an aggregate of $50,000,005, and the Company will
purchase and the Lila Wallace Fund will sell to the Company 1,818,181 shares of
Class B Stock (the "LWF Sale Shares," and together with the DWF Sale Shares, the
"Sale Shares") for an aggregate of $49,999,978, in each case on the basis of
$27.50 for each Sale Share, in accordance with the terms of, and subject to the
conditions set forth in, this Agreement (collectively, the "Share Purchase").
WHEREAS, in the Merger each issued and outstanding share of Class B Stock
outstanding immediately prior to the Effective Time will be converted into 1.24
shares of Common Stock of the Company, par value $.01 per share (the "Common
Stock"), with each share of Common Stock being entitled to one vote per share,
and each share of Class A Stock outstanding immediately prior to the Effective
Time will be converted into one share of Common Stock in accordance with the
terms of the Merger Agreement.
WHEREAS, in connection with the Merger, the Company's Restated Certificate
of Incorporation, as amended, will be amended to reflect the reclassification of
Class B Stock and Class A Stock into shares of Common Stock and to provide for
the classification of the Company's Board of Directors into three classes, and
the elimination of action by written consent of the stockholders without a
meeting, as well as certain related matters.
1
APPENDIX A
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth in this
Agreement, the Company and the Funds agree as follows:
ARTICLE I
THE CLOSING
1.1 Closing. Subject to the fulfillment or waiver of the conditions set
forth in Article V, the closing of the Share Purchase and the Recapitalization
(the "Closing") shall take place (a) at the offices of Wachtell, Lipton, Rosen &
Katz, 51 West 52nd Street, New York, New York, commencing at 9:00 a.m. local
time on the earliest practicable date (but no later than the fifth business day)
following satisfaction or waiver of the conditions set forth in Article V or (b)
at such other place and/or time and/or on such other date as the Company and the
Funds may agree. The date on which the Closing occurs shall be the "Closing
Date." The Closing will consist of the following steps:
(a) The Share Purchase. Immediately prior to the filing and
effectiveness of the certificate of merger effecting the Merger (the
"Certificate of Merger") with the Secretary of State of the State of
Delaware, the Company shall purchase for an aggregate cash purchase price
of $99,999,983 (the "Purchase Price") the Sale Shares and the Funds shall
transfer and deliver to the Company, free and clear of all liens, claims,
security interests, pledges, charges and other encumbrances (collectively,
"Encumbrances"), the Sale Shares. The Funds shall deliver to the Company
share certificates representing all of the Sale Shares, fully endorsed or
with appropriate stock powers in form sufficient for transfer of such
shares to the Company, and a true and complete copy of the resolutions duly
and validly adopted by the Board of Directors and the Members of each Fund
authorizing the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. The Company shall pay
to the Funds the Purchase Price by wire transfer of immediately available
funds to an account or accounts designated by the Funds in writing at least
two business days prior to the Closing Date.
(b) The Merger. Immediately following the consummation of the Share
Purchase, the Company shall file the Certificate of Merger with the
Secretary of State of the State of Delaware and the Merger shall become
effective on the date and at the time (the "Effective Time") that the
Certificate of Merger shall have been accepted by the Secretary of State of
the State of Delaware. Upon the Effective Time, each share certificate
representing shares of Class B Stock shall represent such number of shares
of Common Stock obtained by multiplying the number of shares of Class B
Stock theretofore evidenced by such certificate by 1.24, and each share
certificate representing shares of Class A Stock shall represent the same
number of shares of Common Stock. Notwithstanding anything to the contrary
contained herein, no fractional shares of Common Stock shall be issued to
any holder of shares of Class B Stock. Instead of issuing fractional shares
of Common Stock, the Company shall arrange for the disposition of
fractional interests by those entitled thereto by the mechanism of having
(1) the transfer agent or other agent of the Company aggregate such
fractional interests, (2) the shares resulting from the aggregation sold
and (3) the net proceeds received from the sale allocated and distributed
among the holders of the fractional interests as their respective interests
appear.
(c) Alternative Structure. Notwithstanding the foregoing, in the
event that holders of more than $5 million in the aggregate of stated or
liquidation value of the Company's preferred stock shall have properly made
a demand for appraisal rights with respect to the Merger under applicable
law, the Recapitalization shall be effected through a certificate of
amendment (the "Certificate of Amendment") to the Company's Restated
Certificate of Incorporation, as amended (the "Charter Amendment"), rather
than through the Merger and the "Effective Time" shall be the date and time
that the Certificate of Amendment shall have been accepted by the Secretary
of State of the State of Delaware. All references herein to the
"Recapitalization" shall include the Merger and the Charter Amendment, as
applicable.
2
APPENDIX A
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Funds to enter into this Agreement, the Company
hereby represents and warrants to each Fund as follows:
2.1 Corporate Power and Authority. The Company is duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority to enter into and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated by this Agreement. The execution, delivery and
performance of this Agreement by the Company have been duly authorized by all
necessary corporate action on the part of the Company, subject to receipt of the
requisite approval of the Merger Agreement, the Merger and the transactions
contemplated thereby or, alternatively, the Charter Amendment by the holders of
a majority of the outstanding shares of Class B Stock (the "Requisite
Stockholder Approval"). This Agreement has been duly executed and delivered by
the Company and (assuming due authorization, execution and delivery by each
Fund) constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms subject to (a)
applicable bankruptcy, insolvency, fraudulent conveyance and other similar laws
and (b) general principles of equity, including equitable defenses and limits as
to the availability of equitable remedies, whether such principles are
considered in a proceeding at law or in equity.
2.2 Capitalization of the Company. As of the date of this Agreement, the
Company's authorized capital stock consists solely of (a) 200,000,000 shares of
Class A Stock, (b) 25,000,000 shares of Class B Stock, (c) 40,000 shares of
Preferred Stock, par value $1.00 per share (the "First Preferred Stock"), (d)
120,000 shares of Second Preferred Stock, par value $1.00 per share (the "Second
Preferred Stock"), (e) 230,000 shares of Third Subordinated Preferred Stock, par
value $1.00 per share (the "Third Preferred Stock"), and (f) 25,000,000 shares
of Preference Stock, par value $.0l per share (the "Preference Stock"). As of
March 31, 2002, (a) 87,223,289 shares of Class A Stock were issued and
outstanding and 32,205,183 shares of Class A Stock were issued and held in
treasury, and (b) 12,432,164 shares of Class B Stock were issued and outstanding
and 9,283,893 shares of Class B Stock were issued and held in treasury. As of
the date of this Agreement, (a) 29,720 shares of First Preferred Stock are
issued and outstanding, (b) 103,720 shares of Second Preferred Stock are issued
and outstanding, (c) 155,022 shares of Third Preferred Stock are issued and
outstanding and (d) no shares of Preference Stock are issued and outstanding.
Upon consummation of the Recapitalization, each of the shares of Common Stock
issued to the Funds in the Merger or, if applicable, by virtue of the Charter
Amendment will be duly authorized, validly issued and fully paid and
nonassessable and will not have been issued in violation of any preemptive or
similar rights.
2.3 Conflicts; Consents and Approvals. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement do not and will not (a) violate, conflict with, or result in a breach
of any provision of, or constitute a default under, the Company's Restated
Certificate of Incorporation, as amended, or Amended and Restated By-laws; (b)
subject to receipt of the Financing (as defined in Section 2.5) violate, or
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with the giving of notice or lapse of time or both,
would become a default) under, or entitle any party to terminate, accelerate,
modify or call a default under, or result in the creation of any Encumbrance
upon any of the properties or assets of the Company under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, contract, undertaking, agreement, lease or other instrument or
obligation to which the Company is a party; (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company; or
(d) other than the Requisite Stockholder Approval, the filing of the Certificate
of Merger or, if applicable, the Certificate of Amendment with the Secretary of
State of the State of Delaware, required filings with the Securities and
Exchange Commission (the "Commission") or pursuant to state securities or "blue
sky" laws, and the approval by the New York Stock Exchange of the shares of
Common Stock for listing upon notice of issuance, require any action or consent
or approval of, or review by, or registration or material filing by the Company
with, any third
3
APPENDIX A
party or any local, state or federal court, arbitral tribunal, administrative
agency or commission or other governmental or regulatory body, agency,
instrumentality or authority, except, with respect to clauses (b), (c) and (d),
as would not have a material adverse effect on the Company.
2.4 Board Recommendation. In accordance with the applicable provisions of
the Delaware General Corporation Law and the Company's Restated Certificate of
Incorporation, as amended, and Amended and Restated By-laws, the Board of
Directors of the Company, at a meeting duly called and held at which a quorum
was present throughout, upon the recommendation of a special committee of the
Board of Directors, has adopted a resolution proposing and declaring the
advisability of this Agreement and the transactions contemplated hereby,
including the Merger Agreement, the Merger and, in the alternative, the Charter
Amendment.
2.5 Financing. The Company has obtained a written commitment (the
"Commitment Letter") from JPMorgan Chase Bank, J.P. Morgan Securities, Inc. and
Goldman Sachs Credit Partners L.P. to provide the financing necessary for the
completion of the Share Purchase as well as the acquisition of substantially all
of the assets of Reiman Holding Company, LLC ("Reiman") and its subsidiaries
(the "Reiman Acquisition") pursuant to the Asset Purchase Agreement, dated as of
March 21, 2002, by and among Reiman, the Company, and, with respect to Sections
3.2(h), 4.26 and 6.5 and Articles XI (solely to the extent provided therein) and
XIII thereof, the equityholders of Reiman whose names are set forth on the
signature pages thereto (the total amount of such financing being the
"Financing"). The Company has delivered to the Funds a true and correct copy of
the Commitment Letter. The Commitment Letter is in full force and effect.
2.6 Litigation. As of the date immediately preceding the date hereof, to
the Company's knowledge, there are no actions, suits or proceedings pending
against the Company (or any of its properties, rights or franchises), at law or
in equity, or before any federal or state commission, board, bureau, agency,
regulatory or administrative instrumentality or other governmental authority or
any arbitrator or arbitration tribunal, that would reasonably be expected to,
individually or in the aggregate, prevent, materially impair or materially delay
the consummation of the transactions contemplated hereby.
2.7 Registration Statement/Proxy Statement. (a) Each of the registration
statement to be filed with the Commission by the Company, as amended or
supplemented from time to time (as so amended and supplemented, the
"Registration Statement"), which shall include a proxy statement in connection
with the Stockholders' Meeting (as herein defined) (the "Proxy Statement") will
comply as to form, in all material respects, with the requirements of the
Securities Exchange Act of 1934, as amended and the rules and regulations
promulgated thereunder (the "Exchange Act"), and the Securities Act of 1933, as
amended and the rules and regulations promulgated thereunder (the "Securities
Act"), as the case may be, and will not, on the date of its filing or at the
time it becomes effective under the Securities Act or on the date the Proxy
Statement is mailed to stockholders of the Company and at the time of the
Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
(b) Notwithstanding paragraph (a) of this Section 2.7, no representation or
warranty is made by the Company with respect to statements made or incorporated
by reference in the Registration Statement or the Proxy Statement based on
information supplied by the Funds expressly for inclusion or incorporation by
reference therein.
4
APPENDIX A
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE FUNDS
In order to induce the Company to enter into this Agreement, each Fund
represents and warrants to the Company as follows:
3.1 Title to Shares. The DeWitt Wallace Fund owns 6,693,094 shares of
Class A Stock and owns and has the power to vote 3,108,041 shares of Class B
Stock. The Lila Wallace Fund owns 3,970,969 shares of Class A Stock and owns and
has the power to vote 3,108,041 shares of Class B Stock. Each such Fund has good
title, free and clear of all Encumbrances, to all of its shares of Class A Stock
and Class B Stock.
3.2 Corporate Power and Authority. Such Fund is duly organized and validly
existing under the laws of the State of New York. It has all requisite corporate
power and authority to enter into and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated by this
Agreement. The execution, delivery and performance of this Agreement by it has
been duly authorized by all necessary corporate action on its part. This
Agreement has been duly executed and delivered by such Fund and (assuming due
authorization, execution and delivery by the Company) constitutes the legal,
valid and binding obligation of such Fund, enforceable against it in accordance
with its terms subject to (a) applicable bankruptcy, insolvency, fraudulent
conveyance and other similar laws and (b) general principles of equity,
including equitable defenses and limits as to the availability of equitable
remedies, whether such principles are considered in a proceeding at law or in
equity.
3.3 Conflicts; Consents and Approvals. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement do not and will not (a) violate, conflict with, or result in a breach
of any provision of or, constitute a default under, its Certificate of
Incorporation or Amended and Restated By-laws or other governing or
organizational documents; (b) violate, or conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with the giving
of notice or lapse of time or both, would become a default) under, or entitle
any party to terminate, accelerate, modify or call a default under, or result in
the creation of any Encumbrance upon any of its properties or assets under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, contract, undertaking, agreement, lease or other
instrument or obligation to which it is a party; (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to it; or (d) require
any action or consent or approval of, or review by, or registration or material
filing by it with, any third party or any local, state or federal court,
arbitral tribunal, administrative agency or commission or other governmental or
regulatory body, agency, instrumentality or authority except, with respect to
clauses (b), (c) and (d), as would not have a material adverse effect on such
Fund.
3.4 Litigation. As of the date immediately preceding the date hereof, to
the knowledge of the Funds, there are no actions, suits or proceedings pending
against either of the Funds (or any of such Fund's properties, rights or
franchises), at law or in equity, or before any federal or state commission,
board, bureau, agency, regulatory or administrative instrumentality or other
governmental authority or any arbitrator or arbitration tribunal, that would
reasonably be expected to, individually or in the aggregate, prevent, materially
impair or materially delay the consummation of the transactions contemplated
hereby.
ARTICLE IV
ADDITIONAL COVENANTS
4.1 Stockholders' Meeting. The Company shall call and hold a meeting of
stockholders (the "Stockholders' Meeting") as promptly as practicable for the
purpose of seeking the Requisite Stockholder Approval, and the Company shall use
its reasonable best efforts to hold the Stockholders' Meeting as soon as
practicable following the filing of a definitive proxy statement relating to
such meeting. The Board of Directors of the
5
APPENDIX A
Company shall recommend approval of the Merger Agreement, the Merger and the
other transactions contemplated thereby and, in the alternative, the Charter
Amendment to the holders of Class B Stock.
4.2 Registration Statement; Proxy Materials. The Company shall prepare and
file as soon as practicable a Registration Statement which shall include the
Proxy Statement. The Proxy Statement shall include the recommendation of the
Board of Directors of the Company to the holders of Class B Stock that they vote
in favor of the Merger Agreement, the Merger and the other transactions
contemplated thereby and, in the alternative, the Charter Amendment. The Company
agrees that it shall give the Funds and their counsel a reasonable opportunity
to review and provide comments on any description of or reference to the Funds,
or any description of the reasons for and consequences of the transactions
contemplated by this Agreement (including, without limitation, the Merger and,
in the alternative, the Charter Amendment), set forth in any notice, consent
solicitation or proxy statement distributed to the stockholders in connection
with the Stockholders' Meeting, prior to any such distribution.
4.3 Voting; Transfer; Irrevocable Proxy. Each Fund agrees to vote all
shares of Class B Stock owned by it in favor of the Merger Agreement, the Merger
and the other transactions contemplated thereby and, in the alternative, the
Charter Amendment at the Stockholders' Meeting and not to, directly or
indirectly, cause or encourage any other person or entity to vote against the
Merger Agreement, the Merger and the other transactions contemplated thereby or,
if applicable, the Charter Amendment. Without the prior written consent of the
Company, the Funds shall not, directly or indirectly (a) grant any proxies or
enter into any voting trust or other agreement or arrangement with respect to
the voting of any shares of Class B Stock or (b) acquire, sell, assign,
transfer, encumber or otherwise dispose of, or enter into any contract, option
or other arrangement or understanding with respect to the direct or indirect
acquisition or sale, assignment, transfer, Encumbrance or other disposition of,
any shares of Class B Stock or, other than transactions which comply with Rule
144 of the Securities Act, Class A Stock, during the term of this Agreement or
solicit or encourage any such transaction or a proposal or offer for any such
transaction. Each of the Funds hereby grants to the Company an irrevocable
proxy, coupled with an interest, with respect to the matters subject to the
Requisite Stockholder Approval and hereby appoints and constitutes the Company
its true and lawful attorney-in-fact and agent, with respect to such matters,
with full power of substitution and resubstitution.
4.4 Registration Rights. Effective as of the Closing, the Company and each
Fund shall each have the rights and obligations set forth in Exhibit B.
4.5 Transfer Taxes. The Funds shall be responsible for the payment of any
stock transfer taxes in connection with the Share Purchase and the conversion of
any shares of Class B Stock or Class A Stock owned by the Funds into shares of
Common Stock.
4.6 Listing of Shares of Common Stock. The Company will use its reasonable
best efforts to cause the shares of Common Stock issued in the Recapitalization
to be listed for trading on the New York Stock Exchange, subject to official
notice of issuance, prior to the Closing.
4.7 Financing. The Company will use its reasonable best efforts to secure
the Financing. In the event that any portion of the Financing necessary to
consummate the Share Purchase becomes unavailable, regardless of the reason
therefor, the Company will use its reasonable best efforts to obtain alternative
financing from other sources on and subject to substantially the same terms and
conditions as the portion of such Financing that has become unavailable. The
Company shall use its reasonable best efforts to satisfy on or before the
Closing all requirements of the definitive agreements pursuant to which the
Financing will be obtained (the "Financing Agreements"), which are conditions to
closing the portion of the Financing necessary to consummate the Share Purchase
and to drawing down the cash proceeds thereunder necessary to consummate the
Share Purchase and the conditions to the Closing of the Share Purchase and the
other transactions contemplated by this Agreement. Notwithstanding the
foregoing, the Company shall not be required to pay costs and expenses in
connection with arranging the Financing (or any alternative financing)
materially in excess of the costs and expenses contemplated by the Commitment
Letter or agree to financing
6
APPENDIX A
terms that differ in a manner materially adverse to the Company from those
contemplated by the Commitment Letter.
4.8 Funds Designee. Effective as of the Closing, and until the earlier of
(a) the Company's 2004 annual meeting of stockholders and (b) such time as the
Funds jointly own less than 10% of the issued and outstanding shares of Common
Stock, the Company will use its reasonable best efforts to cause one designee of
the Funds to be nominated and elected as a member of the Company's Board of
Directors.
4.9 Section 16 Matters. Prior to the Closing, the Company shall take all
such steps as may be required to cause the transactions contemplated by this
Agreement, including any dispositions of the shares of Class A Stock and Class B
Stock and acquisitions of Common Stock by each individual that is or will be
subject to the reporting requirements of Section 16(a) of the Exchange Act with
respect to the Company to be exempt under Rule 16b-3 promulgated under the
Exchange Act.
4.10 The Merger Agreement. Subject to Section 1.1(c), the Company shall,
prior to the mailing of the Proxy Statement, form Merger Sub and enter into, and
cause Merger Sub to enter into, the Merger Agreement.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions to Each Party's Obligation. The respective obligation of
each party to effect the Share Purchase and the Recapitalization shall be
subject to the satisfaction prior to the Closing of the following conditions:
(a) Requisite Stockholder Approval. The Requisite Stockholder
Approval shall have been obtained.
(b) Registration Statement. The Registration Statement shall have
been declared effective and shall be effective at the Effective Time, and
no stop order suspending effectiveness shall have been issued, no action,
suit, proceeding or investigation by the Commission to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws or the Securities Act or
the Exchange Act related to the issuance or trading of the Common Stock
shall have been received.
(c) No Injunctions or Restraints. No statute, rule, regulation,
executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other governmental entity or other legal restraint or
prohibition preventing the consummation of the Share Purchase, the filing
of the Certificate of Merger or, if applicable, the Certificate of
Amendment with the Secretary of State of the State of Delaware or the
Merger or, if applicable, the Charter Amendment shall be in effect;
provided, however, that each of the parties shall have used reasonable
efforts to prevent the entry of any such injunction or other order and to
appeal as promptly as possible any injunction or other order that may be
entered.
(d) Listing of Shares of Common Stock. The shares of Common Stock to
be issued in the Recapitalization shall have been approved for listing on
the New York Stock Exchange, subject only to official notice of issuance.
5.2 Conditions to the Company's Obligation. The obligation of the Company
to effect the Share Purchase and the Recapitalization shall be subject to the
satisfaction at or prior to the Closing Date of the following additional
conditions:
(a) Performance of Obligations; Representations and Warranties. (1)
Each of the Funds shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed at or prior
to the Closing Date and (2) each of the representations and warranties of
each of
7
APPENDIX A
the Funds contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as if made on and as of
such date (other than to the extent that any such representation and
warranty, by its terms, is expressly limited to a specific date, in which
case such representation and warranty shall be true and correct in all
material respects as of such date).
(b) Financing. The Company shall have obtained the Financing on terms
consistent with the terms contemplated by the Commitment Letter or
otherwise reasonably acceptable to the Company.
5.3 Conditions to the Funds' Obligation. The obligation of the Funds to
effect the Share Purchase and the Recapitalization shall be subject to the
satisfaction at or prior to the Closing Date of the following additional
conditions: (a) The Company shall have performed in all material respects each
of its agreements contained in this Agreement required to be performed at or
prior to the Closing Date and (b) each of the representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as if made on and as of such
date (other than to the extent that any such representation and warranty, by its
terms, is expressly limited to a specific date, in which case such
representation and warranty shall be true and correct in all material respects
as of such date).
ARTICLE VI
TERMINATION
6.1 Bases for Termination. Anything contained herein to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing:
(a) by mutual written consent of the Company (which consent shall have
been given by the directors of the Company who are unaffiliated with the
Funds) and each of the Funds;
(b) by the Company if any of the conditions set forth in Section 5.2
shall have become incapable of fulfillment, and shall not have been waived
by the Company;
(c) by the Funds if any of the conditions set forth in Section 5.3
shall have become incapable of fulfillment, and shall not have been waived
by the Funds; and
(d) by the Company or the Funds if the Closing does not occur on or
prior to September 30, 2002;
provided, however, that the party seeking termination pursuant to clause (b),
(c), or (d) is not in breach of any of its representations, warranties,
covenants or agreements contained in this Agreement.
6.2 Notice of Termination. In the event of termination by the Company or
the Funds pursuant to this Article VI, written notice thereof shall forthwith be
given to the other party or parties and the transactions contemplated by this
Agreement shall be terminated, without further action by any party.
6.3 Effect of Termination. If this Agreement is terminated and the
transactions contemplated hereby are abandoned as described in this Article VI,
this Agreement shall become void and of no further force and effect. Nothing in
this Article VI shall be deemed to release any party from any liability for any
breach by such party of the terms and provisions of this Agreement or to impair
the right of any party to compel specific performance by another party of its
obligations under this Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 Counterparts. This Agreement may be executed in any number of
counterparts, which together shall constitute one and the same Agreement. The
parties may execute more than one copy of the Agreement, each of which shall
constitute an original.
8
APPENDIX A
7.2 Entire Agreement. This Agreement (including the exhibits attached
hereto) constitutes the entire agreement among the parties and supersedes all
prior agreements, understandings, arrangements or representations by or among
the parties, written and oral, with respect to the subject matter hereof.
7.3 Third Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended or shall be construed to create any third party
beneficiaries.
7.4 Governing Law; Jurisdiction. This Agreement shall be governed by the
laws of the State of Delaware, without giving effect to the conflict of laws
principles thereof. Each party irrevocably and unconditionally consents to
submit to the exclusive jurisdiction of the courts of the State of Delaware and
of the United States of America, in each case located in the State of Delaware,
for any action or proceeding arising out of or relating to this Agreement and
the transactions contemplated by this Agreement (and agrees not to commence any
action except in any such court). Each party irrevocably and unconditionally
waives any objection to the laying of venue of any action or proceeding in the
courts of the State of Delaware or of the United States of America, in each case
located in the State of Delaware, and further irrevocably and unconditionally
waives and agrees not to plead or claim in any such court that any action or
proceeding brought in any such court has been brought in an inconvenient forum.
Each party irrevocably and unconditionally waives any right it may have to a
trial by jury in connection with any action or proceeding arising out of or
relating to this Agreement and the transactions contemplated by this Agreement.
7.5 Specific Performance. The transactions contemplated by this Agreement
are unique. Accordingly, each of the parties acknowledges and agrees that, in
addition to all other remedies to which it may be entitled, each of the parties
hereto is entitled to a decree of specific performance and injunctive and other
equitable relief.
7.6 Amendment. This Agreement may not be altered, amended or supplemented
except by an agreement in writing signed by each of the parties hereto and, in
the case of the Company, approved by the directors of the Company who are
unaffiliated with the Funds.
7.7 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by facsimile, by courier service or by registered or certified mail
(postage prepaid, return receipt, requested) to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 7.7):
If to the Funds, to:
Lila Wallace-Reader's Digest Fund, Inc.
DeWitt Wallace-Reader's Digest Fund, Inc.
Two Park Avenue, 23rd Floor
New York, New York 10016
Attention: M. Christine DeVita
Facsimile No.: (212) 679-6998
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Peter J. Rooney, Esq.
Facsimile No.: (646) 848-7179
if to the Company, to:
The Reader's Digest Association, Inc.
Reader's Digest Road
9
APPENDIX A
Pleasantville, New York 10570
Attention: General Counsel
Facsimile No.: (914) 244-5644
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Patricia Vlahakis, Esq.
Facsimile No.: (212) 403-2000
7.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
7.9 Fees and Expenses. Except as otherwise provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be the responsibility of and
shall be paid by the party incurring such fees or expenses, whether or not the
transactions contemplated by this Agreement are consummated.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
10
APPENDIX A
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
executed by its officer thereunto duly authorized as of the date first written
above.
DEWITT WALLACE-READER'S DIGEST FUND,
INC.
By: /s/ M. CHRISTINE DEVITA
------------------------------------
Name: M. Christine DeVita
Title: President
LILA WALLACE-READER'S DIGEST FUND,
INC.
By: /s/ M. CHRISTINE DEVITA
------------------------------------
Name: M. Christine DeVita
Title: President
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ MICHAEL BRIZEL
------------------------------------
Name: Michael Brizel
Title: Vice President and
General Counsel
[SIGNATURE PAGE TO RECAPITALIZATION AGREEMENT]
11
APPENDIX A
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
[SEE APPENDIX B]
12
APPENDIX A
EXHIBIT B
REGISTRATION RIGHTS
(a) From and after the Closing, and following September 3, 2002, and until
the earliest of (1) the second anniversary of the date of the Agreement, (2)
such time as the Funds do not own collectively more than 2,250,000 shares of
Common Stock and (3) such time as the Funds are able to sell all of their
remaining shares of Common Stock under Rule 144 promulgated under the Securities
Act within a three month period (the earliest of such dates, the "Termination
Date"), the Funds shall have the right to make two requests (the "Requests") of
the Company in writing for registration under the Securities Act of shares of
Common Stock owned by the Funds (it being understood that a request hereunder by
either one or both of the Funds shall count as a Request); provided that the
Funds shall not have the right to exercise their second Request prior to 180
days following completion of an offering pursuant to the first Request. In order
to best facilitate an orderly process, each of the Funds will use its reasonable
best efforts to informally advise the Company as promptly as possible in advance
of submitting a Request that it is contemplating submitting a Request. In the
event the Company determines that it desires to conduct an underwritten public
offering for the account of the Company of Common Stock (other than a
registration relating to the sale of securities to participants in a dividend
reinvestment plan, a registration on Form S-4 relating to a business combination
or similar transaction, a registration on Form S-8 or a registration permitted
under Rule 462 of the Securities Act) after September 3, 2002 and prior to
October 31, 2002, the Company will notify the Funds in writing and if within 5
business days of receipt of such notice the Funds submit a Request to the
Company, the Company shall refrain from conducting any public offering of Common
Stock prior to November 1, 2002.
(1) The Company shall use its reasonable best efforts to cause the
shares of Common Stock to be registered under the Securities Act as soon as
reasonably practicable after receipt of such Requests so as to permit
promptly the sale thereof in accordance with paragraph (b) hereof.
(2) Each Fund hereby undertakes to provide all such information and
materials and take all such action as may be required in order to permit
the Company to comply with all applicable requirements of the Commission
and to obtain any desired acceleration of the effective date of such
registration statement.
(3) Any registration statement filed at the Funds' request hereunder
will not count as a Request unless effectiveness is maintained until the
earlier of the completion of the offering and the date that is three months
following the effective date of such registration statement.
(4) Notwithstanding the foregoing, the Company shall be entitled to
postpone for a reasonable period of time (not to exceed 60 days in the case
of any given postponement, and not to exceed 120 days in any twelve month
period in the case of more than one postponement) the filing of any
registration statement otherwise required to be prepared and filed by the
Company if (A) the Company is, at such time, conducting, or proposing to
file with the Commission within 30 days a registration statement with
respect to an underwritten public offering for the account of the Company
of equity securities (or securities convertible into equity securities) and
is advised in writing by its managing underwriter or underwriters (with a
copy to the Funds) that such offering would, in its or their opinion, be
materially and adversely affected by the registration so requested
(provided that the Company may not exercise its right to so postpone
pursuant to this clause (A) in September or October 2002), or (B) the
Company determines, in good faith, that effecting the registration at such
time would reasonably be expected to (i) adversely affect a pending or
contemplated acquisition, disposition of assets or stock, merger or other
significant transaction or (ii) require the Company to make public
disclosure of information the public disclosure of which, at such time, is
not then otherwise required by law and which at such time the Company in
good faith believes would be adverse in a material respect to the Company's
interest to disclose.
B-1
APPENDIX A
(5) No securities may be registered on a registration statement
requested by the Funds pursuant to this paragraph (a) without the Funds'
express written consent, unless the amount of such securities is subject to
reduction prior to any reduction in the number of shares of Common Stock
originally requested by the Funds to be registered in the event that the
managing underwriters of the related offering advise the Funds in writing
(with a copy to the Company) that they believe that the success of such
offering would be materially and adversely affected by inclusion of all of
the securities requested to be included therein. If the managing
underwriters so advise that they believe that the success of such offering
would be materially and adversely affected by inclusion of all the shares
of Common Stock requested to be registered by the Funds, then the number of
shares of Common Stock to be included in such registration by each Fund
shall be reduced pro rata, on the basis of the number of shares of Common
Stock each Fund requested to be included in such registration.
(b) If the Company is required by the provisions of paragraph (a) to use
its reasonable best efforts to effect the registration of shares of Common Stock
under the Securities Act, the Company will:
(1) as expeditiously as possible, but in any event not later than 30
days after receipt of a Request, prepare and file with the Commission a
registration statement, on such form as the Company in its reasonable
discretion shall determine, with respect to such shares of Common Stock and
use its reasonable best efforts to cause such registration statement
promptly to become and remain effective for a period of time required for
the disposition of such shares of Common Stock by the Fund or Funds
registering shares (the "Selling Stockholders") but not to exceed 90 days,
provided, however, that before filing such registration statement or any
amendments thereto, the Company shall furnish to the representatives of the
Selling Stockholders copies of all documents proposed to be filed and
counsel to the Selling Stockholders shall have a reasonable opportunity to
comment thereon;
(2) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of the shares of Common Stock
covered by such registration statement until the earlier of such time as
all of such shares have been disposed of in a public offering or the
expiration of 90 days from the date of initial effectiveness;
(3) furnish to such Selling Stockholders such number of conformed
copies of the applicable registration statement and each such amendment and
supplement thereto (including in each case all exhibits), and of a summary
prospectus or other prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents, as such Selling Stockholders may reasonably request;
(4) use its reasonable best efforts to register or qualify the shares
of Common Stock covered by such registration statement under such other
securities or blue sky laws of such jurisdictions within the United States
and Puerto Rico as each Selling Stockholder shall reasonably request, to
keep such registration or qualification in effect for so long as such
registration statement remains in effect, and to take any other action
which may be reasonably necessary to enable such Selling Stockholder to
consummate the disposition in such jurisdictions of the shares of Common
Stock owned by such Selling Stockholder (provided, however, that the
Company shall not be required in connection therewith or as a condition
thereto to qualify to do business, subject itself to taxation in or to file
a general consent to service of process in any jurisdiction wherein it
would not but for the requirements of this paragraph (4) be obligated to do
so), and do such other reasonable acts and things as may be required of it
to enable such Selling Stockholder to consummate the disposition in such
jurisdiction of the shares of Common Stock covered by such registration
statement;
(5) use its reasonable best efforts to furnish, at the request of any
Selling Stockholder requesting registration of shares of Common Stock
pursuant to paragraph (a) if the method of distribution is by means of an
underwriting, on the date that the shares of Common Stock are delivered to
the underwriters
B-2
APPENDIX A
for sale pursuant to such registration, or if such shares of Common Stock
are not being sold through underwriters, on the date that the registration
statement with respect to such shares of Common Stock becomes effective,
(A) a signed opinion, dated such date, of the legal counsel representing
the Company for the purpose of such registration (who may be inside
counsel), addressed to the underwriters, if any, and to the Selling
Stockholders making such request, as to such matters as such underwriters
or the Selling Stockholders holding a majority of the shares of Common
Stock included in such registration, as the case may be, may reasonably
request and as would be customary in an underwritten public offering, (B)
letters dated such date and the date the offering is priced from the
independent certified public accountants of the Company, addressed to the
underwriters, if any, and (if permissible under the policies of such
independent certified public accountants) to the Selling Stockholders
making such request (i) stating that they are independent certified public
accountants within the meaning of the Securities Act and that, in the
opinion of such accountants, the financial statements and other financial
data of the Company included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act, and (ii) covering such other financial matters (including
information as to the period ending not more than five (5) business days
prior to the date of such letters) with respect to the registration in
respect of which such letter is being given as such underwriters or the
Selling Stockholders holding a majority of the shares of Common Stock
included in such registration, as the case may be, may reasonably request
and as would be customary in an underwritten public offering (it being
understood that the language and content of the accountants' letters with
respect to clauses (i) and (ii) of this paragraph shall be subject to the
policies applicable to "comfort letters" of such accountants) and (C) a
certificate of an officer of the Company certifying that the
representations and warranties contained in the underwriting agreement are
true and correct in all material respects;
(6) if the method of distribution is by means of an underwriting,
enter into customary agreements (including an underwriting agreement in
customary form) with two underwriters, one selected by the Selling
Stockholders and one selected by the Company, which underwriters shall be
co-book running managers, and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such shares
of Common Stock;
(7) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make earnings
statements satisfying the provisions of Section 11(a) of the Securities Act
generally available to the Selling Stockholders no later than 45 days after
the end of any twelve-month period (or 90 days, if such period is a fiscal
year) (A) commencing at the end of any fiscal quarter in which shares of
Common Stock are sold to underwriters in an underwritten public offering,
or (B) if not sold to underwriters in such an offering, beginning with the
first month of the Company's first fiscal quarter commencing after the
effective date of the registration statement, which statements shall cover
said twelve-month period;
(8) use its reasonable best efforts to cause all such shares of Common
Stock to be listed on each securities exchange or quotation system on which
similar securities issued by the Company are listed or traded;
(9) give written notice to the Selling Stockholders;
(A) when such registration statement or any amendment thereto has
been filed with the Commission and when such registration statement or
any post-effective amendment thereto has become effective;
(B) of any request by the Commission for amendments or supplements
to such registration statement or the prospectus included therein or for
additional information;
(C) of the issuance by the Commission of any stop order suspending
the effectiveness of such registration statement or the initiation of
any proceeding for that purpose;
B-3
APPENDIX A
(D) of the receipt by the Company or its legal counsel of any
notification with respect to the suspension of the qualification of the
Common Stock for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(E) of the happening of any event that requires the Company to make
changes in such registration statement or the prospectus in order to
make the statements therein not misleading (which notice shall be
accompanied by an instruction to suspend the use of the prospectus until
the requisite changes have been made);
(10) use its reasonable best efforts to prevent the issuance or obtain
the withdrawal of any order suspending the effectiveness of such
registration statement at the earliest possible time;
(11) make reasonably available for inspection by the representatives
of the underwriters participating in any disposition pursuant to such
registration statement relevant financial and other records, pertinent
corporate documents and properties of the Company in connection with
customary due diligence relating to such registration;
(12) in connection with any underwritten offering, to the extent
reasonably required and at such times as are not inconsistent with the
other obligations of senior executives of the Company, make such senior
executives available to the Selling Stockholders for meetings with
prospective purchasers of the shares of Common Stock and prepare and
present to potential investors customary "road show" material, in each case
in accordance with the reasonable recommendations of the underwriters and
in all respects in a manner consistent with other new issuances of
securities in an offering of a similar size to such offering of the shares
of Common Stock, in connection with any proposed sale of the shares of
Common Stock in an aggregate offering of at least $50 million; and
(13) use reasonable best efforts to procure the cooperation of the
Company's transfer agent in settling any offering or sale of Common Stock,
including with respect to the transfer of physical stock certificates into
book-entry form in accordance with any procedures reasonably requested by
the Selling Stockholders or the underwriters.
(c) From and after the date of this Agreement and until the Termination
Date, if the Company proposes to register for its own account any shares of
Common Stock or securities convertible into Common Stock under the Securities
Act (other than a registration relating to the sale of securities to
participants in a dividend reinvestment plan, a registration on Form S-4
relating to a business combination or similar transaction, a registration on
Form S-8 or a registration permitted under Rule 462 of the Securities Act), the
Company shall give each Fund written notice of such proposed registration. Upon
the written request of a Fund given within 10 days of receipt of such notice by
such Fund, the Company shall seek to include in such proposed registration such
shares of Common Stock owned by such Fund as such Fund shall request. The
Company shall be under no obligation to complete an offering of securities it
proposes to make under this paragraph and shall incur no liability to the Funds
for its failure to do so. If, at any time after giving notice of its intention
to register securities and prior to the effective date of the applicable
registration statement, the Company shall determine for any reason not to
register or to delay registration of such securities, the Company shall give
notice to the Funds thereof and the Company shall be under no obligation to
register any shares of the Funds in connection with such registration. If a
registration pursuant to this paragraph involves an underwritten offering and
the managing underwriters of such offering believe that the success of the
offering would be materially and adversely affected by inclusion of all or part
of the shares of Common Stock which the Funds have requested to be included,
then the shares requested by the Funds for inclusion shall be subject to
reduction prior to any reduction in the securities to be registered by the
Company. If a public offering in which the Funds are offering shares of Common
Stock pursuant to this paragraph (c) includes more than $50 million of shares of
Common Stock of the Funds (after giving effect to any reduction pursuant to the
immediately preceding sentence), then the Funds shall have the right to appoint
a co-book running manager in connection with such offering.
B-4
APPENDIX A
(d) In connection with a requested registration pursuant to paragraph (a)
or paragraph (c) of this Exhibit B, the Selling Stockholders shall pay (on a pro
rata basis, based upon the number of shares of Common Stock being offered by
each Selling Stockholder compared to the total number of shares being offered)
all underwriting discounts and commissions relating to the shares of the Funds
being so registered, filing fees, printing fees, fees and expenses of complying
with "blue sky" or state securities laws and reasonable fees and expenses
relating to "road show" investor presentations (including the costs of any
aircraft chartered in connection therewith). All fees and expenses of legal
counsel, accountants and other advisors incurred in connection with such a
registration statement shall be borne by the party incurring such fees and
expenses.
(e) In the case of each offering registered pursuant to this Exhibit B, the
Company agrees to indemnify and hold each Selling Stockholder, each underwriter
of Common Stock under such registration and each person who controls any of the
foregoing within the meaning of Section 15 of the Securities Act, and the
directors, officers and members of the Selling Stockholders, harmless against
any and all losses, claims, damages, liabilities or actions, joint or several,
to which they or any of them may become subject under the Securities Act or any
other statute or common law or otherwise, and to reimburse them for any legal or
other expenses reasonably incurred by them in connection with investigating any
claims and defending any actions, insofar as any such losses, claims, damages,
liabilities or actions shall arise out of or shall be based upon (1) any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement relating to the sale of such Common Stock, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or (2) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus (as amended or supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto), if used
prior to the effective date of such registration statement, or contained in the
prospectus (as amended or supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto), or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the indemnification agreement contained
in this paragraph (e) shall not apply to such losses, claims, damages,
liabilities or actions which shall arise from the sale of shares of Common Stock
by the Selling Stockholders if such losses, claims, damages, liabilities or
actions shall arise out of or shall be based upon any such untrue statement or
alleged untrue statement, or any such omission or alleged omission, (i) made in
reliance upon and in conformity with information furnished in writing to the
Company by the Selling Stockholders or any such underwriter expressly for use in
connection with the preparation of the registration statement or any preliminary
prospectus or prospectus contained in the registration statement or any such
amendment thereof or supplement thereto or (ii) in the case of any underwriters
(and each person who controls any underwriters within the meaning of Section 15
of the Securities Act) and in the case of the Selling Stockholders in offerings
in which the Company has not appointed a co-managing book runner, made in any
preliminary prospectus, and the prospectus contained in the registration
statement in the form filed by the Company with the Commission pursuant to Rule
424(b) under the Securities Act shall have corrected such statement or omission
and a copy of such prospectus shall not have been sent or given to such person
at or prior to the confirmation of such sale to him.
(f) In the case of each offering registered pursuant to this Exhibit B, the
Selling Stockholders and each underwriter participating therein agrees, in the
same manner and to the same extent as set forth in paragraph (e) of this Exhibit
B, severally to indemnify and hold harmless (1) the Company and each person, if
any, who controls the Company (other than the Funds) within the meaning of
Section 15 of the Securities Act, and the directors and officers of the Company,
(2) in the case of each such underwriters, the Selling Stockholders, each
person, if any, who controls a Selling Stockholder within the meaning of Section
15 of the Securities Act and the directors, officers and members of the Selling
Stockholders and (3) in the case of the Selling Stockholders, the underwriters,
each person, if any, who controls an underwriter within the meaning of Section
15 of the Securities Act and the directors and officers of the underwriters,
with respect to any statement in or omission from such registration statement or
any preliminary prospectus (as amended or as
B-5
APPENDIX A
supplemented, if amended or supplemented as aforesaid) or prospectus contained
in such registration statement (as amended or as supplemented, if amended or
supplemented as aforesaid), if such statement or omission shall have been made
in reliance upon and in conformity with information furnished in writing to the
Company by the Selling Stockholders or such underwriter (as the case may be)
expressly for use in connection with the preparation of such registration
statement or any preliminary prospectus or prospectus contained in such
registration statement or any such amendment thereof or supplement thereto.
(g) Each party indemnified under paragraph (e) or (f) of this Exhibit B
shall, promptly after receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be sought
hereunder, notify the indemnifying party in writing of the commencement thereof.
The failure of any indemnified party to so notify an indemnifying party of any
such action shall not relieve the indemnifying party from any liability in
respect of such action which it may have to such indemnified party on account of
the indemnity agreement contained in paragraph (e) or (f) of this Exhibit B,
unless and only to the extent that the indemnifying party was prejudiced by such
failure, and in no event shall relieve the indemnifying party from any other
liability which it may have to such indemnified party. In case any such action
shall be brought against any indemnified party and it shall notify an
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it may desire, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under paragraph (e) or (f) of this
Exhibit B for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, other than reasonable
costs of investigation; provided, however, that (1) if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the judgment of the indemnified party, in its sole and absolute
discretion, for the same counsel to represent both the indemnified party and the
indemnifying party, or (2) the indemnifying party fails to assume the defense of
such action, then the indemnified party shall be entitled to retain its own
counsel (it being understood that the Selling Stockholders shall collectively be
entitled to only one counsel), in each jurisdiction for which the indemnified
party determines counsel is required, at the expense of the indemnifying party.
No such third party claim may be settled by the indemnifying party or the
indemnified party (unless such settlement includes an unconditional release of
the indemnified party from all liability arising out of such claim or proceeding
and does not include any relief other than the payment of monetary damages)
without the prior written consent of the other, which consent shall not be
unreasonably withheld.
(h) If the indemnification provided for under paragraph (e) or (f) of this
Exhibit B shall for any reason be held by a court to be unavailable to an
indemnified party under paragraph (e) or (f) hereof in respect of any loss,
claim, damage or liability, or any action in respect thereof, then, in lieu of
the amount paid or payable under paragraph (e) or (f) hereof, the indemnified
party and the indemnifying party under paragraph (e) or (f) hereof shall
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating the
same), (1) in such proportion as is appropriate to reflect the relative fault of
the Company and the prospective seller of securities covered by the registration
statement which resulted in such loss, claim, damage or liability, or action in
respect thereof, with respect to the statements or omissions which resulted in
such loss, claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations or (2) if the allocation provided by
clause (1) above is not permitted by applicable law, in such proportion as shall
be appropriate to reflect the relative benefits received by the Company and such
prospective seller from the offering of the securities covered by such
registration statement. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this paragraph (h) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in this paragraph. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. In addition, no person shall be
obligated to contribute hereunder any amounts in payment for any settlement of
any action or claim effected without such person's consent, which consent shall
not be unreasonably withheld.
B-6
APPENDIX A
(i) From and after the date of the Agreement, and until the earlier of such
time as (1) the Funds have no right to further Requests or (2) the Funds
together own less than 5% of the outstanding shares of Common Stock, the Company
shall not, without the prior written consent of the Funds, enter into any
agreement with any holder or prospective holder of any Common Stock or
securities convertible into Common Stock giving such holder or prospective
holder any registration rights the terms of which would restrict or interfere in
any material respect with the registration rights granted to the Funds
hereunder.
(j) There are no contractual obligations of the Company not to engage in a
public offering.
(k) Capitalized terms used and not defined in this Exhibit B shall have the
meanings set forth in the Agreement.
B-7
APPENDIX B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
, 2002, is by and between The Reader's Digest Association, Inc., a
Delaware corporation (the "Company"), and RDA Recap Corp., a Delaware
corporation and a wholly owned subsidiary of the Company ("Merger Sub").
RECITALS
WHEREAS, pursuant to the Recapitalization Agreement (the "Recapitalization
Agreement"), dated as of April 12, 2002, by and among the Company, the DeWitt
Wallace-Reader's Digest Fund, Inc. and the Lila Wallace-Reader's Digest Fund,
Inc. (together, the "Funds") and this Agreement, the parties hereto desire to
merge Merger Sub with and into the Company with the Company surviving (the
"Merger");
WHEREAS, pursuant to the Merger, among other things, each share of Class B
Voting Common Stock, par value $.01 per share, of the Company ("Class B Stock")
outstanding immediately prior to the Merger will be converted into 1.24 shares
of Common Stock, par value $.01 per share, of the Company ("Common Stock") and
each share of Class A Nonvoting Common Stock, par value $.01 per share, of the
Company ("Class A Stock") outstanding immediately prior to the Merger will be
converted into one share of Common Stock;
WHEREAS, the respective Boards of Directors of the Company and Merger Sub
have determined that the Merger, in the manner contemplated herein, is advisable
and in the best interests of their respective corporations and stockholders,
and, by resolutions duly adopted, have approved and adopted this Agreement and
the Merger;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises contained herein, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms of this Agreement, at the Effective Time
(as defined below), Merger Sub shall be merged with and into the Company in
accordance with this Agreement, and the separate corporate existence of Merger
Sub shall thereupon cease. The Company shall be the surviving corporation in the
Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The
Merger shall have the effects specified in the General Corporation Law of the
State of Delaware (the "DGCL").
1.2 Effective Time. Immediately following the consummation of the Share
Purchase (as defined in the Recapitalization Agreement), if this Agreement shall
not have been terminated as provided herein, Merger Sub and the Company shall
cause a certificate of merger (the "Certificate of Merger") in accordance with
the requirements of the DGCL to be properly executed and filed in accordance
therewith. The Merger shall become effective at the time of filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the DGCL (the "Effective Time").
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
OF THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Company's Restated Certificate of
Incorporation, as amended, as in effect immediately prior to the Effective Time,
shall be amended at the Effective Time as set forth in Annex A hereto, and, as
so amended, shall be the certificate of incorporation of the Surviving
Corporation until thereafter changed or amended in accordance with the
provisions thereof and applicable law.
1
APPENDIX B
2.2 Bylaws. The Amended and Restated By-Laws of the Company in effect
immediately prior to the Effective Time shall be the by-laws of the Surviving
Corporation, until thereafter changed or amended in accordance with the
provisions thereof and applicable law.
ARTICLE III
DIRECTORS AND OFFICERS
OF THE SURVIVING CORPORATION
3.1 Directors of Surviving Corporation. The directors of the Company
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation as of the Effective Time, until the earlier of their death,
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
3.2 Officers of Surviving Corporation. The officers of the Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation as of the Effective Time, until the earlier of their death,
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
ARTICLE IV
EFFECT OF THE MERGER ON THE
CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
4.1 Effect of Merger on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder thereof:
(a) Each share of Class B Stock either issued and outstanding or held
by the Company as treasury stock immediately prior to the Effective Time
shall automatically be converted into 1.24 fully-paid and nonassessable
shares of Common Stock; provided that no fractional shares shall be issued
to any holder, and that instead of issuing such fractional shares, the
Company shall arrange for the disposition of fractional interests by those
entitled thereto, by the mechanism of having (1) the transfer agent or
other agent of the Company aggregate such fractional interests, (2) the
shares resulting from the aggregation sold and (3) the net proceeds
received from the sale allocated and distributed among the holders of the
fractional interests as their respective interests appear.
(b) Each share of Class A Stock either issued and outstanding or held
by the Company as treasury stock immediately prior to the Effective Time
shall automatically be converted into one fully-paid and nonassessable
share of Common Stock.
(c) Each share of preferred stock of the Company either issued and
outstanding or held by the Company as treasury stock immediately prior to
the Effective Time shall remain issued and outstanding or held as treasury
stock, as the case may be, and shall be unaffected by the Merger.
(d) Each share of common stock, par value $.01 per share, of Merger
Sub shall automatically be cancelled and retired and shall cease to exist,
and no consideration shall be delivered or deliverable in exchange
therefor.
4.2 Certificates Representing Class A Stock and Class B Stock. From and
after the Effective Time, each share certificate representing shares of Class B
Stock shall represent such number of shares of Common Stock obtained by
multiplying the number of shares of Class B Stock theretofore evidenced by such
certificate by 1.24, and each share certificate representing shares of Class A
Stock shall represent the same number of shares of Common Stock.
4.3 Dissenters' Rights. Notwithstanding the foregoing, to the extent that
holders of preferred stock are entitled to appraisal rights under Section 262 of
the DGCL, shares of preferred stock issued and outstanding
2
APPENDIX B
immediately prior to the Effective Time and held by a holder who has properly
exercised and perfected his demand for appraisal rights under Section 262 of the
DGCL (the "Dissenting Shares"), shall not be treated in accordance with Section
4.1(c) hereof, but rather the holders of Dissenting Shares shall be entitled to
receive from the Company such consideration as shall be determined pursuant to
Section 262 of the DGCL; provided, however, that if any such holder shall have
failed to perfect or shall effectively withdraw or lose his right to appraisal
and payment under the DGCL, each of such holder's shares of preferred stock
shall thereupon be treated in accordance with Section 4.1(c) hereof, and such
shares shall not be deemed to be Dissenting Shares.
ARTICLE V
TERMINATION
5.1 Termination. This Agreement may be terminated at any time after either
(a) the termination of the Recapitalization Agreement or (b) the alternative
structure becomes applicable under Section 1.1(c) of the Recapitalization
Agreement and in each case prior to the Effective Time by action of the Board of
Directors of the Company.
5.2 Effect of Termination. In the event of termination of this Agreement,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of the Company or Merger Sub.
5.3 Waiver. At any time prior to the Effective Time, each party may, to
the extent legally allowed, waive compliance with any of the agreements for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VI
GENERAL PROVISIONS
6.1 Counterparts. This Agreement may be executed in any number of
counterparts, which together shall constitute one and the same Agreement. The
parties may execute more than one copy of the Agreement, each of which shall
constitute an original.
6.2 Entire Agreement. This Agreement and the Recapitalization Agreement
(including the exhibits attached hereto and thereto) constitute the entire
agreement between the parties and supersede all prior agreements,
understandings, arrangements or representations by or between the parties,
written and oral, with respect to the subject matter hereof.
6.3 Third Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended or shall be construed to create any third party
beneficiaries.
6.4 Governing Law; Jurisdiction. This Agreement shall be governed by the
laws of the State of Delaware, without giving effect to the conflict of laws
principles thereof.
6.5 Amendment. This Agreement may not be altered, amended or supplemented
except by an agreement in writing signed by each of the parties hereto and, in
the case of the Company, approved by directors of the Company who are
unaffiliated with the Funds.
6.6 Assignment. This Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
assigns.
3
APPENDIX B
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
executed by its officer thereunto duly authorized as of the date first written
above.
THE READER'S DIGEST ASSOCIATION, INC.
By:
----------------------------------
Name:
Title:
RDA RECAP CORP.
By:
----------------------------------
Name:
Title:
4
APPENDIX B
ANNEX A
[FORM OF AMENDMENTS TO RESTATED CERTIFICATE OF INCORPORATION]
At the Effective Time, Article IV shall be amended and restated in its
entirety as set forth below:
ARTICLE IV
AUTHORIZED SHARES
The total number of shares which the Corporation shall be authorized to
issue is two hundred twenty-five million three hundred ninety thousand
(225,390,000) shares, of which forty thousand (40,000) shares shall be Preferred
Stock of the par value of One Dollar ($1.00) per share, one hundred twenty
thousand (120,000) shares shall be Second Preferred Stock of the par value of
One Dollar ($1.00) per share, two hundred thirty thousand (230,000) shares shall
be Third Subordinated Preferred Stock of the par value of One Dollar ($1.00) per
share, twenty-five million (25,000,000) shares shall be Preference Stock of the
par value of One Cent ($.01) per share, issuable in series and two hundred
million (200,000,000) shares shall be Common Stock of the par value of One Cent
($.01) per share. The designations and the powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations and restrictions of the shares of each such class of the capital
stock of the Corporation are as follows:
(a) The holders of shares of Preferred Stock (sometimes called "First
Preferred Stock") shall be entitled to receive, when and as declared by the
Board of Directors, dividends thereon at the rate of Four Dollars ($4.00)
per share per annum and no more, payable in cash quarterly on the first
days of January, April, July and October in each year, accruing from the
date of issue of such shares. Such dividends shall be cumulative, so that
if dividends on all issued and outstanding shares of Preferred Stock (First
Preferred Stock) at the rate of Four Dollars ($4.00) per share per annum
shall not have been paid or set apart for payment for the current and all
past quarterly dividend periods, the deficiency shall be paid or set apart
for payment before any distribution, whether by way of dividends or
otherwise, on the Second Preferred Stock or the Third Subordinated
Preferred Stock or the Preference Stock or the Common Stock of the
Corporation shall be declared or paid upon or set apart for payment and
before any Second Preferred Stock or any Third Subordinated Preferred Stock
or any Preference Stock or any Common Stock of the Corporation shall be
purchased by or for the account of the Corporation.
(b) After all dividends on the Preferred Stock (First Preferred Stock)
for all past quarterly dividend periods have been paid or declared and a
sum sufficient for the payment thereof set apart, the holders of shares of
Second Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors, dividends thereon at the rate of Four Dollars
($4.00) per share per annum and no more, payable in cash quarterly on the
first days of January, April, July and October in each year, accruing from
the date of issue. Such dividends shall be cumulative so that if dividends
on all issued and outstanding shares of Second Preferred Stock at the rate
of Four Dollars ($4.00) per share per annum shall not have been paid or set
apart for payment for the current and all past quarterly dividend periods,
the deficiency shall be paid or set apart for payment before any
distribution, whether by way of dividends or otherwise, on the Third
Subordinated Preferred Stock or the Preference Stock or the Common Stock of
the Corporation shall be declared or paid upon or set apart for payment,
and before any Third Subordinated Preferred Stock or any Preference Stock
or any Common Stock of the Corporation shall be purchased by or for the
account of the Corporation.
(c) After all dividends on the Second Preferred Stock for all past
quarterly dividend periods have been paid or declared and a sum sufficient
for the payment thereof set apart, the holders of shares of Third
Subordinated Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, dividends thereon at the rate of Five
Dollars ($5.00) per share per annum and no more, payable in cash quarterly
on the first days of January, April, July and October in each year,
accruing from
A-1
APPENDIX B
the record date, in the case of a stock dividend, and the date of issue in
all other cases. Such dividends shall be cumulative so that if dividends on
all issued and outstanding shares of Third Subordinated Preferred Stock at
the rate of Five Dollars ($5.00) per share per annum shall not have been
paid or set apart for payment for the current and all past quarterly
dividend periods, the deficiency shall be paid or set apart for payment
before any distribution, whether by way of dividends or otherwise, on the
Preference Stock or the Common Stock shall be declared or paid upon or set
apart for payment, and before any Preference Stock or any Common Stock of
the Corporation shall be purchased by or for the account of the
Corporation.
(d) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Preferred
Stock (First Preferred Stock) shall be entitled to receive and be paid the
sum of One Hundred Dollars ($100.00) for each share of such Preferred Stock
together with an amount equal to all accrued and unpaid dividends thereon
before any sum shall be paid to or any assets distributed among the holders
of the Second Preferred Stock or the Third Subordinated Preferred Stock or
the Preference Stock or the Common Stock and after the payment to the
holders of the Preferred Stock (First Preferred) of the sums stated, the
remaining assets and funds of the Corporation shall be divided among and
paid to the holders of the Second Preferred Stock and the Third
Subordinated Preferred Stock and the Preference Stock and the Common Stock
of the Corporation.
(e) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Second
Preferred Stock shall be entitled to receive and be paid the sum of One
Hundred Dollars ($100.00) for each share of such Second Preferred Stock,
together with an amount equal to all accrued and unpaid dividends thereon
before any sum shall be paid to or any assets distributed among the holders
of the Third Subordinated Preferred Stock or the Preference Stock or the
Common Stock of the Corporation; provided, however, that no such payments
shall be made unless the holders of any shares of Preferred Stock (First
Preferred Stock) which may be outstanding at the time shall have received
any sums to which they may be entitled in such event. After payment to the
holders of the Preferred Stock (First Preferred Stock) of the sums stated
in subparagraph (d) hereof, and payment to the holders of the Second
Preferred Stock of the sums stated in this subparagraph (e) the remaining
assets and funds of the Corporation shall be divided among and paid to the
holders of the Third Subordinated Preferred Stock and the Preference Stock
and the Common Stock of the Corporation.
(f) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Third
Subordinated Preferred Stock shall be entitled to receive and to be paid
the sum of One Hundred Dollars ($100.00) for each share of such Third
Subordinated Preferred Stock, together with an amount equal to all accrued
and unpaid dividends thereon before any sum shall be paid to or any assets
distributed among the holders of the Preference Stock or the Common Stock
of the Corporation; provided, however, that no such payments shall be made
unless the holders of any shares of Preferred Stock (First Preferred Stock)
or Second Preferred Stock which may be outstanding at the time shall have
received any sums to which they may be entitled in such event. After
payment of the holders of the Preferred Stock (First Preferred Stock) of
the sums stated in subparagraph (d) hereof, and payment to the holders of
the Second Preferred Stock of the sums stated in subparagraph (e) and
payment to the holders of the Third Subordinated Preferred Stock of the
sums stated in subparagraph (f), the remaining assets and funds of the
Corporation shall be divided among and paid to the holders of the
Preference Stock and the Common Stock of the Corporation.
(g) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued and outstanding Preferred Stock
(First Preferred Stock) at any time, or from time to time, at the
redemption price of One Hundred and Five Dollars ($105.00) per share
together with an amount equal to all unpaid accrued dividends thereon
computed to the date of redemption. In the event that less than all the
issued and outstanding shares of Preferred Stock are to be redeemed, the
amount to be redeemed and the method of effecting such redemption, whether
by lot or pro rata, may be determined by the Board of Directors. Notice of
such redemption, stating the date upon which, and the place at which
A-2
APPENDIX B
certificates representing the shares to be redeemed shall be surrendered,
shall be mailed not less than fifteen (15) days prior to the redemption
date to each holder of such shares at his address as it appears on the
books of the Corporation. From and after the redemption date, unless
default shall be made by the Corporation in providing the funds for
redemption, all rights of the holders in respect of such shares shall cease
except the right to receive the redemption price payable upon surrender of
certificates representing such shares, together with any amount equal to
all unpaid accrued dividends thereon.
(h) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued and outstanding Second Preferred
Stock at any time, or from time to time, at the redemption price of One
Hundred and Five Dollars ($105.00) per share together with an amount equal
to all unpaid accrued dividends thereon computed to the date of redemption;
provided, however, that so long as any shares of the Preferred Stock (First
Preferred Stock) are outstanding the Board of Directors may not redeem any
shares of the Second Preferred Stock unless all dividends on the Preferred
Stock (First Preferred Stock) for all past quarterly dividend periods shall
have been paid or declared and a sum sufficient for the payment thereof set
apart. In the event that less than all the issued and outstanding shares of
Second Preferred Stock are to be redeemed, the amount to be redeemed and
the method of effecting such redemption, whether by lot or pro rata, may be
determined by the Board of Directors. Notice of such redemption, stating
the date upon which, and the place at which certificates representing the
shares to be redeemed shall be surrendered, shall be mailed not less than
fifteen (15) days prior to the redemption date to each holder of such
shares at his address as it appears on the books of the Corporation. From
and after the redemption date, unless default shall be made by the
Corporation in providing the funds for redemption, all rights of the
holders in respect of such shares shall cease except the right to receive
the redemption price payable upon surrender of certificates representing
such shares, together with an amount equal to all unpaid accrued dividends
thereon.
(i) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued or outstanding Third
Subordinated Preferred Stock at any time, or from time to time, at the
redemption price of One Hundred and Five Dollars ($105.00) per share
together with an amount equal to all unpaid accrued dividends thereon
computed to the date of redemption; provided, however, that so long as any
shares of the Preferred Stock (First Preferred Stock) and the Second
Preferred Stock are outstanding the Board of Directors may not redeem any
shares of the Third Subordinated Preferred Stock unless all dividends on
the Preferred Stock (First Preferred Stock) and Second Preferred Stock for
all past quarterly dividend periods shall have been paid or declared and a
sum sufficient for the payment thereof set apart. In the event that less
than all the issued and outstanding shares of Third Subordinated Preferred
Stock are to be redeemed, the amount to be redeemed and the method of
effecting such redemption, whether by lot or pro rata, may be determined by
the Board of Directors. Notice of such redemption, stating the date upon
which, and the place at which certificates representing the shares to be
redeemed shall be surrendered, shall be mailed not less than fifteen (15)
days prior to the redemption date to each holder of such shares at his
address as it appears on the books of the Corporation. From and after the
redemption date, unless default shall be made by the Corporation in
providing the funds for redemption, all rights of the holders in respect of
such shares shall cease except the right to receive the redemption price
payable upon surrender of certificates representing such shares, together
with an amount of all unpaid accrued dividends thereon.
(j) Except as expressly otherwise provided by law, the holders of the
Preferred Stock (First Preferred Stock) and the holders of the Second
Preferred Stock and the holders of the Third Subordinated Preferred Stock
shall not be entitled to vote at any meeting of the stockholders or to
receive notice of such meeting.
(k) (A) The Preference Stock may be issued, from time to time, by the
Board of Directors as shares of one or more series of Preference Stock. The
Board of Directors is expressly authorized to fix, by resolution or
resolutions, the powers, designations, preferences and relative,
participating, optional or
A-3
APPENDIX B
other special rights, if any, or the qualifications, limitations or
restrictions thereof, pertaining to each series of Preference Stock,
including, without limitation:
(i) the distinctive serial designation of such series which shall
distinguish it from other series;
(ii) the number of shares included in such series, which number may
be increased or decreased from time to time unless otherwise provided by
the Board of Directors in creating the series;
(iii) the annual dividend rate or rates (or method of determining
such rate or rates, including the date or dates, if any, upon which and
the terms and conditions under which, such dividend rate or rates may be
reset or otherwise modified) for shares of such series and the date or
dates upon which such dividends shall be payable;
(iv) whether dividends on the shares of such series shall be
cumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or
dates from which dividends of the shares of such series shall be
cumulative;
(v) the amount or amounts which shall be paid out of the assets of
the Corporation to the holders of the shares of such series upon
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation;
(vi) the price or prices at which, the period or periods within
which and the terms and conditions upon which the shares of such series
may be redeemed, in whole or in part, at the option of the Corporation;
(vii) the obligation, if any, of the Corporation to purchase or
redeem, in whole or in part, shares of such series pursuant to a sinking
fund or redemption or purchase account, at the option of the holders of
such shares, upon the happening of a specified event or otherwise and
the price or prices at which, the period or periods within which and the
terms and conditions upon which the shares of such series shall be
purchased or redeemed, in whole or in part, pursuant to such obligation;
(viii) whether the shares of such series shall be convertible into,
or exchangeable for, at the option of either the holder or the
Corporation or upon the happening of a specified event or otherwise,
shares of any other class or classes or any other series of the same or
any other class or classes of capital stock of the Corporation, or any
other securities of the Corporation or any shares of stock or securities
of any other corporation or other entity, and the terms and conditions
of any such conversion or exchange, including (without limitation) the
price or prices or the rate or rates of conversion or exchange and the
terms and conditions of any adjustments thereof, and the period or
periods within which such conversion or exchange may occur;
(ix) the voting rights, if any, of the shares of such series in
addition to those required by law, including the number of votes per
share and any requirement for the approval by the holders of all
Preference Stock, or of the shares of one or more series, or of both, in
an amount greater than a majority, up to such amount as is in accordance
with applicable law, as a condition to specified corporate action or
amendments to the certificate of incorporation;
(x) the ranking of the shares of the series as compared with shares
of other series of the Preference Stock in respect of the right to
receive dividends and the right to receive payments out of the assets of
the Corporation upon voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation;
(xi) whether there shall be any limitations applicable, while
shares of such series are outstanding, upon the payment of dividends or
the making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any capital stock of the
Corporation, or upon any other action of the Corporation, and if so, the
terms and conditions thereof; and
A-4
APPENDIX B
(xii) any other powers, preferences and relative, participating,
optional or other rights and any qualifications, limitations or
restrictions not inconsistent herewith or with applicable law.
All shares of any one series of Preference Stock shall be alike in
every particular except as to the dates from and after which dividends
thereon shall be cumulative.
(B) Notwithstanding the provisions of the foregoing paragraph (k)(A)
of this Article IV, the authority of the Board of Directors to fix the
powers, designations, preferences, rights, qualifications, limitations and
restrictions pertaining to the shares of Preference Stock or any series
thereof shall be subject to the limitation that all shares of Preference
Stock shall be subject to the rights and preferences of the Preferred Stock
(First Preferred Stock), Second Preferred Stock and Third Subordinated
Preferred Stock.
(C) All shares of Preference Stock shall rank senior to the Common
Stock in respect of the right to receive dividends and the right to receive
payments out of the assets of the Corporation upon the voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation,
except as set forth in the resolution or resolutions of the Board of
Directors creating and designating any series of Preference Stock. All
shares of Preference Stock redeemed, purchased or otherwise acquired by the
Corporation (including shares surrendered for conversion or exchange) shall
be cancelled and thereupon restored to the status of authorized but
unissued shares of Preference Stock undesignated as to series, unless
otherwise provided in the resolution or resolutions of the Board of
Directors creating and designating the series of Preference Stock of which
the shares that are redeemed, purchased or otherwise acquired by the
Corporation are a part.
(l) Subject to the rights and preferences of the First Preferred
Stock, Second Preferred Stock, Third Subordinated Preferred Stock and
Preference Stock, as set forth in paragraphs (a) through (k) of this
Article IV, the Common Stock shall participate share and share alike in all
dividends and distributions of assets upon liquidation or otherwise and the
holders of the Common Stock of the Corporation shall have full voting power
for all purposes, with each share of Common Stock entitled to one vote per
share, save as otherwise required by law.
(m) None of the holders of capital stock of any class shall be
entitled as of right to purchase or subscribe for any unissued stock of the
Corporation of any class or any additional shares of any class to be issued
by reason of any increase of the authorized stock of the Corporation, or
any other securities convertible into or exchangeable for stock of the
Corporation or carrying any right to purchase such stock.
At the Effective Time, Article V shall be amended and restated in its
entirety as set forth below:
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of Directors of
the Corporation shall be fixed by the Board of Directors in the manner
provided in the By-Laws, but in no case shall the number be less than three
(3) nor more than twelve (12). The Directors need not be stockholders. The
election of the Directors of the Corporation need not be by written ballot
unless the By-Laws so require. The Directors of the Corporation, other than
those who may be elected by the holders of any series of Preferred Stock or
Preference Stock under specific circumstances, shall be divided into three
classes as nearly equal in number as is reasonably possible. Jonathan B.
Bulkeley, Herman Cain, C.J. Silas and Ed Zschau shall be members of the
first class of directors with terms expiring at the 2002 annual meeting of
stockholders. James E. Preston, Lawrence R. Ricciardi and William J. White
shall be members of the second class of directors with terms expiring at
the 2003 annual meeting of stockholders. Lynne V. Cheney, M. Christine
DeVita and Thomas O. Ryder shall be members of the third class of directors
with terms expiring at the 2004 annual meeting of stockholders. At each
subsequent annual meeting of stockholders, the successors to the directors
whose terms shall expire that year shall be elected to hold office for the
term of three years, so that the term of office of one class of directors
shall expire in each year. In any event, each director of the Corporation
shall hold office until that director's successor is duly elected and
qualified.
A-5
APPENDIX B
(b) In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered:
(1) To adopt, amend or repeal the By-Laws of the Corporation;
provided, that such action shall require the affirmative vote of a
majority of the total number of Directors. Nothing herein shall limit
the power of the holders of shares of Common Stock of the Corporation to
adopt, amend or repeal the By-Laws of the Corporation.
(2) To provide for the issuance, from time to time, of the shares
of stock of the Corporation, whether now or hereafter authorized, for
such consideration and on such terms and conditions as it may lawfully
fix from time to time; and all shares so issued, the full consideration
for which has been paid, shall be deemed fully paid and nonassessable.
(c) A Director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent that such exemption from
liability or limitation thereof is not permitted under Title 8, Chapter 1
of the Delaware Code as currently in effect or as the same may hereafter be
amended. No amendment, modification or repeal of this paragraph shall
adversely affect any right or protection of a Director that exists at the
time of such amendment, modification or repeal.
At the Effective Time, the following new article shall be added immediately
after Article VIII:
ARTICLE IX
ACTION BY WRITTEN CONSENT
No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting and the power of stockholders to consent in writing is specifically
denied.
A-6
APPENDIX C-1
CERTIFICATE OF AMENDMENT OF THE
RESTATED CERTIFICATE OF INCORPORATION OF
THE READER'S DIGEST ASSOCIATION, INC.
UNDER SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, The Reader's Digest Association, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY:
<Table>
FIRST: The Board of Directors of the Corporation adopted
resolutions proposing and declaring advisable the amendments
to the Restated Certificate of Incorporation set forth in
Exhibit A hereto.
SECOND: To effect the foregoing, the Restated Certificate of
Incorporation of the Corporation is hereby amended as set
forth in Exhibit A hereto.
THIRD: At a meeting of stockholders of the Corporation duly held on
, 2002, a majority of the outstanding stock of the
Corporation entitled to vote voted to approve the amendments
set forth as Exhibit A hereto in accordance with the
provisions of the Restated Certificate of Incorporation of
the Corporation and the General Corporation Law of the State
of Delaware.
FOURTH: Said amendments were duly adopted in accordance with Section
242 of the General Corporation Law of the State of Delaware.
</Table>
IN WITNESS WHEREOF, The Reader's Digest Association, Inc. has caused this
certificate to be signed by , its , this day of
, 2002.
THE READER'S DIGEST ASSOCIATION, INC.
By:
------------------------------------
Name:
Title:
APPENDIX C-1
EXHIBIT A
Article IV is hereby amended by adding the following paragraph at the
beginning of Article IV:
Without regard to any other provision of this Certificate of
Incorporation (including, without limitation, all of the provisions of
Article IV), each one (1) share of Class B Voting Common Stock, either
issued and outstanding or held by the Corporation as treasury stock,
immediately prior to the time this amendment becomes effective shall be and
is hereby automatically reclassified as and changed (without any further
act) into 1.24 fully-paid and nonassessable shares of Class A Nonvoting
Common Stock, without increasing or decreasing the amount of stated capital
or paid-in surplus of the Corporation, provided that no fractional shares
shall be issued to any holder, and that instead of issuing such fractional
shares, the Corporation shall arrange for the disposition of fractional
interests by those entitled thereto, by the mechanism of having (1) the
transfer agent of the Corporation aggregate such fractional interests, (2)
the shares resulting from the aggregation sold and (3) the net proceeds
received from the sale allocated and distributed among the holders of the
fractional interests as their respective interests appear.
APPENDIX C-2
CERTIFICATE OF AMENDMENT OF THE
RESTATED CERTIFICATE OF INCORPORATION OF
THE READER'S DIGEST ASSOCIATION, INC.
UNDER SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, The Reader's Digest Association, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY:
<Table>
FIRST: The Board of Directors of the Corporation adopted
resolutions proposing and declaring advisable the amendments
to the Restated Certificate of Incorporation set forth in
Exhibit A hereto.
SECOND: To effect the foregoing, the Restated Certificate of
Incorporation of the Corporation is hereby amended as set
forth in Exhibit A hereto.
THIRD: At a meeting of stockholders of the Corporation duly held on
, 2002, a majority of the outstanding stock of the
Corporation entitled to vote voted to approve the amendments
attached as Exhibit A hereto in accordance with the
provisions of the Restated Certificate of Incorporation of
the Corporation and the General Corporation Law of the State
of Delaware.
FOURTH: Said amendments were duly adopted in accordance with Section
242 of the General Corporation Law of the State of Delaware.
</Table>
IN WITNESS WHEREOF, The Reader's Digest Association, Inc. has caused this
certificate to be signed by , its
, this day of , 2002.
THE READER'S DIGEST ASSOCIATION, INC.
By:
------------------------------------
Name:
Title:
APPENDIX C-2
EXHIBIT A
Article IV is hereby amended and restated in its entirety as set forth
below:
ARTICLE IV
AUTHORIZED SHARES
Without regard to any other provision of this Certificate of Incorporation
(including, without limitation, all of the provisions of Article IV), the Class
A Nonvoting Common Stock is hereby renamed Common Stock.
The total number of shares which the Corporation shall be authorized to
issue is two hundred twenty-five million three hundred ninety thousand
(225,390,000) shares, of which forty thousand (40,000) shares shall be Preferred
Stock of the par value of One Dollar ($1.00) per share, one hundred twenty
thousand (120,000) shares shall be Second Preferred Stock of the par value of
One Dollar ($1.00) per share, two hundred thirty thousand (230,000) shares shall
be Third Subordinated Preferred Stock of the par value of One Dollar ($1.00) per
share, twenty-five million (25,000,000) shares shall be Preference Stock of the
par value of One Cent ($.01) per share, issuable in series and two hundred
million (200,000,000) shares shall be Common Stock of the par value of One Cent
($.01) per share. The designations and the powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations and restrictions of the shares of each such class of the capital
stock of the Corporation are as follows:
(a) The holders of shares of Preferred Stock (sometimes called "First
Preferred Stock") shall be entitled to receive, when and as declared by the
Board of Directors, dividends thereon at the rate of Four Dollars ($4.00)
per share per annum and no more, payable in cash quarterly on the first
days of January, April, July and October in each year, accruing from the
date of issue of such shares. Such dividends shall be cumulative, so that
if dividends on all issued and outstanding shares of Preferred Stock (First
Preferred Stock) at the rate of Four Dollars ($4.00) per share per annum
shall not have been paid or set apart for payment for the current and all
past quarterly dividend periods, the deficiency shall be paid or set apart
for payment before any distribution, whether by way of dividends or
otherwise, on the Second Preferred Stock or the Third Subordinated
Preferred Stock or the Preference Stock or the Common Stock of the
Corporation shall be declared or paid upon or set apart for payment and
before any Second Preferred Stock or any Third Subordinated Preferred Stock
or any Preference Stock or any Common Stock of the Corporation shall be
purchased by or for the account of the Corporation.
(b) After all dividends on the Preferred Stock (First Preferred Stock)
for all past quarterly dividend periods have been paid or declared and a
sum sufficient for the payment thereof set apart, the holders of shares of
Second Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors, dividends thereon at the rate of Four Dollars
($4.00) per share per annum and no more, payable in cash quarterly on the
first days of January, April, July and October in each year, accruing from
the date of issue. Such dividends shall be cumulative so that if dividends
on all issued and outstanding shares of Second Preferred Stock at the rate
of Four Dollars ($4.00) per share per annum shall not have been paid or set
apart for payment for the current and all past quarterly dividend periods,
the deficiency shall be paid or set apart for payment before any
distribution, whether by way of dividends or otherwise, on the Third
Subordinated Preferred Stock or the Preference Stock or the Common Stock of
the Corporation shall be declared or paid upon or set apart for payment,
and before any Third Subordinated Preferred Stock or any Preference Stock
or any Common Stock of the Corporation shall be purchased by or for the
account of the Corporation.
(c) After all dividends on the Second Preferred Stock for all past
quarterly dividend periods have been paid or declared and a sum sufficient
for the payment thereof set apart, the holders of shares of Third
Subordinated Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, dividends thereon at the rate of Five
Dollars ($5.00) per share per annum and no more,
1
APPENDIX C-2
payable in cash quarterly on the first days of January, April, July and
October in each year, accruing from the record date, in the case of a stock
dividend, and the date of issue in all other cases. Such dividends shall be
cumulative so that if dividends on all issued and outstanding shares of
Third Subordinated Preferred Stock at the rate of Five Dollars ($5.00) per
share per annum shall not have been paid or set apart for payment for the
current and all past quarterly dividend periods, the deficiency shall be
paid or set apart for payment before any distribution, whether by way of
dividends or otherwise, on the Preference Stock or the Common Stock shall
be declared or paid upon or set apart for payment, and before any
Preference Stock or any Common Stock of the Corporation shall be purchased
by or for the account of the Corporation.
(d) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Preferred
Stock (First Preferred Stock) shall be entitled to receive and be paid the
sum of One Hundred Dollars ($100.00) for each share of such Preferred Stock
together with an amount equal to all accrued and unpaid dividends thereon
before any sum shall be paid to or any assets distributed among the holders
of the Second Preferred Stock or the Third Subordinated Preferred Stock or
the Preference Stock or the Common Stock and after the payment to the
holders of the Preferred Stock (First Preferred) of the sums stated, the
remaining assets and funds of the Corporation shall be divided among and
paid to the holders of the Second Preferred Stock and the Third
Subordinated Preferred Stock and the Preference Stock and the Common Stock
of the Corporation.
(e) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Second
Preferred Stock shall be entitled to receive and be paid the sum of One
Hundred Dollars ($100.00) for each share of such Second Preferred Stock,
together with an amount equal to all accrued and unpaid dividends thereon
before any sum shall be paid to or any assets distributed among the holders
of the Third Subordinated Preferred Stock or the Preference Stock or the
Common Stock of the Corporation; provided, however, that no such payments
shall be made unless the holders of any shares of Preferred Stock (First
Preferred Stock) which may be outstanding at the time shall have received
any sums to which they may be entitled in such event. After payment to the
holders of the Preferred Stock (First Preferred Stock) of the sums stated
in subparagraph (d) hereof, and payment to the holders of the Second
Preferred Stock of the sums stated in this subparagraph (e) the remaining
assets and funds of the Corporation shall be divided among and paid to the
holders of the Third Subordinated Preferred Stock and the Preference Stock
and the Common Stock of the Corporation.
(f) In the event of any liquidation, dissolution or winding-up of the
Corporation (whether voluntary or involuntary) the holders of the Third
Subordinated Preferred Stock shall be entitled to receive and to be paid
the sum of One Hundred Dollars ($100.00) for each share of such Third
Subordinated Preferred Stock, together with an amount equal to all accrued
and unpaid dividends thereon before any sum shall be paid to or any assets
distributed among the holders of the Preference Stock or the Common Stock
of the Corporation; provided, however, that no such payments shall be made
unless the holders of any shares of Preferred Stock (First Preferred Stock)
or Second Preferred Stock which may be outstanding at the time shall have
received any sums to which they may be entitled in such event. After
payment of the holders of the Preferred Stock (First Preferred Stock) of
the sums stated in subparagraph (d) hereof, and payment to the holders of
the Second Preferred Stock of the sums stated in subparagraph (e) and
payment to the holders of the Third Subordinated Preferred Stock of the
sums stated in subparagraph (f), the remaining assets and funds of the
Corporation shall be divided among and paid to the holders of the
Preference Stock and the Common Stock of the Corporation.
(g) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued and outstanding Preferred Stock
(First Preferred Stock) at any time, or from time to time, at the
redemption price of One Hundred and Five Dollars ($105.00) per share
together with an amount equal to all unpaid accrued dividends thereon
computed to the date of redemption. In the event that less than all the
issued and outstanding shares of Preferred Stock are to be redeemed, the
amount to be redeemed and the method of effecting such redemption, whether
by lot or pro rata, may be determined by
2
APPENDIX C-2
the Board of Directors. Notice of such redemption, stating the date upon
which, and the place at which certificates representing the shares to be
redeemed shall be surrendered, shall be mailed not less than fifteen (15)
days prior to the redemption date to each holder of such shares at his
address as it appears on the books of the Corporation. From and after the
redemption date, unless default shall be made by the Corporation in
providing the funds for redemption, all rights of the holders in respect of
such shares shall cease except the right to receive the redemption price
payable upon surrender of certificates representing such shares, together
with any amount equal to all unpaid accrued dividends thereon.
(h) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued and outstanding Second Preferred
Stock at any time, or from time to time, at the redemption price of One
Hundred and Five Dollars ($105.00) per share together with an amount equal
to all unpaid accrued dividends thereon computed to the date of redemption;
provided, however, that so long as any shares of the Preferred Stock (First
Preferred Stock) are outstanding the Board of Directors may not redeem any
shares of the Second Preferred Stock unless all dividends on the Preferred
Stock (First Preferred Stock) for all past quarterly dividend periods shall
have been paid or declared and a sum sufficient for the payment thereof set
apart. In the event that less than all the issued and outstanding shares of
Second Preferred Stock are to be redeemed, the amount to be redeemed and
the method of effecting such redemption, whether by lot or pro rata, may be
determined by the Board of Directors. Notice of such redemption, stating
the date upon which, and the place at which certificates representing the
shares to be redeemed shall be surrendered, shall be mailed not less than
fifteen (15) days prior to the redemption date to each holder of such
shares at his address as it appears on the books of the Corporation. From
and after the redemption date, unless default shall be made by the
Corporation in providing the funds for redemption, all rights of the
holders in respect of such shares shall cease except the right to receive
the redemption price payable upon surrender of certificates representing
such shares, together with an amount equal to all unpaid accrued dividends
thereon.
(i) The Corporation, at the option of the Board of Directors, may
redeem the whole or any part of the issued or outstanding Third
Subordinated Preferred Stock at any time, or from time to time, at the
redemption price of One Hundred and Five Dollars ($105.00) per share
together with an amount equal to all unpaid accrued dividends thereon
computed to the date of redemption; provided, however, that so long as any
shares of the Preferred Stock (First Preferred Stock) and the Second
Preferred Stock are outstanding the Board of Directors may not redeem any
shares of the Third Subordinated Preferred Stock unless all dividends on
the Preferred Stock (First Preferred Stock) and Second Preferred Stock for
all past quarterly dividend periods shall have been paid or declared and a
sum sufficient for the payment thereof set apart. In the event that less
than all the issued and outstanding shares of Third Subordinated Preferred
Stock are to be redeemed, the amount to be redeemed and the method of
effecting such redemption, whether by lot or pro rata, may be determined by
the Board of Directors. Notice of such redemption, stating the date upon
which, and the place at which certificates representing the shares to be
redeemed shall be surrendered, shall be mailed not less than fifteen (15)
days prior to the redemption date to each holder of such shares at his
address as it appears on the books of the Corporation. From and after the
redemption date, unless default shall be made by the Corporation in
providing the funds for redemption, all rights of the holders in respect of
such shares shall cease except the right to receive the redemption price
payable upon surrender of certificates representing such shares, together
with an amount of all unpaid accrued dividends thereon.
(j) Except as expressly otherwise provided by law, the holders of the
Preferred Stock (First Preferred Stock) and the holders of the Second
Preferred Stock and the holders of the Third Subordinated Preferred Stock
shall not be entitled to vote at any meeting of the stockholders or to
receive notice of such meeting.
(k) (A) The Preference Stock may be issued, from time to time, by the
Board of Directors as shares of one or more series of Preference Stock. The
Board of Directors is expressly authorized to fix, by resolution or
resolutions, the powers, designations, preferences and relative,
participating, optional or
3
APPENDIX C-2
other special rights, if any, or the qualifications, limitations or
restrictions thereof, pertaining to each series of Preference Stock,
including, without limitation:
(i) the distinctive serial designation of such series which shall
distinguish it from other series;
(ii) the number of shares included in such series, which number may
be increased or decreased from time to time unless otherwise provided by
the Board of Directors in creating the series;
(iii) the annual dividend rate or rates (or method of determining
such rate or rates, including the date or dates, if any, upon which and
the terms and conditions under which, such dividend rate or rates may be
reset or otherwise modified) for shares of such series and the date or
dates upon which such dividends shall be payable;
(iv) whether dividends on the shares of such series shall be
cumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or
dates from which dividends of the shares of such series shall be
cumulative;
(v) the amount or amounts which shall be paid out of the assets of
the Corporation to the holders of the shares of such series upon
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation;
(vi) the price or prices at which, the period or periods within
which and the terms and conditions upon which the shares of such series
may be redeemed, in whole or in part, at the option of the Corporation;
(vii) the obligation, if any, of the Corporation to purchase or
redeem, in whole or in part, shares of such series pursuant to a sinking
fund or redemption or purchase account, at the option of the holders of
such shares, upon the happening of a specified event or otherwise and
the price or prices at which, the period or periods within which and the
terms and conditions upon which the shares of such series shall be
purchased or redeemed, in whole or in part, pursuant to such obligation;
(viii) whether the shares of such series shall be convertible into,
or exchangeable for, at the option of either the holder or the
Corporation or upon the happening of a specified event or otherwise,
shares of any other class or classes or any other series of the same or
any other class or classes of capital stock of the Corporation, or any
other securities of the Corporation or any shares of stock or securities
of any other corporation or other entity, and the terms and conditions
of any such conversion or exchange, including (without limitation) the
price or prices or the rate or rates of conversion or exchange and the
terms and conditions of any adjustments thereof, and the period or
periods within which such conversion or exchange may occur;
(ix) the voting rights, if any, of the shares of such series in
addition to those required by law, including the number of votes per
share and any requirement for the approval by the holders of all
Preference Stock, or of the shares of one or more series, or of both, in
an amount greater than a majority, up to such amount as is in accordance
with applicable law, as a condition to specified corporate action or
amendments to the certificate of incorporation;
(x) the ranking of the shares of the series as compared with shares
of other series of the Preference Stock in respect of the right to
receive dividends and the right to receive payments out of the assets of
the Corporation upon voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation;
(xi) whether there shall be any limitations applicable, while
shares of such series are outstanding, upon the payment of dividends or
the making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any capital stock of the
Corporation, or upon any other action of the Corporation, and if so, the
terms and conditions thereof; and
4
APPENDIX C-2
(xii) any other powers, preferences and relative, participating,
optional or other rights and any qualifications, limitations or
restrictions not inconsistent herewith or with applicable law.
All shares of any one series of Preference Stock shall be alike in
every particular except as to the dates from and after which dividends
thereon shall be cumulative.
(B) Notwithstanding the provisions of the foregoing paragraph (k)(A)
of this Article IV, the authority of the Board of Directors to fix the
powers, designations, preferences, rights, qualifications, limitations and
restrictions pertaining to the shares of Preference Stock or any series
thereof shall be subject to the limitation that all shares of Preference
Stock shall be subject to the rights and preferences of the Preferred Stock
(First Preferred Stock), Second Preferred Stock and Third Subordinated
Preferred Stock.
(C) All shares of Preference Stock shall rank senior to the Common
Stock in respect of the right to receive dividends and the right to receive
payments out of the assets of the Corporation upon the voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation,
except as set forth in the resolution or resolutions of the Board of
Directors creating and designating any series of Preference Stock. All
shares of Preference Stock redeemed, purchased or otherwise acquired by the
Corporation (including shares surrendered for conversion or exchange) shall
be cancelled and thereupon restored to the status of authorized but
unissued shares of Preference Stock undesignated as to series, unless
otherwise provided in the resolution or resolutions of the Board of
Directors creating and designating the series of Preference Stock of which
the shares that are redeemed, purchased or otherwise acquired by the
Corporation are a part.
(l) Subject to the rights and preferences of the First Preferred
Stock, Second Preferred Stock, Third Subordinated Preferred Stock and
Preference Stock, as set forth in paragraphs (a) through (k) of this
Article IV, the Common Stock shall participate share and share alike in all
dividends and distributions of assets upon liquidation or otherwise and the
holders of the Common Stock of the Corporation shall have full voting power
for all purposes, with each share of Common Stock entitled to one vote per
share, save as otherwise required by law.
(m) None of the holders of capital stock of any class shall be
entitled as of right to purchase or subscribe for any unissued stock of the
Corporation of any class or any additional shares of any class to be issued
by reason of any increase of the authorized stock of the Corporation, or
any other securities convertible into or exchangeable for stock of the
Corporation or carrying any right to purchase such stock.
Article V is hereby amended and restated in its entirety as set forth
below:
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of Directors of
the Corporation shall be fixed by the Board of Directors in the manner
provided in the By-Laws, but in no case shall the number be less than three
(3) nor more than twelve (12). The Directors need not be stockholders. The
election of the Directors of the Corporation need not be by written ballot
unless the By-Laws so require. The Directors of the Corporation, other than
those who may be elected by the holders of any series of Preferred Stock or
Preference Stock under specific circumstances, shall be divided into three
classes as nearly equal in number as is reasonably possible. Jonathan B.
Bulkeley, Herman Cain, C.J. Silas and Ed Zschau shall be members of the
first class of directors with terms expiring at the 2002 annual meeting of
stockholders. James E. Preston, Lawrence R. Ricciardi and William J. White
shall be members of the second class of directors with terms expiring at
the 2003 annual meeting of stockholders. Lynne V. Cheney, M. Christine
DeVita and Thomas O. Ryder shall be members of the third class of directors
with terms expiring at the 2004 annual meeting of stockholders. At each
subsequent annual meeting of stockholders, the successors to the directors
whose terms shall expire that year shall be elected to hold office for the
term of three years, so that the term of office of one class of directors
shall expire in each year. In any event, each director of the Corporation
shall hold office until that director's successor is duly elected and
qualified.
5
APPENDIX C-2
(b) In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered:
(1) To adopt, amend or repeal the By-Laws of the Corporation;
provided, that such action shall require the affirmative vote of a
majority of the total number of Directors. Nothing herein shall limit
the power of the holders of shares of Common Stock of the Corporation to
adopt, amend or repeal the By-Laws of the Corporation.
(2) To provide for the issuance, from time to time, of the shares
of stock of the Corporation, whether now or hereafter authorized, for
such consideration and on such terms and conditions as it may lawfully
fix from time to time; and all shares so issued, the full consideration
for which has been paid, shall be deemed fully paid and nonassessable.
(c) A Director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent that such exemption from
liability or limitation thereof is not permitted under Title 8, Chapter 1
of the Delaware Code as currently in effect or as the same may hereafter be
amended. No amendment, modification or repeal of this paragraph shall
adversely affect any right or protection of a Director that exists at the
time of such amendment, modification or repeal.
The following new Article IX is hereby added immediately following Article
VIII:
ARTICLE IX
ACTION BY WRITTEN CONSENT
No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting and the power of stockholders to consent in writing is specifically
denied.
6
APPENDIX D
PERSONAL AND CONFIDENTIAL
April 12, 2002
Special Committee of the Board of Directors
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570
Board of Directors
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders (other than the Lila Wallace -- Reader's Digest Fund, Inc.
and the DeWitt Wallace -- Reader's Digest Fund, Inc. (collectively, the
"Funds")) of the outstanding shares of Class A Common Stock, par value $0.01 per
share (the "Class A Common Stock"), and outstanding shares of Class B Common
Stock, par value $0.01 per share (the "Class B Common Stock"; together with the
Class A Common Stock, the "Shares") of The Reader's Digest Association, Inc.
(the "Company") of (i) the repurchase (the "Purchase") of 3,636,363 shares of
Class B Common Stock held by the Funds for $27.50 in cash per share, or
$99,999,983 in cash in the aggregate (the "Purchase Amount"), (ii) the exchange
ratio of 1.24 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Company to be exchanged for each share of Class B Common Stock
(the "Class B Exchange Ratio"), other than shares of Class B Common Stock
purchased from the Funds as described above, and (iii) the exchange ratio of 1
share of Common Stock for each share of Class A Common Stock (the "Class A
Exchange Ratio"; collectively with the Class B Exchange Ratio and the Purchase
Amount, the "Recapitalization"), taken as a whole, in each case pursuant to the
Recapitalization Agreement, dated as of April 12, 2002 (the "Agreement"), among
the Company and the Funds. You have informed us that, pursuant to the Agreement,
(i) (a) the Company shall form a wholly owned subsidiary which shall merge with
and into the Company (the "Merger") and (b) upon consummation of the Merger, all
of the outstanding shares of Class B Common Stock (other than shares repurchased
from the Funds) and all of the outstanding shares of Class A Common Stock will
be exchanged for shares of Common Stock pursuant to the respective exchange
ratios set forth above, provided that, in certain circumstances described in
Section 1.1(c) of the Agreement, such Recapitalization shall be effected
pursuant to an amendment to the Company's restated certificate of incorporation
(the "Charter Amendment") rather than pursuant to the Merger; and (ii)
immediately prior to the Merger or Charter Amendment, as applicable, the Company
will repurchase 3,636,363 shares of Class B Common Stock from the Funds for the
Purchase Amount. You also have informed us that, as of the date of the
Agreement, the Funds held 10,664,063 shares of Class A Common Stock and
6,216,082 shares of Class B Common Stock and that the Recapitalization was the
result of arm's-length negotiations between the Special Committee and the Funds.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in performing financial analyses with respect to businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. We are familiar with the Company and the Funds having provided
certain investment banking services to the Company from time to time, including
(i) having acted as sole lead and bookrunning manager with respect to the sale
of 11,851,496 shares of Class A Common Stock by certain stockholders through an
offering of hybrid equity securities exchangeable into shares of Class A Common
Stock in February 1998, (ii) having acted as the Company's financial advisor in
connection with its acquisition of Books Are Fun, Ltd. in August 1999, (iii)
having acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the exchange of a portion of the
Class B Common Stock held by the Funds into Class A Common Stock in September
1999,
APPENDIX D
Special Committee of the Board of Directors
Board of Directors
The Reader's Digest Association, Inc.
April 12, 2002
Page 2
(iv) having acted as sole lead and book-running manager with respect to the
public secondary offering of 11,500,000 shares of Class A Common Stock
(including shares held by the Funds) in November 1999, (v) having provided a
fairness opinion to the Company in connection with its pending acquisition of
the Reiman Publications business ("Reiman Publications") from Reiman Holding
Company, LLC which was announced in March 2002, and (vi) having acted as
financial advisor to the Special Committee of the Board of Directors of the
Company in connection with, and having participated in certain of the
negotiations leading to, the Agreement. In addition, we are acting as co-lead
arranger of the bank facility that is expected to be used to fund the
acquisition of Reiman Publications and the cash portion of the Recapitalization.
Goldman, Sachs & Co. provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold positions in securities, including derivative
securities, of the Company for its own account and for the accounts of
customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company for the five fiscal years ended June 30, 2001; certain interim reports
to stockholders and Quarterly Reports on Form 10-Q of the Company; certain other
communications from the Company to its stockholders; and certain internal
financial projections for the Company prepared by Company management (the
"Forecasts"). We also have held discussions with members of the senior
management of the Company regarding the past and current business operations,
financial condition and future prospects of the Company. In addition we have
held discussions with members of the senior management of the Company and the
Special Committee of the Board of Directors of the Company regarding their
assessment of the strategic rationale for, and the potential benefits of, the
transaction contemplated by the Agreement. We have also reviewed the reported
prices and trading activities for the Company's Class A Common Stock and Class B
Common Stock, compared certain financial and stock market information for the
Company with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain other
transactions, including transactions in which a controlling stockholder group
effectively relinquishes voting control, reviewed the financial terms of certain
recent business combinations in the consumer publishing industry specifically
and other industries generally and performed such other studies and analyses as
we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information discussed with or reviewed by us and have
assumed such accuracy and completeness for purposes of rendering this opinion.
In that regard, we have assumed with your consent that the Forecasts have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the Company. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or any of
its subsidiaries and we have not been furnished with any such evaluation or
appraisal. Our advisory services and the opinion expressed herein are provided
for the information and assistance of the Special Committee of the Board of
Directors of the Company and the Board of Directors of the Company in connection
with their consideration of the transaction contemplated by the Agreement and do
not constitute a recommendation as to how any holder of Class B Common Stock
should vote with respect to such transaction. We also have noted the Special
Committee's determination that all holders of Class B Common Stock (not just the
Funds) would receive the benefit of the Class B Exchange Ratio in the
Recapitalization. In addition, we took into account the fact that neither the
Funds nor any other party will have voting control of the Company upon
consummation of the transaction contemplated by the Agreement. We express no
view as to the price at which the Common Stock may likely trade following
completion of the transaction contemplated by the Agreement or as to the
relative fairness of the Recapitalization to the holders of Class A Common Stock
as compared to the holders of Class B Common Stock.
APPENDIX D
Special Committee of the Board of Directors
Board of Directors
The Reader's Digest Association, Inc.
April 12, 2002
Page 3
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Recapitalization, taken as a whole, pursuant to the Agreement is fair from a
financial point of view to the holders of Shares (other than the Funds).
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
--------------------------------------
GOLDMAN, SACHS & CO.
APPENDIX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
1
APPENDIX E
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, then, either a constituent corporation
before the effective date of the merger or consolidation, or the surviving
or resulting corporation within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
2
APPENDIX E
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders
3
APPENDIX E
of uncertificated stock forthwith, and the case of holders of shares represented
by certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other decrees in
the Court of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
4
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Registrant's Restated Certificate of Incorporation, as amended, provides
that Registrant shall indemnify each officer or director of Registrant to the
fullest extent permitted by law, subject to the limitations set forth in its
by-laws. The by-laws provide that Registrant shall indemnify to the fullest
extent permitted by law any person made or threatened to be made a party to any
action, suit or proceeding, 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 Registrant or serves or served
at the request of Registrant 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 Registrant 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 Registrant.
The rights of any person under the by-laws shall be enforceable against
Registrant 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,
Registrant 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
actions, suits or proceedings. The Delaware General Corporation Law also
provides that Delaware corporations may purchase insurance on behalf of any
director, officer, employee or agent.
Registrant may purchase and maintain insurance on behalf of any director,
officer, employee or agent of the Registrant or another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any expenses incurred in any proceeding and any liabilities asserted
against him or her by reason of such persons being or having been such a
director, officer, employee or agent, whether or not Registrant would have the
power to indemnify such person against such expenses and liabilities under the
provisions of the Restated Certificate of Incorporation or otherwise. Registrant
maintains such insurance on behalf of its directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
See Exhibit Index.
(b) Financial Statement Schedules.
None.
(c) Item 4(b) Information.
The opinion of Goldman, Sachs & Co. is attached as Appendix D to the
proxy statement/prospectus.
ITEM 22. UNDERTAKINGS
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
II-1
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(d) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder, through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) of
the Securities Act of 1933, the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(e) The undersigned registrant hereby undertakes that every prospectus: (i)
that is filed pursuant to the paragraph immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933, and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment 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.
(f) 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
Securities Act of 1933, 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 any 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
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
(g) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(h) The undersigned registrant hereby undertakes that, 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 Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee
II-2
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in this 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.
(i) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of New Castle,
State of New York, as of June 14, 2002.
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ THOMAS O. RYDER
------------------------------------
Thomas O. Ryder
Chairman of the Board
and Chief Executive Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael A. Brizel, C.H.R. DuPree, Michael Geltzeiler
and William H. Magill, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated as of June 14, 2002.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ THOMAS O. RYDER Director, Chairman of the Board
- ----------------------------------------------------- and Chief Executive Officer
Thomas O. Ryder (principal executive officer)
/s/ MICHAEL S. GELTZEILER Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Michael S. Geltzeiler (principal financial officer)
/s/ THOMAS D. BARRY Vice President and Corporate Controller
- ----------------------------------------------------- (principal accounting officer)
Thomas D. Barry
/s/ JONATHAN B. BULKELEY Director
- -----------------------------------------------------
Jonathan B. Bulkeley
/s/ HERMAN CAIN Director
- -----------------------------------------------------
Herman Cain
/s/ LYNNE V. CHENEY Director
- -----------------------------------------------------
Lynne V. Cheney
/s/ M. CHRISTINE DEVITA Director
- -----------------------------------------------------
M. Christine DeVita
</Table>
II-4
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ JAMES E. PRESTON Director
- -----------------------------------------------------
James E. Preston
/s/ LAWRENCE R. RICCIARDI Director
- -----------------------------------------------------
Lawrence R. Ricciardi
/s/ C.J. SILAS Director
- -----------------------------------------------------
C.J. Silas
/s/ WILLIAM J. WHITE Director
- -----------------------------------------------------
William J. White
/s/ ED ZSCHAU Director
- -----------------------------------------------------
Ed Zschau
</Table>
II-5
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Recapitalization Agreement, dated as of April 12, 2002, by
and among the DeWitt Wallace-Reader's Digest Fund, Inc., the
Lila Wallace-Reader's Digest Fund, Inc. and The Reader's
Digest Association, Inc., included as Appendix A to the
proxy statement/prospectus which is part of this
registration statement.
2.2 Agreement and Plan of Merger, dated as of , 2002, by
and between The Reader's Digest Association, Inc. and RDA
Recap Corp., included as Appendix B to the proxy
statement/prospectus which is part of this registration
statement.
3.1.1 Restated Certificate of Incorporation of The Reader's Digest
Association, Inc., filed with the State of Delaware on
February 7, 1990 (Exhibit 3.1.1 to Annual Report on Form
10-K for the year ended June 30, 1993).
3.1.2 Certificate of Amendment of the Certificate of Incorporation
of The Reader's Digest Association, Inc., filed with the
State of Delaware on February 22, 1991 (Exhibit 3.1.2 to
Annual Report on Form 10-K for the year ended June 30,
1993).
3.1.3 Certificate of Amendment of the Certificate of Incorporation
of The Reader's Digest Association, Inc., filed with the
State of Delaware on November 19, 1999 (Exhibit 10.29 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 2000).
3.1.4 Proposed Certificates of Amendment of the Certificate of
Incorporation of The Reader's Digest Association, Inc.,
included as Appendix C to the proxy statement/prospectus
which is part of this registration statement.
3.2.1 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., effective February 22, 1991 (Exhibit 3.2
to Annual Report on Form 10-K for the year ended June 30,
1993).
3.2.2 Amended and Restated By-Laws of The Reader's Digest
Association, Inc., to be effective upon completion of the
recapitalization.
5.1* Opinion of C.H.R. DuPree, Esq., as to the legality of the
securities being registered.
23.1* Consent of C.H.R. DuPree, Esq. (included in Exhibit 5.1
hereto).
23.2 Consent of KPMG LLP.
23.3 Consent of Ernst & Young LLP.
99.1 Opinion of Goldman, Sachs & Co., included as Appendix D to
the proxy statement/prospectus which is part of this
registration statement.
99.2* Form of Proxy for Special Meeting of Stockholders of The
Reader's Digest Association, Inc.
99.3* Form of Voting Direction Card for Participants in the
Reader's Digest Employee Ownership Plan and 401(k)
Partnership.
99.4* Form of Admission Card.
99.5 Consent of Goldman, Sachs & Co.
</Table>
- ---------------
* To be filed by amendment.