A soft economy, the events of September 11 and the anthrax scare combined to reduce sales by 14%, to $210.9 million, in Reader's Digest's North America Books and Home Entertainment group for the second quarter ended December 31, 2001. Operating income in the unit tumbled 41%, to $22.1 million. Company chairman Thomas O. Ryder said the anthrax scare, which he expected to be a short-term problem, "went on and on through the entire quarter. It's now just starting to ease." The scare proved especially troublesome in the BHE unit, he added.

Although the Books Are Fun division had double-digit gains in the quarter and Canadian operations had good performances, revenues in the BHE group's U.S. operations fell 43%, and the operations had a loss. Revenues fell in part because of the planned reduction in promotional mailings and a "steep" drop in response rates. Earnings were hurt by the poor response rate as well as by new investments in marketing and product development.

Ryder was hopeful that the BHE group would begin to see a turnaround in the second half of the fiscal year, particularly in the fourth quarter. He said he expected to see improvement in the group's sweepstakes promotion, greater acceptance of new products and the addition of 300,000 to 400,000 new customers for Select Editions through the use of outside lists. Use of the new lists brought in more than 600,000 customers for Select Editions in the first half of the year. Ryder acknowledged that he is also counting on better response rates in the second half of the fiscal year. He said the company saw its first "robin" of the year when the response rate to the promotion for PCs Made Easy was better than expected.

RD is also working on ways to leverage the success of its Books Are Fun division. The company is expanding its sales force to increase the number of events conducted by the unit and is developing new products that can be sold by BAF.

In addition to internal developments, RD made a small acquisition in the quarter, acquiring the child development toy program from the Italian publisher D' Agostini and adding it to its Young Families division.

For the first six months of fiscal '02, operating profit was down 80%, to $12.3 million, and sales fell 15% to $344.6 million.