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Embarrassed Anglo-Dutch publishing giant Reed Elsevier has put together an independent investigative team to probe recently discovered circulation irregularities in Reed Travel Group's hotel and travel directories.

The overstated circulation, stretching over a period of five years, could result in Reed handing over more than $300 million to advertisers.


Legal firms Freshfields, London, and Davis Polk & Wardwell, New York, plus accounting giant Arthur Andersen & Co. and the U.S.-based Audit Bureau of Circulations are investigating how and why publications in the Secaucus, N.J.-based unit overstated circulation data.

The discovery, made within Reed, has forced the group to compensate some airline and hotel directory advertisers that overpaid because of the inflated circulation claims.

The Reed Travel Group has not determined yet how many advertisers are involved, and whether some or all would be reimbursed, a spokesman said.

Regular advertisers include United Airlines and British Airways in the Official Airlines Guide plus Hilton International and the Sheraton Group in Hotel Travel Index.

Reed is "hoping to work out a program of compensation as quickly as possible. The priority is on resolving this," the spokesman said, adding that the investigation is expected to take "several weeks or more."


"It looks like the audits [conducted by Reed's independent investigative team] are going to take a fair amount of time," said Travel Group CEO Katy Misunas. "So we're approaching the problem from both ways. We are trying to extrapolate from initial findings how long the audit will take. In addition, we are looking at developing a compensation plan. The alternative goal is to get out to the marketplace with a simple and fair package" of compensation for advertisers.

The company is hoping advertisers will agree to a formula based on discounts for future advertising and interest on the amount overpaid.

Reed also might decide to approach advertisers with a payment that seems in the ballpark of what is owed and see if the two sides can agree.

Complicating matters, Ms. Misunas said, is the fact that hotel advertisers from 1991 may now be owned by a different parent company or, in some cases, have gone out of business, creating a complicated trail to unravel for compensation.


Analysts estimate $322 million, calculated by offering discounts on future ads, will be handed out to advertisers.

"This is unprecedented within the Reed group," confessed an insider, who declined to be identified. "One could say the company was embarrassed. The important thing is we've owned up to this voluntarily. It wasn't the advertisers who [originally] complained. There was no whistle blowing."

"It came as a total shock to me yesterday morning," said Alan Desser, chairman of Verified Audit Circulations, Los Angeles, which was responsible for auditing some of the directories.

"We stand behind our report and don't believe there is anything less than honest in it," Mr. Desser said. "However, what the publisher does with the numbers is a little bit out of our control."


Mr. Desser said his company, which audits OAG and HTI, does a three-part audit.

"We check whether they've printed them, whether they've sent them and verify that they have been received," he said. By checking printer and postal receipts provided by the publisher, Verified Audit Circulations verifies the first two for every issue. But who is receiving the directories is only audited once a year by a mailed survey.

A Reed insider said the problem with the inflated circulation came from shipping directories to bogus locations outside the U.S., which allowed Reed to produce mail receipts.

"Again that's all part of the investigation," Ms. Misunas said. "I don't know if it's true or not. We're still looking into it."


The discrepancies, going at least as far back as 1991, were uncovered by a new Travel Group management team, in place since May 1996 and led by Ms. Misunas. The discovery of the irregularities came about as a result of product performance reviews undertaken by Ms. Misunas and her staff.

One former Reed Travel Group employee, who wished to remain anonymous, suspects some of the problems may have started when British media mogul Robert Maxwell owned OAG in the early 1990s. Reed bought the directory for about $450 million in 1993.

"Those titles have had so many owners, and management has been asleep at the wheel," said the executive. The company's directories also have faced stiff competition from online products that some say are making the directories obsolete.


Reed Elsevier's management, including Co-Chairmen Nigel Stapleton and Herman Bruggink, brought the circulation irregularities to the attention of the board two weeks ago. Messrs. Stapleton and Bruggink are taking full responsibility, along with the management team of Reed Travel Group, to ensure circulation figures are accurate going forward. The company announced it will take a charge, still to be determined, against 1997 profits to compensate advertisers.

The 30 titles published by Reed Travel Group earned an estimated $805 million in ad revenue between 1991 and 1996.

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