Stock Prospectus Lifts Veil of Secrecy at Reader’s Digest

NEW YORK —  Reader’s Digest Assn., publisher of the world’s most widely read magazine, on Tuesday issued the prospectus for its first stock offering and in so doing lifted a veil of secrecy that has hidden its inner financial workings for six decades.

The prospectus for the sale of 25 million non-voting shares showed a publishing and direct-mail business that has undergone booming growth in recent years but that also saw profit growth abruptly slow in the fiscal year that ended last June.

With annual revenue of about $1.83 billion, the association is controlled by a charitable trust and two funds set up by founders DeWitt Wallace, who died in 1981, and Lila Wallace, who died in 1984. In 1922, the pair launched a magazine that grew to a current worldwide circulation of 28 million, mixing conservative politics and plain-spun humor.

The underwriters of the offering, Goldman, Sachs & Co. and Lazard Freres & Co., expect that the non-voting Class A shares will be priced between $18 and $22 apiece. At that valuation, the offering would be worth $450 million to $550 million.

And assuming that the company’s 20 million Class B voting shares are worth no less than the 124 million non-voting shares, the entire company would have a value of as much as $3.2 billion.

The non-voting shares, which represent 21% of all common stock, will be sold by the two controlling funds and seven independent foundations set up earlier in the decade to support some of the Wallaces’ favorite charities. Those foundations benefit, among others, Colonial Williamsburg, the Metropolitan Museum of Art in New York, Memorial Sloan-Kettering Cancer Center in New York, and a conservation and preservation group called Scenic Hudson.

The two controlling funds--the DeWitt Wallace-Reader’s Digest Fund and the Lila Wallace-Reader’s Digest Fund--each own 10 million voting common shares, or 50% of the class.

The firm said it was the foundations’ wish to sell some shares to create a more active market for the securities, making it easier for shareholders to sell stock if they wish. Of the 25 million Class A shares to be sold, 21 million will be sold in the United States and the balance will be sold abroad.

The prospectus for the securities, which will be sold in February, shows how the company has moved from a sole focus on its Reader’s Digest and Reader’s Digest Condensed Books lines to direct marketing of other books, specialty magazines, recorded music, videotapes and other merchandise. Among the specialty magazines are the Family Handyman, Travel Holiday and New Choices for the Best Years.

The books and entertainment products now account for more than half of the business’s total revenue and operating profits.

After the death of Lila Wallace in 1984, the company’s management embarked on a new strategy from its headquarters in suburban Westchester County, N.Y. It expanded operations while cutting costs, closing less profitable businesses and reducing its work force to a current 7,400 from 9,200.

Between 1985 and 1988, net income grew an average of 40% a year, and pretax operating income increased by an average of 56% annually.

Between fiscal 1988 and fiscal 1989, however, operating profit fell 3% to $207 million and net income rose only 7% to $152 million. The company attributed the slowdown to a number of factors, including slower book sales, the addition of new money-losing magazines, and the increased costs from new compensation and profit-sharing plans.

READER’S DIGEST ASSN. AT A GLANCE

Based in Pleasantville, N.Y., the association is a major publisher and direct-mail marketer. Its flagship monthly, the Reader’s Digest, is published in 39 editions in 15 languages, with a worldwide circulation of 28 million. In fiscal 1989, the magazine posted operating income of $62 million on revenue of $589 million, about 32% of the company’s total. Direct-mail sales of books, recorded music and home video products generated $192 million in operating income on $1.09 billion in revenue, about 59% of the company’s total. The association also publishes special interest magazines and assists school fund-raising campaigns.

Year ended June 30

1989 1988 1987 Sales (millions) $1,832 $1,712 $1,420 Net income (millions) 152 142 95

Assets: $1.17 billion Employees: 7,400