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TMCNet:  RDA HOLDING CO. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 19, 2012]

RDA HOLDING CO. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Management's discussion and analysis of the financial condition and results of operations ("MD&A") of the Company is intended to provide a reader of our Consolidated Financial Statements with a narrative from management's perspective on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This discussion is organized as follows: · Executive Overview · Results of Operations · Liquidity and Capital Resources · Recent Accounting Pronouncements This discussion should be read in conjunction with the Consolidated Financial Statements and related notes presented elsewhere in this report and with our December 31, 2011 Consolidated Financial Statements filed with the Securities and Exchange Commission on Form 10-K. This discussion contains forward-looking statements about our plans, our markets, the demand for our products and services and our expectations regarding future results, as discussed in the section "Cautionary Note Regarding Forward-Looking Statements" below.


Certain amounts and percentages do not recalculate due to rounding. Any references in MD&A to "we," "us," "RDA," "the Company" and "our" generally refer to RDA Holding Co. and its subsidiaries.

As discussed in Note 2, Reorganization and Emergence from Chapter 11, in the Notes to our December 31, 2011 Consolidated Financial Statements, we emerged from chapter 11 bankruptcy protection on February 19, 2010 and adopted fresh start accounting in accordance with Accounting Standards Codification ("ASC"), Topic 852, Reorganizations. In accordance with generally accepted accounting principles in the United States, we were considered a new company upon our emergence from bankruptcy, with the periods prior to February 19, 2010 representing the predecessor company ("Predecessor Company") and the periods after February 19, 2010 representing the successor company ("Successor Company"). The periods subsequent to February 20, 2010 include the impact of the application of fresh start accounting upon our emergence from bankruptcy.

Cautionary Note Regarding Forward-Looking Statements Certain statements in this MD&A and in future oral and written statements that we make, may be "forward-looking statements". These statements reflect our beliefs and expectations as to future events and trends affecting our business, consolidated financial condition and results of operations and discuss, among other things, anticipated future performance and future business plans.

Forward-looking statements are identified by such words and phrases as "prospects," "outlook," "believes," "estimates," "intends," "may," "will," "should," "anticipates," "expects" or "plans," or the negative or other similar expressions, or by discussion of trends and conditions, strategy or risks and uncertainties.

Forward-looking statements are necessarily subject to risks and uncertainties, many of which are outside our control or ability to predict with accuracy and some of which we might not even anticipate, because they relate to events and depend on circumstances that may or may not occur in the future. These could cause actual results to differ materially from our forward-looking statements.

We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity, and our business strategy and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that our expectations will be achieved. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements, those results or developments may not be indicative of results or developments in subsequent periods. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

34 -------------------------------------------------------------------------------- Important factors that may cause actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties set forth in this MD&A and in the "Business" and "Risk Factors" sections contained in our Form 10-K for the fiscal year 2011, filed with the Securities and Exchange Commission, and include the following: · our degree of leverage and concerns about our financial condition and our ability to generate sufficient cash to service our debt while continuing to fund our operations; · our ability to complete our transformation to a simpler business, including the identification and completion of significant transactions, such as international licensing transactions and other strategic transactions, and right-sizing our balance sheet in order to stabilize our business; · significant financial restrictions placed on us by the indenture governing our Senior Secured Notes and the agreements governing our 2012 Secured Credit Facility and 2011 Unsecured Term Loan (each as defined below) and our ability to comply with the covenants contained in those agreements or, if we are unable to comply with such covenants, to obtain a waiver or amendment from our lenders; · general economic and market conditions; · increased competition and other factors affecting the media and publishing industries generally; · our ability to anticipate, respond or adapt to trends in what the public finds appealing; · the ability to attract and retain new and younger customers and key personnel; · changes in relationships with, or the financial condition of, key suppliers or vendors; · declines in advertising revenue or in media spending generally; · a failure to maintain circulation levels in a cost-efficient manner; · risks relating to the foreign countries where we transact business; · a material deterioration in foreign exchange rates with respect to the U.S. dollar; · our ability to fulfill our strategy of building our Internet and digital businesses; · lack of comparable financial data due to the restructuring of our business or the adoption of fresh start accounting; · the application of tax laws resulting from our chapter 11 proceedings, which will have an adverse effect on our future cash tax obligations; and · the risk factors set forth under the section titled "Risk Factors" in Part II of this report and our Annual Report on Form 10-K.

Any forward-looking statements that we make speak only as of the dates of such statements. We assume no obligation to update or supplement any forward-looking statements that may become untrue because of subsequent events, whether because of new information, future events or otherwise, except as otherwise required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Overview We are a global, multi-brand and multi-platform media and direct marketing company that educates, entertains and connects audiences around the world. We are dedicated to providing our customers with the inspiration, ideas and tools to simplify and enrich their lives. We operate our owned and licensed businesses throughout North America, Europe, Asia Pacific and Latin America, through multiple channels, such as direct mail (including catalogs), the Internet and retail. Through trusted partners and expert sourcing we co-brand, market and sell other consumer goods and financial services.

During 2012, our core businesses have continued to face negative pressures.

Factors affecting our international businesses have included unfavorable macro-economic environments, particularly in Europe, investment constraints restricting acquisition of new customers, and declining active customer bases.

Our North America businesses have been negatively affected by lower sales on our traditional book product lines, and declining subscription renewals, along with lower per-copy rates on some print magazines.

The impact of these pressures and other factors described below has led to operating losses, including impairment charges, and cash flow deficits since our emergence from Chapter 11 in 2010. We expect these adverse conditions to continue for the remainder of 2012 and through 2013.

35 -------------------------------------------------------------------------------- In order to address these pressures and the macroeconomic and other trends impacting our business, as previously disclosed, we are working to transform Reader's Digest into a simpler, more focused company, that will deliver improved operating and financial results, including improved cash flows and positive net income. These efforts have involved, and will continue to involve, among other things, restructuring operations and re-allocating resources in order to maximize efficiencies, generate cash and/or reduce costs, selling or disposing of non-core assets, and reducing our debt and right-sizing our balance sheet in order to stabilize our business.

At the same time, we continue to transition our business model. In North America, we continue to expand our digital delivery capabilities to provide consumers with their choice of traditional print or digital access to our magazines and direct mail product offerings. We are also divesting or existing unprofitable business lines to mitigate the impact of negative pressures affecting performance. Internationally, we are working towards transforming our international businesses from a more traditional direct marketing model to a customer-centric and affinity-based approach. We have already seen early signs of success for this transformation in some markets in our Asia Pacific and Latin America ("APLA") segment. Within our international markets, our response rates are improving, year-over-year, as a result of our customer-centric promotional mailing approach. However, the trends in our overall orders remain negative due to declines in our active customer base and lower quantities on promotional mailings. Further, due to the investment requirements to continue and complete this transformation and our current financial constraints, we believe that strategic partners may be better positioned to help transition the international businesses. Towards this goal, we are exploring options to license or sell some of our international businesses to third parties and exit unprofitable markets.

During the second quarter of 2012, we committed to a plan to sell our businesses in Mexico and Argentina. During the third quarter of 2012, we sold our businesses in Spain and Portugal. We have also shut down our operations in China, Kazakhstan and the Ukraine. See our "Discontinued Operations" section below for further information. If our strategy towards licensing additional international businesses is not successful, we expect to continue to experience declining operating results in our international operations in the short-term.

Consistent with our strategic objective of concentration on core businesses and of right-sizing our balance sheet, during 2012 we finalized the sales of our Allrecipes.com, Weekly Reader and LED businesses. Using the proceeds from the Allrecipes.com sale, we purchased and retired $60.6 of our Senior Secured Notes and repaid our 2011 Secured Term Loan, including a prepayment penalty, and our Senior Credit Facility. We also secured replacement financing at the end of the first quarter of 2012 with an unaffiliated third-party lender. See our "Financing Activities" section below and Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Notwithstanding these efforts and accomplishments, our ability to successfully complete the transformation of our company and to fully realize the benefits of these strategies is subject to numerous risks and uncertainties, many of which are not within our control. For example, we cannot be certain that our customers will react favorably to our internet and digital initiatives. With respect to asset sales and licensing transactions, we cannot be certain that we will be able to locate licensees and/or buyers for these business at prices that we find acceptable, or at all. With respect to reducing our debt, in addition to the uncertainties surrounding the sources of funds or other consideration for any such debt reductions, we cannot be certain that our lenders and bondholders will be willing to accept any proposals that we might wish or need to make that would involve any modifications to the terms of the agreements governing our obligations. As a result of these and other risks and uncertainties, we cannot provide any assurance that we will be able to successfully complete these actions and thereby reverse the negative trend in operating and financial results that we have experienced in recent periods. Refer to "Liquidity and Capital Resources - Sufficiency of capital resources" and Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Financial Overview At September 30, 2012, we have three reportable segments which operate our media and direct marketing businesses: North America, Europe and APLA. Our North America segment primarily operates our media businesses, while our Europe and APLA segments primarily operate our direct marketing businesses. Total revenue for the nine months ended September 30, 2012 was $753.9. Excluding intercompany eliminations and fair value adjustments, the North America, Europe and APLA segments contributed 46.3%, 36.2% and 17.5% of total revenue, respectively.

For the nine months ended September 30, 2012, excluding intercompany eliminations and fair value adjustments, the combined sales of books, music, other home entertainment products and other products contributed 58.4% of total revenue, while magazine subscriptions, newsstand sales and advertising contributed 41.6% of total revenue.

36 -------------------------------------------------------------------------------- We typically generate our strongest revenue in the fourth calendar quarter due to consumer purchases during the holiday season. Within our North America segment, our revenue and profitability is strongest in the fourth quarter, followed by the second quarter, due to the increased number of magazine issues within each of those quarters, coupled with the timing of year end annual publications and consumer holiday purchases in the fourth quarter. Our international segments are also seasonal, with fluctuations in profits as a result of the timing of customer acquisition mailings (generally made in the first and third quarters, depressing profits in those quarters as a result), and revenue tending to be strongest in the fourth quarter due to holiday consumer purchases.

Financing Activities During the nine months ended September 30, 2012, we also executed the financing activities described below as part of our ongoing efforts to improve our liquidity and cash position. Refer to "Liquidity and Capital Resources - Sufficiency of capital resources" and Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information on these financing activities.

On June 15, 2012, we completed the purchase of $60.6 of our Floating Rate Senior Secured Notes due 2017 ("Senior Secured Notes"), pursuant to our cash tender offer, using proceeds from the sale of the Allrecipes.com business, at a purchase price of 95% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase.

On March 30, 2012, we entered into the $50.0 2012 Secured Term Loan and an $11.0 letter of credit facility ("Letter of Credit Facility" and together with the 2012 Secured Term Loan, the "2012 Secured Credit Facility"). The 2012 Secured Credit Facility matures on March 30, 2015. This new facility effectively replaced the Senior Credit Facility and 2011 Secured Term Loan, which we had repaid and terminated using proceeds from the sale of Allrecipes.com.

On March 21, 2012, we repaid and terminated our three year revolving credit facility ("Senior Credit Facility"), using $35.0 of net proceeds from our Allrecipes.com sale. Further, we cash-collateralized our standby letters of credit, $11.4 as of March 21, 2012, which had been issued under the Senior Credit Facility. During the third quarter of 2012, we re-issued these standby letters of credit under our 2012 Secured Credit Facility. We expect to receive the cash, previously used as collateral, in the fourth quarter of 2012.

On March 24, 2012, we amended our $10.0 unsecured term loan ("2011 Unsecured Term Loan") to increase the senior secured leverage ratio for the quarter ended March 31, 2012 and thereafter.

On March 6, 2012, using a portion of the net proceeds from our sale of Allrecipes.com, we repaid our $45.0 secured term loan ("2011 Secured Term Loan"), along with a $5.0 prepayment premium, which fully satisfied our obligations.

As of September 30, 2012, we were not in compliance with the financial covenants under our 2012 Secured Credit Facility (as defined below). Refer to "Liquidity and Capital Resources - Sufficiency of capital resources" and Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Following the completion of these activities, at September 30, 2012, our principal financing obligations consisted of our $50.0 2012 Secured Term Loan and $11.0 Letter of Credit Facility under our 2012 Secured Credit Facility, $464.4 outstanding Senior Secured Notes, and our $10.0 2011 Unsecured Term Loan.

Discontinued Operations We reported a loss from discontinued operations, net of taxes of $0.5 for the three months ended September 30, 2012. On July 2, 2012, we sold the operations of our Lifestyle and Entertainment Direct business ("LED") for $1.1, which was paid in cash and resulted in an immaterial loss. The sale of our Spain and Portugal businesses closed on July 31, 2012; the financial impact of the transaction was not material.

We reported income from discontinued operations, net of taxes, of $16.5 for the nine months ended September 30, 2012. This was driven by our sale of Allrecipes.com, which resulted in a gain of $36.9, net of taxes, partially offset by losses incurred on the businesses that we classified as discontinued operations. During 2012, we sold our Weekly Reader, LED, Spain and Portugal businesses. Losses were also incurred on businesses that were closed during the year, including our Reader's Digest Ukraine, Kazakhstan and China businesses, closed during the second quarter of 2012; and our Worldwide Country Tours and Reader's Digest Bulgaria businesses, closed during the first quarter of 2012.

During the second quarter of 2012, we committed to a plan to sell our Reader's Digest Mexico and Argentina businesses, previously classified within our APLA segment. We met the criteria under ASC 360 to classify these businesses as held for sale. There is no expectation of continuing cash flows (other than passive royalty income) or involvement in the operations after they are sold. The operating results for these businesses are included in discontinued operations for all periods presented. The assets and liabilities for these businesses are classified as held for sale for all periods presented. We believe that the sale of these businesses within the next twelve months is probable.

37 -------------------------------------------------------------------------------- Intercompany Eliminations, Corporate Unallocated Expenses and Other We present our segment revenue and operating (losses) profits consistently with how we manage our operations and how our chief operating decision maker reviews our results. Revenue and expenses attributable to intercompany transactions are included in the results of our reportable segments. However, we separately report corporate unallocated expenses, which cover expenses that are not directly attributable to business unit performance. Corporate unallocated expenses include the cost of corporate governance and other corporate-related expenses, as well as certain income and expenses associated with our U.S.

pension plans and postretirement healthcare costs, stock awards and other executive compensation programs that are not allocated to our reportable segments. Our segments include employee bonus expense, assuming we have met and earned 100% of our targeted bonus, to report our segments on a consistent basis. Any adjustments to the actual payouts and expected funding targets are recorded as an increase or decrease to corporate unallocated expenses. We separately report the effects of goodwill and other intangible asset impairment charges, certain fair value adjustments related to emergence from bankruptcy and other operating items, net, because our chief operating decision maker does not consider these items when assessing business unit performance.

Results of Operations Upon our emergence from chapter 11 proceedings, fresh start accounting rules under U.S. GAAP required that the Company record its assets and liabilities at fair value. These adjustments significantly affected the comparability of our results and included fair value adjustments to goodwill, other intangible assets, fixed assets, pensions and the reduction of a significant amount of unearned revenue. These adjustments impacted our reported revenue and operating expenses. As the fair value adjustments to unearned revenue are amortized into revenue over the duration of our subscriptions, our reported revenue after our emergence from chapter 11 is lower than the amounts we would have otherwise reported. However, with the exception of incremental depreciation as a result of fair value adjustments to our tangible assets, our chief operating decision maker does not consider the impact of these adjustments in the operating results, and therefore, these items are largely excluded from our segment results. Other intangible asset amortization is reported within the corporate unallocated line.

Our Form 12b-25 filed on November 15, 2012, identified expected corrections to prior period amounts related to non-cash tax provisions, non-cash impairment charges and stock-based compensation expense for the fourth quarter of 2010, the second, third and fourth quarters of 2011, and the first and second quarters of 2012. At the time of filing, we expected these corrections to increase our net loss by approximately $5.0 to $10.0 in each respective period. However, as a result of additional analysis, we determined that corrections were only necessary to the first quarter of 2012, for which we increased net loss by $14.5. See Note 2, Revision of Prior Period Consolidated Financial Statements, for further information.

38 -------------------------------------------------------------------------------- Table of Contents Reportable segment financial information for three months ended September 30, 2012, compared to three months ended September 30, 2011: Successor Company Three months ended September 30, 2012 2011 Revenue North America $ 105.0 $ 133.8 Europe 85.5 130.9 Asia Pacific & Latin America 44.5 57.3 Subtotal 235.0 322.0 Intercompany eliminations (2.7 ) (1.9 ) Fair value adjustments (a) (2.2 ) (7.7 ) Total revenue $ 230.1 $ 312.4 Operating (loss) profit North America $ (2.5 ) $ (6.0 ) Europe (5.1 ) (4.5 ) Asia Pacific & Latin America 3.0 3.6 Subtotal (4.6 ) (6.9 ) Corporate unallocated (7.6 ) (19.8 ) Fair value adjustments (a) (1.2 ) (3.8 ) Impairment of assets (85.0 ) (10.3 ) Other operating items, net (b) (1.7 ) (10.5 ) Operating loss (100.1 ) (51.3 ) Interest expense 14.4 15.3 Other income, net (1.4 ) (2.3 ) Income tax (benefit) expense (6.4 ) 1.6 Loss from discontinued operations (0.5 ) (10.9 ) Net loss $ (107.2 ) $ (76.8 ) (a) Fair value adjustments include the amortization of the fair value reduction to unearned revenue and related deferred cost accounts resulted from the application of fresh start accounting upon our emergence from bankruptcy.

(b) Items included in other operating items, net consist of the following: (i) restructuring charges, representing the streamlining of our organizational structure; (ii) professional, contractual charges and other periodic costs related to the strategic repositioning of our businesses; and (iii) gain or loss on the sale or disposal of assets. See Note 4, Other Operating Items, Net, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Revenue Revenue for the three months ended September 30, 2012, decreased $82.3, or 26.3%, to $230.1, as compared to $312.4 for the three months ended September 30, 2011. Our revenue included the amortization of fair value adjustments, which reduced our unearned revenue recorded at our emergence from bankruptcy on February 19, 2010 as a result of fresh start accounting. The amortization of fair value adjustments to unearned revenue reduced revenue by $2.2 for the three months ended September 30, 2012 and $7.7 for the three months ended September 30, 2011.

Excluding the negative effect of foreign currency translation of $14.9, and fair value adjustments, revenue for the three months ended September 30, 2012 decreased $72.9 or 22.8%, as compared to the three months ended September 30, 2011. Our revenue decline was largely due to decreased mail quantities due to a lower active customer base on our books and home entertainment products in Europe and Asia. The decline was also driven by lower sales on some of our book product lines; the sale of the Every Day with Rachael Ray publication in October 2011; and declining subscription renewals, along with lower per-copy rates, on our magazine titles in the North America segment.

39 -------------------------------------------------------------------------------- Table of Contents Product, Distribution and Editorial Expenses Product, distribution and editorial expenses for the three months ended September 30, 2012 decreased $36.7, or 25.1%, to $109.5, as compared to $146.2 for the three months ended September 30, 2011. Excluding the positive effect of foreign currency translation of $6.5, product, distribution and editorial expenses for the three months ended September 30, 2012 decreased $30.2, or 20.7%, as compared to the three months ended September 30, 2011. Our product, distribution and editorial expenses declined, primarily due to sales volume declines, which included the absence of costs for the Every Day with Rachael Ray publication.

Promotion, Marketing and Administrative Expenses Promotion, marketing and administrative expenses for the three months ended September 30, 2012 decreased $62.7, or 31.9%, to $134.0, as compared to $196.7 for the three months ended September 30, 2011. Excluding the positive effect of foreign currency translation of $9.2, promotion, marketing and administrative expenses for the three months ended September 30, 2012 decreased $53.5, or 27.2%, as compared to the three months ended September 30, 2011. The decline in promotion, marketing and administrative expenses was largely driven by reductions in our promotional mailings, due to a smaller promotable base and by more efficient mailing practices under our customer-centric strategy. The savings related to promotional investments to acquire new customers will continue to reduce our active customer bases, in so far as we are not replenishing customer names, leading to a smaller revenue base. The decline in promotion, marketing and administrative expenses was also driven by overhead cost savings due to lower corporate costs, as discussed below, and cost savings resulting from our 2011 headcount reduction initiatives; and the absence of costs for the Every Day with Rachael Ray publication.

Operating loss Operating loss for the three months ended September 30, 2012 increased $48.8 to $100.1, as compared to $51.3 for the three months ended September 30, 2011.

During the three months ended September 30, 2012, we concluded that interim impairment tests were necessary for our Europe and North America businesses.

This conclusion was based on certain indicators of impairment. Our results in Europe experienced further, unanticipated declines, based on continuing unfavorable economic environments, softer results to our promotional campaigns, continuing declines in some of our books and home entertainment products, particularly on our single sale book products. It continues to be difficult to forecast our business in this transformational environment and the actual declines have occurred at rates higher than we predicted. In addition, revenue declines in certain brands in our North America businesses resulted in the need to perform an interim impairment analysis on certain tradenames.

Based on our interim impairment test, our Europe reportable segment had goodwill and other intangible asset impairment charges of $64.0 and $2.7, respectively.

Our North America reportable segment had other intangible asset impairment charges related to certain tradenames of $13.5 and $1.1 for our United States and Canada reporting units, respectively. We also had property and equipment impairment charges of $3.7 in our North America segment. We will also continue to monitor the progress of our transformational changes to these businesses, the execution of performance against our financial projections and the impact on the value of our goodwill and other long-lived assets. See Note 3, Impairment of Assets, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Operating loss for our reportable segments (which does not include corporate unallocated expense, fair value adjustments, impairment of assets and other operating items, net) for the three months ended September 30, 2012 decreased $2.3 to $4.6, as compared to $6.9 for the three months ended September 30, 2011. The impact of foreign exchange movements was minimal on our segment results during the three months ended September 30, 2012. The decrease in operating loss was primarily the result of the sale of the Every Day with Rachael Ray publication in October 2011; and reduced promotional investments and overhead cost savings resulting, in part, from our 2011 restructuring initiatives. The improvement in operating loss was partially offset by declining revenue, as described above.

Corporate unallocated expense for the three months ended September 30, 2012 decreased $12.2 to $7.6, as compared to $19.8 for the three months ended September 30, 2011. The decrease is primarily driven by decreased amortization from certain other intangible assets becoming fully amortized in previous periods. Additionally, in the three months ended September 30, 2012, we reversed stock-based compensation expense related to the remeasurement of our liability-classified awards to reflect the estimated fair value of our common stock.

Other operating items, net for the three months ended September 30, 2012 decreased $8.8 to $1.7, as compared to $10.5 for the three months ended September 30, 2011. The decrease was primarily due to larger restructuring activities in the three months ended September 30, 2011, primarily across our Europe and APLA regions.

40 -------------------------------------------------------------------------------- Table of Contents Interest Expense Interest expense for the three months ended September 30, 2012 decreased $0.9 to $14.4, as compared to $15.3 for the three months ended September 30, 2011, including the amortization of debt issuance costs and bond discount of $1.5 and $0.9, respectively. The decrease was the result of decreased outstanding borrowings under the Senior Secured Notes; and repayment of the 2011 Secured Term Loan on March 6, 2012, partially offset by borrowings under the 2012 Secured Term Loan, entered into on March 31, 2012. See Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Income Taxes The income tax benefit for the three months ended September 30, 2012 increased $8.0, to $6.4, as compared to an expense of $1.6 for the three months ended September 30, 2011. The income tax benefit for the three months ended September 30, 2012 is driven by the Company's jurisdictional earnings mix.

Additionally, the income tax benefit for the three months ended September 30, 2012 reflected the impact of impairments to non-deductible goodwill and identified intangible assets which were included in our annual effective tax rate as they were no longer considered unusual in nature unlike in the prior year's quarter when the impairments charges were considered as discrete events.

The income tax expense for the three months ended September 30, 2011 is driven by the Company's jurisdictional earnings mix and the impairment in the quarter of non-deductible goodwill and identified intangible assets previously recorded in fresh start accounting. Additionally, the income tax expense recorded in the prior year quarter reflects the limitation under ASC-740 that the income tax benefit for the year to date loss can not be greater than the anticipated full year tax benefit.

Results of Operations: Reportable Segments North America Revenue in our North America segment for the three months ended September 30, 2012 decreased $28.8, or 21.5%, to $105.0, as compared to $133.8 for the three months ended September 30, 2011. Foreign currency translation had a minimal impact in the quarter. The decrease was primarily driven by the sale of Every Day with Rachael Ray at the end of 2011; lower sales on some of our book product lines due to declining promotional efforts and softer response rates; and declining subscription renewals, along with lower per-copy rates, on our food and home magazine titles and our Reader's Digest titles.

Operating loss in our North America segment for the three months ended September 30, 2012 decreased $3.5 to $2.5, as compared to $6.0 for the three months ended September 30, 2011. Foreign currency translation had a minimal impact in the quarter. The decrease was primarily driven by the absence of the Every Day with Rachael Ray publication, which incurred an operating loss in the prior year; decreased promotional investment due to smaller and canceled campaign mailings; and product cost savings initiatives. This was partially offset by lower revenue impact described above.

Europe Revenue in our Europe segment for the three months ended September 30, 2012 decreased $45.4, or 34.7%, to $85.5, as compared to $130.9 for the three months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $11.3, revenue for the three months ended September 30, 2012 decreased $34.1 or 26.1%, as compared to the three months ended September 30, 2011. This decline was largely driven by decreased mail quantities due to the continued decline in our active customer base and our planned reductions in the intensity of our promotional mailings.

Operating loss in our Europe segment for the three months ended September 30, 2012 increased $0.6, or 13.3%, to $5.1, as compared to $4.5 for the three months September 30, 2011. Excluding the positive effect of foreign currency translation of $0.6, operating loss for the three months ended September 30, 2012 increased $1.2, or 26.7%, as compared to the three months ended September 30, 2011. The increase was primarily due to lower revenue impact described above coupled with a one-time charge related to our licensing agreement with a third party to publish the United Kingdom edition of Reader's Digest magazine and sell other products under the Reader's Digest brand. These were partially offset by reduced promotional investments, and overhead cost savings resulting from our 2011 headcount reduction initiatives.

Asia Pacific & Latin America Revenue in our APLA segment for the three months ended September 30, 2012 decreased $12.8, or 22.3%, to $44.5, as compared to $57.3 for the three months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $3.5, revenue for the three months ended September 30, 2012 decreased $9.3 or 16.2%, as compared to the three months ended September 30, 2011. The decline was primarily driven by a lower active customer base for our books and home entertainment products, most notably in Brazil; and declining magazine circulation across the region.

41 -------------------------------------------------------------------------------- Table of Contents Operating profit in our APLA segment for the three months ended September 30, 2012 decreased $0.6, or 16.7%, to $3.0, as compared to $3.6 for the three months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $0.3, operating profit for the three months ended September 30, 2012 decreased $0.3 or 8.3%, as compared to the three months ended September 30, 2011. The decrease was primarily due to lower revenue impact described above; partially offset by reduced promotional investments; and by overhead cost savings resulting from our 2011 headcount reduction initiatives, primarily in Asia.

Reportable segment financial information for nine months ended September 30, 2012, compared to nine months ended September 30, 2011: Successor Company Nine months ended September 30, 2012 2011 Revenue North America $ 359.3 $ 459.2 Europe 281.2 388.0 Asia Pacific & Latin America 135.4 158.2 Subtotal 775.9 1,005.4 Intercompany eliminations (5.5 ) (5.1 ) Fair value adjustments (a) (16.5 ) (40.5 ) Total revenue $ 753.9 $ 959.8 Operating profit (loss) North America $ 18.0 $ 34.9 Europe (17.4 ) (0.9 ) Asia Pacific & Latin America 4.8 6.2 Subtotal 5.4 40.2 Corporate unallocated (43.3 ) (75.7 ) Fair value adjustments (a) (8.7 ) (25.4 ) Impairment of assets (203.7 ) (238.0 ) Other operating items, net (b) (3.4 ) (16.7 ) Operating loss (253.7 ) (315.6 ) Interest expense 47.2 43.3 Gain on deconsolidation of subsidiary (0.8 ) (8.5 ) Other income, net (4.3 ) (2.7 ) Income tax benefit (55.9 ) (10.4 ) Income (loss) from discontinued operations 16.5 (61.7 ) Net loss $ (223.4 ) $ (399.0 ) (a) Fair value adjustments include the amortization of the fair value reduction to unearned revenue and related deferred cost accounts resulted from the application of fresh start accounting upon our emergence from bankruptcy.

(b) Items included in other operating items, net consist of the following: (i) restructuring charges, representing the streamlining of our organizational structure; (ii) professional, contractual charges and other periodic costs related to the strategic repositioning of our businesses; (iii) gain or loss on the sale or disposal of assets; and (iv) pension curtailments. See Note 4, Other Operating Items, Net, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Revenue Revenue for the nine months ended September 30, 2012, decreased $205.9, or 21.5%, to $753.9, as compared to $959.8 for the nine months ended September 30, 2011. Our revenue included the amortization of fair value adjustments, which reduced our unearned revenue recorded at our emergence from bankruptcy on February 19, 2010 as a result of fresh start accounting. The amortization of fair value adjustments to unearned revenue reduced revenue by $16.5 for the nine months ended September 30, 2012 and $40.5 for the nine months ended September 30, 2011.

42 -------------------------------------------------------------------------------- Table of Contents Excluding the negative effect of foreign currency translation of $38.7, and fair value adjustments, revenue for the nine months ended September 30, 2012 decreased $191.2, or 19.1%, as compared to the nine months ended September 30, 2011. Our revenue declines were driven by the sale of Every Day with Rachael Ray at the end of 2011; declining subscription renewals, along with lower per-copy rates across many of our magazine titles; and lower sales on books due in part, to decreased promotional investments in direct marketing efforts, along with continued attrition of our active customer base in North America. Our revenue declines were also driven by a lower active customer base, across many of our markets in Europe and Asia. This was, in part, resulting from our decision to scale back the frequency and intensity of promotional efforts to new customers, as our customer-centric strategy becomes more fully effected in these markets.

Product, Distribution and Editorial Expenses Product, distribution and editorial expenses for the nine months ended September 30, 2012 decreased $92.7 to $346.5, as compared to $439.2 for the nine months ended September 30, 2011. Excluding the positive effect of foreign currency translation of $17.0, product, distribution and editorial expenses for the nine months ended September 30, 2012 decreased $75.7, or 17.2%, as compared to the nine months ended September 30, 2011. Our product, distribution and editorial expenses declined, primarily due to sales volume declines and the absence of costs for the Every Day with Rachael Ray publication.

Promotion, Marketing and Administrative Expenses Promotion, marketing and administrative expenses for the nine months ended September 30, 2012 decreased $127.5 to $454.0, as compared to $581.5 for the nine months ended September 30, 2011. Excluding the positive effect of foreign currency translation of $23.1, promotion, marketing and administrative expenses for the nine months ended September 30, 2012 decreased $104.4, or 18.0%, as compared to the nine months ended September 30, 2011. The decline in promotion, marketing and administrative expenses was driven by sales volume declines and reduced promotional investments due to a smaller promotable customer base and execution of our customer-centric approach. The savings related to promotional investments to acquire new customers will continue to reduce our active customer bases, in so far as we are not replenishing customer names, leading to a smaller revenue base. The decline in promotion, marketing and administrative expenses was also driven by reduced overhead due to lower corporate costs, as discussed below, and cost savings resulting from our 2011 headcount reduction initiatives; and the absence of costs for the Every Day with Rachael Ray publication.

Operating (loss) profit Operating loss for the nine months ended September 30, 2012 decreased $61.9 to $253.7, as compared to $315.6 for the nine months ended September 30, 2011.

We determined that an interim impairment test was necessary during the three months ended June 30, 2012. During the three months ended September 30, 2012, we finalized our second quarter 2012 interim test and determined a second interim impairment test was necessary. These analyses resulted in an impairment charge of $203.7 for goodwill, other intangible assets, and property and equipment, net. This conclusion to perform these interim impairment tests was based on certain indicators of impairment, including lower than expected results and a decline in our then most recent financial projections developed during the year.

Our interim impairment test has also been impacted by declines in market comparables since our last annual impairment test. In addition, revenue declines in certain brands in our North America and Europe businesses resulted in the need to perform an interim impairment analysis on certain tradenames. Based on our interim impairment tests, our Europe reportable segment had goodwill and other intangible asset impairment charges of $92.7 and $27.3, respectively. Our North America reportable segment had goodwill and other intangible asset impairment charges related to our Canada reporting unit of $36.8 and $14.2, respectively; and other intangible asset impairment charges related to certain tradenames in our United States reporting unit of $25.6. We also had property and equipment impairment charges of $3.7 in our North America segment. We will continue to monitor the progress of our transformational changes to these businesses, the execution of performance against our financial projections and the impact on the value of our goodwill and other long-lived assets. See Note 3, Impairment of Assets, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

Operating profit for our reportable segments (which does not include corporate unallocated expense, fair value adjustments, impairment of assets and other operating items, net) for the nine months ended September 30, 2012 decreased $34.8 to $5.4, as compared to $40.2 for the nine months ended September 30, 2011. The impact of foreign exchange movements was minimal on our segment results during the nine months ended September 30, 2012. The decrease was primarily driven by declining revenue impact, as described above; offset, in part, by reduced promotional investments and our more efficient promotional mailing practices under our customer-centric strategy; and overhead cost savings resulting, in part, from our 2011 restructuring initiatives.

43 -------------------------------------------------------------------------------- Table of Contents Corporate unallocated expense for the nine months ended September 30, 2012 decreased $32.4 to $43.3, as compared to $75.7 for the nine months ended September 30, 2011. The decrease is primarily driven by higher stock-based compensation expense in the prior year, associated with the April 2011 change in our Board of Director composition and related executive severance, and by decreased amortization from certain other intangible assets becoming fully amortized in previous periods. Additionally, in the nine months ended September 30, 2012, we reversed stock-based compensation expense related to the remeasurement of our liability-classified awards to reflect the estimated fair value of our common stock.

Other operating items, net for the nine months ended September 30, 2012 decreased $13.3 to $3.4, as compared to $16.7 for the nine months ended September 30, 2011. The decrease was primarily due to lower restructuring charges in the current period due to fewer restructuring activities; and charges in the prior year for professional fees associated with our chapter 11 filings and the application of fresh start accounting incurred after our emergence from bankruptcy.

Interest Expense Interest expense for the nine months ended September 30, 2012 increased $3.9 to $47.2, as compared to $43.3 for the nine months ended September 30, 2011, including the amortization of deferred financing fees and bond discount of $6.0 and $3.2, respectively. The increase was primarily the result of the write-off of deferred financing fees associated with the repayment and termination of the Senior Credit Facility in the first quarter of 2012, along with additional borrowings during 2012 under our 2012 Secured Term Loan; partially offset by decreased interest expense related to the Senior Secured Notes due the cash tender offer completed in June 2012.

Income Taxes The income tax benefit for the nine months ended September 30, 2012 increased $45.5, to $55.9, as compared to a benefit of $10.4 for the nine months ended September 30, 2011. The income tax benefit for the nine months ended September 30, 2012 reflected the impact of impairments to non-deductible goodwill and identified intangibles, which were included in our annual effective tax rate, as they were no longer considered unusual in nature. The reported benefit for the nine months ended September 30, 2012 reflects a $20.6 tax benefit related to our domestic continuing operations, which is supported by taxable income generated by the sale of Allrecipes.com, a component of discontinued operations as well as a discrete tax benefit of $10.2 related to the settlement of certain tax audits and litigation. The income tax benefit for the nine months ended September 30, 2011 was impacted by the impairment in the quarter of non-deductible goodwill and identified intangibles previously recorded in fresh start accounting. This was recorded as a discrete benefit. The income tax benefit was further impacted by the establishment of a valuation allowance on certain US tax assets, offset by the reversal of valuation allowance previously recorded on certain of our state net operating loss carryforward.

Results of Operations: Reportable Segments North America Revenue in our North America segment for the nine months ended September 30, 2012 decreased $99.9, or 21.8%, to $359.3, as compared to $459.2 for the nine months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $1.3, revenue for the nine months ended September 30, 2012 decreased $98.6, or 21.5%, as compared to the nine months ended September 30, 2011. The decrease was primarily driven by the sale of Every Day with Rachael Ray at the end of 2011 and the closure of freshHome; declining subscription renewals, along with lower per-copy rates across many of our magazine titles; lower sales on books due in part, to decreased promotional investments in direct marketing efforts, along with continued attrition of our active customer base; lower sales across our children's books, due to lower demand for our product offerings; and decreased advertising in Canada. This was partially offset by increased advertising across our United States Reader's Digest print and digital platforms and Haven Home Media, which we acquired in 2011.

Operating profit in our North America segment for the nine months ended September 30, 2012 decreased $16.9, or 48.4%, to $18.0, as compared to $34.9 for the nine months ended September 30, 2011. Foreign currency translation had a minimal impact in the period. The decrease was primarily driven by lower revenue described above, offset somewhat by the absence of the Every Day with Rachael Ray publication, which incurred an operating loss in the prior year; reduced promotion investments across some direct marketing efforts; and increased advertising across our United States Reader's Digest print and digital platforms.

44 -------------------------------------------------------------------------------- Table of Contents Europe Revenue in our Europe segment for the nine months ended September 30, 2012 decreased $106.8, or 27.5%, to $281.2, as compared to $388.0 for the nine months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $29.6, revenue for the nine months ended September 30, 2012 decreased $77.2, or 19.9%, as compared to the nine months ended September 30, 2011. This decline was largely driven by a lower active customer base on our books and home entertainment products across the region. Our results reflect the continued impact of the continuing decline in our active customer base and reduction in promotional investments.

Operating loss in our Europe segment for the nine months ended September 30, 2012 increased $16.5, to $17.4, as compared to $0.9 for the nine months September 30, 2011. Foreign currency translation had a minimal impact in the period. The increase in operating loss was primarily due to lower revenue described above, and to a lesser extent, a one-time charge related to our licensing agreement with a third party to publish the United Kingdom edition of Reader's Digest magazine and sell other products under the Reader's Digest brand. This was partially offset by reduced promotional investments, as we scale back the intensity and mailing quantities for campaigns to certain customer segments and overhead cost savings resulting from our 2011 headcount reduction initiatives.

Asia Pacific & Latin America Revenue in our APLA segment for the nine months ended September 30, 2012 decreased $22.8, or 14.4%, to $135.4, as compared to $158.2 for the nine months ended September 30, 2011. Excluding the negative effect of foreign currency translation of $8.0, revenue for the nine months ended September 30, 2012 decreased $14.8, as compared to the nine months ended September 30, 2011. The decline was primarily driven by lower circulation and advertising on certain magazine titles; and a lower active customer base for our books and home entertainment products, most notably in Brazil.

Operating profit in our APLA segment for nine months ended September 30, 2012 decreased $1.4 to $4.8, as compared to $6.2 for the nine months ended September 30, 2011. Foreign currency translation had a minimal impact in the period. This decrease was primarily due to the lower revenue described above, somewhat offset by reduced promotional activities and overhead cost savings resulting from our 2011 headcount reduction initiatives.

Liquidity and Capital Resources Cash Flows The consolidated statements of cash flows are summarized below: Successor Company Nine months ended September 30, 2012 2011 Net change in cash due to: Continuing operating activities $ (71.9 ) $ (84.9 ) Discontinued operating activities (19.6 ) (12.7 ) Operating activities (91.5 ) (97.6 ) Continuing investing activities 169.9 (4.5 ) Discontinued investing activities 2.3 (1.2 ) Investing activities 172.2 (5.7 ) Continuing financing activities (105.2 ) 37.9 Discontinued financing activities (0.2 ) (0.1 ) Financing activities (105.4 ) 37.8 Effect of exchange rate changes on cash and cash equivalents 0.5 (0.5 ) Net change in cash and cash equivalents (24.2 ) (66.0 ) Cash and cash equivalents at beginning of period 112.3 169.4 Cash and cash equivalents at end of period $ 88.1 $ 103.4 Overview At September 30, 2012, we had $88.1 of cash and cash equivalents. During the nine months ended September 30, 2012, there was a net decrease in cash of $24.2, which was driven by lower operating cash flows and cash-collateralization of our stand-by letters of credit, which were previously supported by the Senior Credit Facility. Additionally, we repaid a portion of our debt, funded by the net proceeds from our sale of Allrecipes.com and our 2012 Secured Term Loan.

45 -------------------------------------------------------------------------------- Table of Contents During the nine months ended September 30, 2011, there was a net decrease in cash of $66.0, which was primarily due to our February 2011 common stock repurchase, payments related to our change in control and our April 2011 Board Change, reorganization and restructuring payments, and investments in working capital as a consequence of lower operating cash flows due to reduced business activities, partially offset by borrowings under our Senior Credit Facility and cash inflow related to the sale of certain assets.

Cash flows from operating activities Net cash used by continuing operating activities was $71.9 during the nine months ended September 30, 2012, which was driven by our current year operating loss; declines in our working capital driven by reductions in business activities; and prepaid production costs, due to timing.

Net cash used by continuing operating activities was $84.9 during the nine months ended September 30, 2011. The use of cash was driven by our operating loss, payments related to our April 2011 Board Change and reorganization and restructuring payments, along with investments in working capital, which primarily consisted of an accumulation of inventory in preparation for fulfilling third quarter promotion efforts and anticipated fourth quarter activity (primarily in Europe), prepaid promotion and production costs, and a decrease in accrued expense. This was offset, in part, by the collection of accounts receivable.

Cash flows from investing activities Net cash provided by continuing investing activities was $169.9 during the nine months ended September 30, 2012, primarily due to the sale of Allrecipes.com, which yielded $175.0 in gross proceeds, or approximately $150.0 in net proceeds, after our tax liability related to the gain on the sale and associated professional fees. The net proceeds were primarily used to repay a portion of our outstanding debt and execute a tender offer on our Senior Secured Notes, as discussed in the "Debt" section below, and for capital expenditures. Our capital spending during the nine months ended September 30, 2012 also included routine capital expenditures.

Net cash used by continuing investing activities was $4.5 during the nine months ended September 30, 2011, primarily due to normal capital expenditures and investments in new enterprise planning and reporting platforms, along with cash outlay for our Haven Home acquisition, partially offset by proceeds from the sale of certain assets.

Cash flows from financing activities Net cash used by continuing financing activities was $105.2 during the nine months ended September 30, 2012. During the first quarter of 2012, using net proceeds from our Allrecipes.com sale we executed repayment on our 2011 Secured Term Loan, including payment of an early prepayment penalty, repaid our Senior Credit Facility and cash-collateralized our standby letters of credit outstanding thereunder. During the second quarter of 2012, we executed the tender offer on our Senior Secured Notes. These cash outlays were offset, in part, by proceeds from our 2012 Secured Term Loan, funded on March 30, 2012.

Net cash provided by continuing financing activities was $37.9 during the nine months ended September 30, 2011, primarily due to borrowings under our Secured Term Loan, Unsecured Term Loan and net borrowings under our Senior Credit Facility. This was offset by cash outlaid for our February 2011 repurchase of common stock and payments related to our Board Change, which were funded, in part, by the net borrowings under our Senior Credit Facility. Additionally, we expended cash towards financing fees on the New Credit Facilities.

Debt Our debt facilities at September 30, 2012 consisted of our Senior Secured Notes, 2011 Unsecured Term Loan and 2012 Secured Credit Facility. See Note 10, Debt, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

46 -------------------------------------------------------------------------------- Table of Contents A summary of activity for our outstanding debt instruments is as follows: · Senior Secured Notes and Indenture: At September 30, 2012, $464.4, net of unamortized discount of $9.8, was outstanding under the Senior Secured Notes, reflecting repayment of $60.6, from our tender offer. The Senior Secured Notes bear interest at a variable rate, which is reset quarterly, equal to LIBOR (subject to LIBOR floor of 3.0%) plus 6.5%. The Senior Secured Notes are fully and unconditionally guaranteed, on a first priority basis, jointly and severally by ourselves and by substantially all of our existing and future wholly-owned direct and indirect domestic subsidiaries. The obligations and guarantees under the Senior Secured Notes are secured by a first priority security interest in substantially all of our assets. The Indenture governing the Senior Secured Notes includes various covenants that, among other things, restrict certain payments by us, restrict our ability to merge with another entity, incur or guarantee debt and sell or transfer assets. The Indenture governing the Senior Secured Notes also contains events of default customary for agreements of its type, including a cross-default provision that is triggered by a default under other indebtedness in a principal amount of $30.0 or more, that results from the failure to pay such indebtedness at its final maturity, or results in the holder of such indebtedness causing that indebtedness to become due before its final maturity (i.e. accelerated).

· 2012 Secured Credit Facility: On March 30, 2012, the Company entered into a credit and guarantee agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, the Guarantors (defined therein), Wells Fargo Principal Lending, LLC as issuing lender, and the lenders thereunder, providing the Company with a $50.0 secured term loan ("2012 Secured Term Loan") and an $11.0 letter of credit facility ("Letter of Credit Facility" and together with the 2012 Secured Term Loan, the "2012 Secured Credit Facility"). The 2012 Secured Credit Facility matures on March 30, 2015. The term loans under the 2012 Secured Term Loan bear interest at a variable rate per annum, based upon the Company's election of a prime rate or LIBOR (subject to a floor of 4.0% and 3.0%, respectively) plus 4.0% in the case of prime rate borrowings and 5.0% in the case of LIBOR borrowings. The drawn letters of credit under the Letter of Credit Facility bear an interest rate of 6.0% per annum and the Letter of Credit Facility includes a utilization fee of 1.0% per annum, which will accrue on the total undrawn amount of the Letter of Credit Facility. The 2012 Secured Term Loan has a short-term repayment of $0.125 due quarterly, which is recorded in current portion of long-term debt in our consolidated balance sheets.

The 2012 Secured Credit Facility is fully and unconditionally guaranteed on a first priority secured basis, jointly and severally by ourselves and by substantially all of our existing and future wholly-owned direct and indirect domestic subsidiaries. The obligations and guaranty under the 2012 Secured Credit Facility are secured by a first priority security interest in the same collateral that secures our Senior Secured Notes. The 2012 Secured Credit Facility and the Senior Secured Notes are secured by the same collateral and rank pari passu with each other under the documentation governing such collateral; however, the 2012 Secured Credit Facility constitutes "Priority Payment Lien Obligations" under such documentation and enjoys priority ("first out") treatment with respect to post-default dispositions and realizations of collateral thereunder. The 2012 Secured Credit Facility contains mandatory prepayment provisions in the event of certain events, including certain asset sales. The 2012 Secured Credit Facility includes various covenants that, among other things, restrict certain payments by us, restrict our ability to merge with another entity, incur or guarantee debt and sell or transfer assets and require us to meet certain financial ratios. The 2012 Secured Credit Facility also contains events of default customary for agreements of its type, including a cross-default provision that is triggered by an "event of default" under either the 2011 Unsecured Term Loan or the Indenture governing the Senior Secured Notes, the failure to make a payment on any other indebtedness in a principal amount of $18.0 or more, or a default that causes or permits the holder of such indebtedness to become due prior to its stated maturity (i.e.

accelerated). On November 9, 2012, we obtained an amendment for the 2012 Secured Term Loan from the lender thereunder, which modified the financial covenants contained in the 2012 Secured Term Loan.

· 2011 Unsecured Term Loan: On August 12, 2011, the Company entered into an unsecured term loan and guarantee agreement with Luxor Capital Group, as administrative agent; the Guarantors (as defined therein); and the lenders thereunder, consisting of funds affiliated with Luxor Capital Group and Point Lobos Capital, who are shareholders of the Company's common stock, providing the Company with the $10.0 Unsecured Term Loan. The 2011 Unsecured Term Loan matures in May 2014 and bears interest at the rate of 11.0% per annum. The 2011 Unsecured Term Loan is fully and unconditionally guaranteed, on an unsecured basis, jointly and severally by ourselves and by substantially all of our existing and future wholly-owned direct and indirect domestic subsidiaries. The 2011 Unsecured Term Loan contains mandatory prepayment provisions in the event of certain events, including certain asset sales, however, certain other indebtedness, including the Senior Secured Notes, would be paid prior to the 2011 Unsecured Term Loan. In the event of any optional and mandatory prepayments, we will be required to pay a prepayment premium as set forth in the 2011 Unsecured Term Loan.

47 -------------------------------------------------------------------------------- Table of Contents The 2011 Unsecured Term Loan includes various covenants that, among other things, restrict certain payments by us, restrict our ability to merge with another entity, incur or guarantee debt and sell or transfer assets and require us to meet a senior secured leverage ratio. The 2011 Unsecured Term Loan also contains events of default customary for agreements of its type, including a cross-default provision that is triggered by an "event of default" under certain indebtedness, including the Indenture governing the Senior Secured Notes, the failure to make a payment on any other indebtedness in a principal amount of $18.0 or more, or a default that causes or permits the holder of such indebtedness to become due prior to its stated maturity (i.e. accelerated).

On March 16, 2012, we obtained a waiver for the 2011 Unsecured Term Loan from the lenders thereunder, which waived compliance, as of December 31, 2011, with a financial covenant contained in the 2011 Unsecured Term Loan. On March 24, 2012, we amended the 2011 Unsecured Term Loan to increase the senior secured leverage ratio in the financial covenant for the quarter ended March 31, 2012 and thereafter.

In connection with the 2011 Unsecured Term Loan, the Company issued two tranches of warrants to the lenders. See Note 13, Common Stock Warrants, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

We were in violation of the financial covenants under our 2012 Secured Credit Facility as of September 30, 2012. We obtained an amendment from our lender, dated November 9, 2012, to modify the financial covenant levels for the fiscal quarter ended September 30, 2012 as follows, to prevent a default under the agreement governing the 2012 Secured Credit Facility: the total leverage ratio was modified from 6.25:1.00 to 7.50:1.00; the first-out first lien leverage ratio was modified from 0.70:1.00 to 0.85:1.00; and the cash interest coverage ratio was modified from 1.50:1.00 to 1.20:1.00. In addition, the amendment modified the variable rate per annum to plus 5.00% in the case of prime rate borrowings and 6.00% in the case of LIBOR borrowings and waived the requirement to deliver financial statements for the fiscal quarter ended September 30, 2012 within forty-five days of the end of such quarter, and provided that the financial statements for the fiscal quarter ended September 30, 2012 must be delivered within fifty days of the end of such fiscal quarter. Management believes however, that based on current projections and given the impact of continued business declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 Secured Credit Facility for the next several quarters. Accordingly, we have reclassified the 2012 Secured Credit Facility from non-current to current, in our consolidated balance sheet, as of September 30, 2012.

Additionally, we have reclassified the 2011 Unsecured Term Loan from non-current to current in our consolidated balance sheet, as of September 30, 2012, due to certain cross-default provisions. We continue to classify the Senior Secured Notes as non-current, in our consolidated balance sheet, as of September 30, 2012, as there is no expectation of a cross-default because the 2012 Secured Term Loan was not accelerated by the lender.

We were in compliance with all other covenants contained in our debt agreements as of September 30, 2012. Our ability to comply with the other covenants in our debt agreements, including in our 2011 Unsecured Term Loan, which requires us to meet a senior secured leverage ratio, depends on our results of operations and the speed with which we can execute our operational and strategic initiatives and their outcomes.

We are currently in negotiations with our lender to further amend the 2012 Secured Term Loan to revise the financial covenants to levels that we believe are attainable based on our updated projections and strategic plan, inclusive of our transformation efforts described above (including assumptions regarding the successful sale and licensing of some international businesses). However, there can be no assurance that an agreement will be reached. The failure to comply with the financial covenants under the 2012 Secured Credit Facility would constitute an event of default, which would give the lenders under that facility the right to accelerate payment of their loans and which in turn could create an event of default under our 2011 Unsecured Term Loan and our Senior Secured Notes. Based on our relationships and ongoing discussions with our lenders, we believe it is reasonably likely that we would be successful in obtaining such waivers and/or amendments. It is possible that, as part of granting any such waivers or amendment, the lenders will require us to pay consent fees and/or insist on modifications to the applicable agreements that could place additional restrictions on our operations and would restrict our ability to respond to future financial or operational challenges. However, it is impossible to predict with certainty that we would be able to obtain an amendment or waiver or repay the 2012 Secured Credit Facility. If we are unable to do so, our lender could declare all outstanding principal and interest under the 2012 Secured Credit Facility to be due and payable, which in turn could create an event of default under our 2011 Unsecured Term Loan and our Senior Secured Notes, and we might not be able to meet these obligations.

Sufficiency of capital resources 48 -------------------------------------------------------------------------------- Table of Contents Our primary sources of operating cash are revenue from non-magazine products (including single and series book sales, music, video and DVD products), magazine related products (including subscription revenue, advertising revenue and newsstand revenue) and non-published products and services (including vitamins and related health products, jewelry, merchandise, wine, mailing list rentals and royalty and license agreements). Recently, our sources of cash have also included the sales of assets and financing sources, including proceeds from the issuance of the Senior Secured Notes, as well as borrowings under the 2012 Secured Credit Facility. Our primary uses of cash are product and promotional costs; administrative expenses, including compensation, services and supplies; debt service; and income taxes.

Our operating cash flows are impacted by, among other things, the following items: (i) the speed with which we manage our cost structure in response to operating margin compression, (ii) customer demand for our products, (iii) the impact of the global financial environment on our customers and the stability of the financial, foreign exchange, equity and credit markets, (iv) the ability or willingness of our vendors to supply products and services to us on favorable terms and (v) rapid changes in the highly competitive market in which we operate. In addition, the extent to which we operate our international businesses under a licensing model (or, alternatively, sell or shut down some or all of the businesses) will impact our operating cash flows.

Since emerging from Chapter 11 in February 2010, we have experienced operating losses and cash flow deficits. Deteriorating macroeconomic and industry conditions and uncertainty have had a significant negative impact on the demand for our products and, therefore, the cash flows of our businesses. Most of our revenue is based upon discretionary spending by consumers, which is influenced by customer preferences and general economic conditions. Customer demand has declined in recent periods due to changing preferences as a result of increased competition from alternative content providers and pricing pressures. In addition, a longer term trend has been a decrease in revenue from advertising as budgets have scaled back and advertisers have shifted their investments to more directed platforms, including the internet. We initiated various measures in 2011 and 2012 to mitigate the impact on our cash flows, including reducing our cost structure by lowering headcount and overhead expenses. In addition, we decided to pursue a strategy of licensing our international businesses to provide a more predictable and stable income stream and thereby reduce debt.

Notwithstanding these initiatives, in recent periods our business continued to face a number of challenges, including declines in our active customer and subscriber bases, declining sales of our book products and softness in our international markets and in advertising in several of our publications, which have had an adverse impact on our results of operations. Further, our businesses continue to be impacted by the continued reduction in promotional investments, as we migrate towards a more focused customer-centric and digital-based approach and discontinue efforts towards acquiring new customers for traditional direct marketing purposes and as we continue to reduce costs. We expect some of these conditions to continue throughout 2012 and through 2013.

In addition to the initiatives discussed above, we have taken steps to sell or shutdown several non-core or underperforming businesses. During the first quarter of 2012, we sold our Weekly Reader and our Allrecipes.com businesses.

Proceeds of $3.4 from the Weekly Reader sale were not material. The net proceeds from the Allrecipes.com sale of approximately $150.0 were primarily used to repay the 2011 Secured Term Loan, the Senior Credit Facility and related fees, to repurchase a portion of our Senior Secured Notes, and for certain capital expenditures as permitted by the Indenture. In addition, during the first quarter of 2012, we shut down our Worldwide Country Tours business and our RD Bulgaria operations. These initiatives continued in the second quarter of 2012, as we have taken steps to sell businesses in Mexico and Argentina, and shut down businesses in Ukraine, Kazakhstan and China. We also closed the sale of our LED business on July 2, 2012 and we closed on the sale of our Spain and Portugal businesses on July 31, 2012. See Note 7, Discontinued Operations and Assets Held for Sale, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

As of September 30, 2012, we had $88.1 in cash and cash equivalents, of which approximately $59.1 was held by foreign subsidiaries. While the tax-related impact of repatriation of cash on hand from our foreign subsidiaries to the United States is not expected to be material in the near term, at any given time, approximately $50.0 to $60.0 of our global cash is generally unavailable for general corporate use as it is held in various worldwide bank accounts for local needs, such as prefunding payrolls and certain payables, and local working capital needs. Further, at any given time, we generally have legally or contractually restricted cash of $12.0 to $18.0, required for sweepstakes deposits, cash collateral for credit card transactions and postal deposits. We are also involved in a dispute with the tax authorities in Brazil, against which we paid $4.5 in April 2012 and in which we continue to pay incremental taxes under protest. In addition, on August 23, 2012, we announced that we had reached a settlement of all legal proceedings with the Federal Trade Commission staff on the FTC's allegations regarding the marketing campaign for the Ab Circle Pro fitness product, pursuant to a Consent Order under which we agreed to pay between approximately $13.8 and $23.8 for consumer redress.

49 -------------------------------------------------------------------------------- Table of Contents In light of the uncertainty that we will have sufficient cash flows to meet our working capital requirements, we are taking further steps to reduce our cash requirements. We are continuing our process to sell international assets and license our underlying intellectual property related to these businesses, and have received positive initial interest on these initiatives. We also continue to pursue reductions to our cost infrastructure, commensurate with our plans to create a smaller, simpler business, including reductions in workforce, direct costs and operating efficiencies. In addition, we are transforming our North America business to make it more competitive and profitable in the longer-term, by moving towards a multi-channel marketing approach for targeted products. We cannot assure you, however, that we will be able to successfully implement these initiatives or that, even if we are able to implement them, these initiatives will be sufficient to fully address our liquidity needs.

Our ability to meet our working capital, capital expenditure, restructuring costs, debt service and other funding requirements is dependent on our ability to successfully execute our strategic initiatives, including (i) licensing or exiting some or all of our international businesses; (ii) further reductions in our debt levels; (iii) continued reductions in direct costs and corporate overhead; and (iv) a stabilization in operating results in our North America business. If we are not able to successfully execute these initiatives in a timely manner or if we experience additional adverse impacts that we are unable to adequately anticipate, we believe that we will not have sufficient cash flow to meet our working capital, debt service and other liquidity requirements for the next twelve months, which would have a material adverse impact on our business.

We currently do not have any other sources of cash, other than our cash on hand and operating cash flows. If our cash on hand and cash flows from operations are not sufficient to fully fund our working capital and other liquidity requirements, we would need to obtain funding from other sources. However, we expect that, as a result of the factors described above, including current economic and market conditions, our current leverage and recent operating results, and our current credit ratings, it would be difficult for us to obtain additional debt or equity financing on terms that are acceptable to us, if at all. Also, our debt agreements contain covenants that limit our ability to incur additional debt, and those lenders may be unwilling to modify or waive those covenants if such modifications or waivers are necessary. In addition, while affiliates of certain of our shareholders provided us with funds in the past under the 2011 Secured Term Loan and the 2011 Unsecured Term Loan, neither they nor any other shareholders have agreed or are under any obligation to provide us with any further funding. If, under such circumstances we were unable to obtain additional financing, we would need to pursue one or more alternative solutions to generate cash and reduce our cash requirements, such as selling additional assets or restructuring our balance sheet through, among other things, amendments, modifications, tender or exchange offers or other negotiated transactions with our lenders, bondholders and other constituents. We cannot be certain that any such transactions will be successful.

An important factor that has an impact on our ability to obtain financing, and the cost to us of such financing, is our corporate credit ratings, which were downgraded by both Moody's and Standard & Poor's during the third quarter of 2012. Our current corporate credit ratings and outlooks are summarized below: Rating Agency Rating Outlook Moody's Caa1 Negative Standard & Poor's CCC- Negative Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include, but are not limited to, changes in our operating performance, the economic environment, conditions in the markets and industries in which we operate, our financial position and changes in our business strategy. Although the impact that these ratings changes will have on our ability to raise new capital, receive other forms of credit extensions or the cost at which the new capital may be negotiated has yet to be seen, it is likely to be more challenging for us to do so.

Collateral requirements The Senior Secured Notes and our 2012 Secured Credit Facility are secured by a first priority security interest on substantially all of the assets of the Company and the Guarantors, including 100.0% of the capital stock of the Company and its domestic subsidiaries and 65.0% of the capital stock of their respective first-tier foreign subsidiaries, in each case subject to certain exceptions (including that the capital stock of subsidiaries no longer collateralizes the Senior Secured Notes upon reaching certain significant thresholds) set forth in the Indenture and related documentation.

As of September 30, 2012, excluding intercompany assets, our non-guarantor subsidiaries represented approximately 41.2% of our total assets. The value of the collateral in the event of liquidation may be materially different from book value.

Significant Accounting Policies Below is an update to our critical accounting policies, as included in our audited consolidated December 31, 2011 financial statements and accompanying notes.

50 -------------------------------------------------------------------------------- Table of Contents During the three months ended September 30, 2012, we concluded that interim impairment tests for goodwill were necessary for our Europe and Canada reporting units. This conclusion was based on certain indicators of impairment, including lower than expected results and a decline in our most recent financial projections. Our interim impairment test has been impacted by declines in market comparables since our last annual impairment test. Revenue declines in certain brands in our North America businesses resulted in the need to perform an interim impairment analysis on certain tradenames.

We determined that an interim impairment test was necessary during the three months ended June 30, 2012. During the three months ended September 30, 2012, we finalized our second quarter 2012 interim test and determined a second interim impairment test was necessary. These analyses resulted in an impairment charge of $203.7 for goodwill, other intangible assets, and property and equipment, net. We estimated the fair value of the Europe and Canada reporting units based on a combination of the income and market multiple approaches. Generally, we place a greater significance on the income approach. We estimated the fair value of our tradenames using the relief from royalty method. During three months ended September 30, 2012, the discount rate used in our impairment tests ranged from 15.0% to 16.0%; the near-term growth rates ranged from (21.2)% to 9.1%; and the perpetual growth rates ranged from 0.0% to 2.0%. See Note 3, Impairment of Assets in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

The financial forecast utilized for purposes of the impairment analysis was an estimate of reasonable expected-case financial results that a market participant would expect the Company to generate in the future. While the Company believes the assumptions used in the interim impairment analyses are reasonable, our analyses are sensitive to adverse changes in the assumptions used in the valuations. In particular, changes in the projected cash flows, the discount rate, the terminal year growth rate and market multiple assumptions could produce significantly different results for the impairment analyses. Internal and external factors could result in changes in these assumptions against actual performance which may result in future impairment tests and charges. Internal and external factors that could negatively impact our key assumptions include a decline in the stock market that would reduce relative valuations of comparable peer-group companies; a decrease in economic outlook or expectation for the publishing industry; certain strategic initiatives are not realized or achieved at the level expected; an increase in interest rates, borrowing rates and other measures of risk, which would increase the discount rate applied to future cash flows and reduce the present value of future cash flows; and a result in an actual financial performance that is lower than anticipated. We will continue to monitor any changes in circumstances for indicators of impairment.

Recent Accounting Pronouncements In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-08, Testing Goodwill for Impairment ("ASU 2011-08"), which represents an update to ASC Topic 350, Intangibles-Goodwill and Other ("ASC 350"). ASU 2011-08 simplifies how entities test goodwill for impairment. ASU 2011-08 permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether to perform a two-step goodwill impairment test. ASU 2011-08 is effective for the Company in the first quarter of its fiscal year ending December 31, 2012. The Company adopted this guidance effective January 1, 2012, and it did not have any impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"), which represents an update to ASC 220, Comprehensive Income ("ASC 220"). ASU 2011-05 provides new disclosure guidance for comprehensive income, requiring presentation of each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. An entity will have the option to present these items in one continuous statement or two separate but consecutive statements. An entity will no longer be permitted to present components of other comprehensive income as part of the statement of changes in stockholders' equity. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"), which represents an update to ASC 220. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments.

These updates are effective for fiscal years beginning after December 15, 2011 and for interim periods within those years. The Company adopted this guidance effective January 1, 2012, and it did not have a material impact on our consolidated financial statements.

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