10-Q 1 a09-13479_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarter ended March 31, 2009

 

Commission file number 001-10434

 


 

THE READER’S DIGEST ASSOCIATION, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

13-1726769

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Reader’s Digest Road, Pleasantville, New York

 

10570

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (914) 238-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  o   No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x

 

The number of shares of Common Stock of the registrant outstanding as of May 15, 2009 was 1,000.

 

 

 



Table of Contents

 

THE READER’S DIGEST ASSOCIATION, INC.

 

QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED March 31, 2009

 

INDEX

 

 

 

Page

 

 

 

Part I -

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Consolidated Statements of Operations for the three and nine-months ended March 31, 2009 and 2008

4

 

 

 

 

Consolidated Balance Sheets as of March 31, 2009 and June 30, 2008

5

 

 

 

 

Consolidated Statements of Cash Flows for the nine-months ended March 31, 2009 and 2008

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

43

 

 

 

Item 4T.

Controls and Procedures

43

 

 

 

Part II -

Other Information

 

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 3.

Defaults Upon Senior Securities

48

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

48

 

 

 

Item 5.

Other Information

48

 

 

 

Item 6.

Exhibits

49

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

All references in this report to “Reader’s Digest,” “RDA,” the “Company,” “we,” “us” and “our” mean, unless the context indicates otherwise, The Reader’s Digest Association, Inc., and its subsidiaries on a consolidated basis.

 

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

 

Portions of the information in this Quarterly Report, including, but not limited to, those set forth under Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, and certain oral statements made from time to time by representatives of the Company may be considered “forward-looking statements.” Forward-looking statements can be identified by the use of forward-looking terminology, including words such as “prospects,” “outlook,” “believes,” “estimates,” “intends,” “may,” “will,” “should,” “anticipates,” “expects” or “plans,” or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties. These forward-looking statements include all matters that are not historical facts. They relate to, without limitation, our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, plans, objectives and the industry in which we operate.

 

Forward-looking statements are inherently subject to risks, trends and uncertainties, many of which are beyond our ability to control or 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. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report. 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 contained in this quarterly report, 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.

 

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 the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections in this report and in the Business, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections in our Annual Report on Form 10-K for the year ended June 30, 2008.

 

Any forward-looking statements that we make in this quarterly report 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. 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.

 

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Table of Contents

 

ITEM 1. FINANCIAL STATEMENTS

 

The Reader’s Digest Association, Inc. and Subsidiaries

Consolidated Statements of Operations

(in millions)

(unaudited)

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

479.1

 

$

575.1

 

$

1,657.3

 

$

1,801.9

 

 

 

 

 

 

 

 

 

 

 

Product, distribution and editorial expenses

 

207.4

 

244.1

 

721.5

 

784.0

 

Promotion, marketing and administrative expenses

 

270.9

 

332.2

 

937.9

 

1,043.9

 

Impairment of assets

 

527.1

 

 

527.1

 

 

Other operating items, net

 

9.6

 

7.0

 

31.4

 

15.6

 

Operating loss

 

(535.9

)

(8.2

)

(560.6

)

(41.6

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

36.5

 

42.9

 

117.2

 

135.2

 

Other (income) expense , net

 

(0.6

)

(1.7

)

1.5

 

(6.6

)

Loss before income taxes and discontinued operations

 

(571.8

)

(49.4

)

(679.3

)

(170.2

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

(112.1

)

(10.2

)

(98.3

)

(18.7

)

Loss from continuing operations

 

(459.7

)

(39.2

)

(581.0

)

(151.5

)

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax expense (benefits) of $0.9 and $(15.9) for the three and nine-months ended March 31, 2009, respectively and $(4.5) and $(5.1) for the three and nine-months ended March 31, 2008, respectively

 

(2.3

)

(14.4

)

(71.6

)

(7.8

)

Net loss

 

$

(462.0

)

$

(53.6

)

$

(652.6

)

$

(159.3

)

 

See accompanying Notes to the Consolidated Financial Statements

 

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Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Consolidated Balance Sheets

(in millions, except share and per share data)

(unaudited)

 

 

 

March 31,

 

June 30,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

102.4

 

$

79.4

 

Accounts receivable, net

 

220.7

 

291.5

 

Inventories

 

108.1

 

112.0

 

Prepaid and deferred promotion costs

 

38.2

 

54.5

 

Prepaid expenses and other current assets

 

182.3

 

157.1

 

Assets held for sale

 

0.9

 

241.4

 

Total current assets

 

652.6

 

935.9

 

Property, plant and equipment, net

 

68.9

 

99.1

 

Goodwill

 

1,172.3

 

1,621.2

 

Other intangible assets, net

 

498.6

 

901.5

 

Prepaid pension assets

 

308.5

 

290.9

 

Other noncurrent assets

 

115.0

 

117.5

 

Total assets

 

$

2,815.9

 

$

3,966.1

 

Liabilities and stockholder’s (deficit) equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt and short term debt

 

$

15.6

 

$

25.6

 

Accounts payable

 

200.3

 

229.4

 

Accrued expenses

 

214.1

 

270.0

 

Income taxes payable

 

14.9

 

26.9

 

Unearned revenues

 

388.0

 

377.9

 

Other current liabilities

 

13.2

 

10.9

 

Liabilities held for sale

 

 

42.5

 

Total current liabilities

 

846.1

 

983.2

 

Long-term debt

 

2,164.3

 

2,091.9

 

Unearned revenues

 

151.8

 

137.6

 

Accrued pension

 

71.3

 

84.0

 

Post-retirement and post-employment benefits other than pensions

 

20.8

 

25.5

 

Other noncurrent liabilities

 

245.5

 

388.9

 

Total liabilities

 

$

3,499.8

 

$

3,711.1

 

Common stock (par value $1.00 per share, authorized and issued 1,000 shares at March 31, 2009 and June 30, 2008)

 

 

 

Paid-in capital

 

1,010.7

 

1,008.8

 

Accumulated deficit

 

(1,559.8

)

(907.2

)

Accumulated other comprehensive (loss) gain

 

(134.8

)

153.4

 

Total stockholder’s (deficit) equity

 

(683.9

)

255.0

 

Total liabilities and stockholder’s (deficit) equity

 

$

2,815.9

 

$

3,966.1

 

 

See accompanying Notes to the Consolidated Financial Statements

 

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Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

 

 

Nine-months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(652.6

)

$

(159.3

)

 

 

 

 

 

 

Adjustments to reconcile net loss to operating cash flows:

 

 

 

 

 

Loss from discontinued operations, net of tax expense

 

71.6

 

7.8

 

Depreciation and amortization

 

59.0

 

59.4

 

Impairment of assets, net of tax

 

422.5

 

 

Amortization of debt issuance costs

 

6.3

 

6.3

 

Net gain on sale of certain assets

 

0.7

 

(0.2

)

Stock-based compensation

 

2.2

 

6.5

 

Changes in assets and liabilities, net of effects of dispositions:

 

 

 

 

 

Accounts receivable, net

 

24.7

 

35.6

 

Inventories

 

(11.8

)

(3.2

)

Prepaid and deferred promotion costs

 

7.1

 

20.2

 

Other assets

 

(68.1

)

(28.8

)

Unearned revenues

 

59.2

 

145.1

 

Income and deferred taxes, net

 

(18.5

)

(42.9

)

Accounts payable and accrued expenses

 

(32.5

)

(85.5

)

Other liabilities

 

(6.7

)

16.7

 

Net change in cash due to continuing operating activities

 

(136.9

)

(22.3

)

Net change in cash due to discontinued operating activities

 

(38.2

)

(20.4

)

Net change in cash due to operating activities

 

(175.1

)

(42.7

)

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of certain businesses, net

 

108.1

 

17.3

 

Purchases of intangibles

 

 

(1.1

)

Capital expenditures

 

(10.1

)

(18.9

)

Other investing activity

 

13.8

 

 

Net change in cash due to investing activities

 

111.8

 

(2.7

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

489.1

 

252.1

 

Debt payments

 

(398.9

)

(161.0

)

Short-term borrowings, net

 

(6.5

)

 

Repurchase of preferred stock

 

 

(17.3

)

Other, net

 

(0.2

)

(0.1

)

Net change in cash due to financing activities

 

83.5

 

73.7

 

Effect of exchange rate changes on cash and cash equivalents

 

2.8

 

4.0

 

Net change in cash and cash equivalents

 

23.0

 

32.3

 

Cash and cash equivalents at beginning of period

 

79.4

 

50.2

 

Cash and cash equivalents at end of period

 

$

102.4

 

$

82.5

 

 

See accompanying Notes to the Consolidated Financial Statements

 

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Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

References in Notes to Consolidated Financial Statements to “we,” “us,” “our,” “RDA” and “Company” are to The Reader’s Digest Association, Inc. and its subsidiaries on a consolidated basis.  All references to the years 2009 and 2008, unless otherwise indicated, are to fiscal year 2009 and fiscal year 2008, respectively.  Our fiscal year is the period from July 1 through June 30.

 

(1)                                 Basis of Presentation

 

Description of Our Business

 

We are a global multi-brand media and marketing company that educates, entertains and connects audiences around the world.  We are dedicated to providing our customers with the inspiration, ideas and tools that simplify and enrich their lives.  With offices in 44 countries and serving customers in 78 countries, we market books, magazines, educational products, recorded music collections and home video products to a customer database of approximately 130 million names worldwide.  We sell our products worldwide through direct marketing and direct sales channels.  Our best known trademark is our flagship brand, Reader’s Digest.  Our business is organized and reports across three primary business segments: Reader’s Digest United States, Reader’s Digest International, and School & Educational Services. For further commentary regarding these segments, see Management’s Discussion and Analysis and Note 15, Segments, in our Annual Report on Form 10-K.

 

During the first half of fiscal 2009, we sold our home party planning business Taste of Home Entertaining, Inc. (“TOHE”); our schools and youth fundraising business consisting of QSP, Inc., Quality Service Programs, Inc., and their affiliated subsidiaries in the United States and Canada (“QSP”); and the principal operating assets of Books Are Fun, Ltd. (“BAF”), our display-marketing business, in connection with our exit of this business.  As a result, TOHE, QSP and BAF are classified as discontinued operations for all periods presented in the consolidated financial statements.   See Note 3, Discontinued Operations, for more information.

 

In connection with the interim review of the Company’s goodwill and long-lived assets for recoverability, the Company determined that its goodwill and long-lived assets were impaired and recorded estimated impairment charges of $205.4 and $321.7, respectively, during the three-months ended March 31, 2009, which is included in the line item Impairment of assets in the Company’s Consolidated Statements of Operations.  Refer to Note 4, Impairment of Assets, for more information.

 

Basis of Presentation

 

The accompanying consolidated financial statements as of March 31, 2009 and June 30, 2008 and for the three and nine-months ended March 31, 2009 and 2008 includes the accounts of The Reader’s Digest Association, Inc. and its majority-owned subsidiaries including the predecessor entities WRC Media Inc. (“WRC Media”) and Direct Holdings U.S. Corp. (“Direct Holdings”).  We and our majority owned subsidiaries are owned by RDA Holding Co., an entity controlled by Ripplewood Holdings L.L.C. (“Ripplewood”).

 

On January 23, 2007, RDA Holding Co. (a Ripplewood controlled entity), WRC Acquisition Co. (a subsidiary of RDA Holding Co.) and WRC Media entered into a merger agreement that provided for WRC Acquisition Co. to merge with and into WRC Media, with WRC Media being the surviving corporation (the “WRC Media Merger”).  An investment fund affiliated with Ripplewood acquired its original interest in WRC Media in 1999 and had at the time of the WRC Media Merger approximately a 46% economic interest and a majority voting interest in WRC Media.  The merger consideration of $100.7 paid to WRC Media’s existing stockholders to acquire all the common stock of WRC Media at the closing of the WRC Merger on March 2, 2007 included a combination of RDA Holding Co. common stock of $80.6, RDA Holding Co. junior pay-in-kind preferred stock of $20.0 and cash of $0.1.

 

On January 23, 2007, RDA Holding Co. entered into a stock acquisition agreement to acquire all the common stock of Direct Holdings in exchange for shares of common stock of RDA Holding Co. and net cash totaling $56.7 (the “Direct Holdings Stock Acquisition”).  An investment fund affiliated with Ripplewood acquired its original interest in Direct Holdings in December 2003 and had at the time of the Direct Holdings Stock Acquisition approximately an 84% voting and economic interest in Direct Holdings.  The net consideration of $56.7 paid at the closing of the Direct Holdings Stock Acquisition on March 2, 2007 included a combination of RDA Holding Co. common stock of $50.1 and net cash of $6.6. Under the terms of the stock acquisition agreement, a purchase price adjustment was required to be made in January 2008, which resulted in the issuance of additional RDA Holding Co. common stock of $0.7 and payment of cash of $0.1 to the shareholders of Direct Holdings.

 

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The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

On March 2, 2007, RDA Holding Co. acquired The Reader’s Digest Association, Inc. pursuant to a Merger Agreement dated November 16, 2006 among The Reader’s Digest Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (a wholly owned subsidiary of RDA Holding Co.) (the “RDA Merger Agreement”).  Pursuant to the RDA Merger Agreement, Doctor Acquisition Co. was merged with and into The Reader’s Digest Association, Inc., with The Reader’s Digest Association, Inc. being the surviving corporation (the “Acquisition Transaction”).  In the Acquisition Transaction, each outstanding share of common stock of The Reader’s Digest Association, Inc. (except those held in treasury) was converted into the right to receive $17.00 in cash and each outstanding share of Doctor Acquisition Co. was converted into one share of common stock of The Reader’s Digest Association, Inc., as the surviving corporation.  Prior to the Acquisition Transaction, The Reader’s Digest Association, Inc. was a publicly traded company listed on the New York Stock Exchange.  Upon the closing of the Acquisition Transaction, RDA Holding Co. became the owner of all the issued and outstanding common stock of The Reader’s Digest Association, Inc., as the surviving corporation of the Acquisition Transaction. Concurrently, with the closing of The Reader’s Digest Association, Inc. acquisition on March 2, 2007, RDA Holding Co. contributed all of the outstanding shares of WRC Media and Direct Holdings to The Reader’s Digest Association, Inc.

 

Prior to the acquisition of The Reader’s Digest Association, Inc., investment funds affiliated with Ripplewood controlled a majority of the voting rights in both WRC Media and Direct Holdings.  WRC Media is treated as the predecessor company since Ripplewood acquired its controlling ownership position in WRC Media in 1999, prior to its ownership position in Direct Holdings and The Reader’s Digest Association, Inc. The combination of WRC Media and Direct Holdings for the periods prior to March 2, 2007 was accounted for using the accounting method prescribed in the Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations, (“SFAS 141”) for a combination of entities under common control.

 

The acquisition of The Reader’s Digest Association, Inc. by RDA Holding Co. was accounted for using the purchase method of accounting prescribed in SFAS 141Accordingly, the consolidated results of The Reader’s Digest Association, Inc. are included in the consolidated financial statements from the acquisition date on March 2, 2007 and include the pushdown of purchase consideration from RDA Holding Co.

 

The consolidated financial statements include all companies that RDA directly controls.  All significant intercompany accounts and transactions have been eliminated for all periods presented in the consolidated financial statements.

 

We report on a fiscal year that begins July 1.  The three and nine-months ended March 31, 2009 and 2008 are for and through the third quarters of fiscal 2009 and 2008, respectively.

 

Use of Estimates and Interim Reporting

 

The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes that are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008. These statements, in the opinion of management, have been prepared following the requirements of the Securities and Exchange Commission and generally accepted accounting principles in the United States of America (“GAAP”) for interim reporting, applying certain assumptions and estimates, including all adjustments considered necessary to present such information fairly.  Operating results for any interim period are not necessarily indicative of the results for an entire year due to the seasonality of our business among other things.  In preparing the consolidated financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period.  Actual results could differ from those estimates.

 

Reclassifications

 

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the presentation as of and for the three and nine-months ended March 31, 2009.  Such amounts include the Company’s reclassification of assets and liabilities held for sale and discontinued operations.

 

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Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

Accounting Policies

 

We adopted the provisions of SFAS No. 157, Fair Value Measurements, (“SFAS 157”) on July 1, 2008. We recorded no change to our opening balance of retained earnings as of July 1, 2008 as we do not hold any financial instruments requiring retrospective application per the provisions of SFAS 157.

 

Fair Value Hierarchy

 

SFAS 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect our own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS 157, these two types of inputs have created the following fair value hierarchy:

 

Level 1

 

Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

 

Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3

 

Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

SFAS 157 requires the use of observable market data if such data is available without undue cost and effort.

 

Measurement of Fair Value

 

When available, we use unadjusted quoted market prices to measure fair value and classify such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates and classifies such items within Level 2. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments and classifies such items within Level 3.

 

We have interest rate swaps, described in Note 9, Derivatives Instruments, which are fair valued as required by SFAS 157 and fall into level 2 of the fair value hierarchy. We evaluate whether the creditworthiness of each swap counterparty is such that default on its obligations under the swap is not probable.  We also assess whether the LIBOR-based interest payments are probable of being paid under the loans at the inception and, on an ongoing basis (no less than once each quarter), during the life of each hedging relationship. In addition, we use an independent source to ascertain market values to assist us in determining the fair value of the financial instruments.

 

Effective January 1, 2009, we adopted the provisions of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures concerning (1) the manner in which an entity uses derivatives (and the reasons it uses them), (2) the manner in which derivatives and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and interpretations thereof, and (3) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows.  Refer to Note 9, Derivative Instruments, for these disclosures.

 

Recent Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”).  SFAS 141(R) clarifies the accounting for business combinations and provides additional guidance on disclosure requirements.  SFAS 141(R) will require the recognition of 100% of the fair values of assets acquired, liabilities assumed and non-controlling interests in acquisitions of less than 100% controlling interest when the acquisition constitutes a change in control in the acquired entity, all acquisition-related transaction costs will be expensed as incurred and will require the expensing of acquisition-related restructuring costs as incurred unless the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities are met, as of the acquisition date.  SFAS 141(R) is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We are currently evaluating the provisions of SFAS 141(R) and plan on adopting this new standard, as required, beginning July 1, 2009. 

 

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The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The impact of this standard will be dependent on the level of our acquisitions in the future and the level of adjustments to our tax estimates related to prior acquisitions.

 

In December 2008, the FASB Issued FASB Staff Position (“FSP”) SFAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, (“FSP 132(R)”).  FSP 132(R) provides enhanced guidance on employer’s disclosures about plan assets of a defined benefit pension or other post retirement plan.  The standard is effective for financial statements issued for fiscal years ending after December 15, 2009.  We do not expect the impact of this FSP to have a material impact on our financial statements.

 

(2)                                 Acquisition of The Reader’s Digest Association, Inc.

 

On March 2, 2007, RDA Holding Co. acquired 100% of the outstanding common stock of The Reader’s Digest Association, Inc. for $1,517.1; net of cash acquired of $119.6, plus capitalized transaction costs of $36.0. In connection with the Acquisition Transaction, certain holders of preferred stock executed their preferred stock appraisal rights.

 

In October 2007, we reached an agreement to redeem 26,725, 83,783 and 87,083 shares of preferred stock, second preferred stock and third subordinated preferred stock, respectively, for an aggregate of approximately $11.6.

 

In January 2008, we reached an agreement to redeem 2,995, 19,937 and 67,939 shares of first preferred stock, second preferred stock and third subordinated preferred stock, respectively, for $5.7.  Each share of preferred stock repurchased was automatically canceled; therefore, at June 30, 2008 and March 31, 2009, there were no shares of preferred stock issued or outstanding.

 

(3)                                 Discontinued Operations

 

During fiscal 2009, we sold our home party-planning business TOHE; our schools and youth fundraising business QSP, Inc.; and sold the principal operating assets of BAF, RDA’s display-marketing business, in connection with the exit of the business.

 

The TOHE transaction closed on July 23, 2008.  Consideration for such sale was a $1.0 subordinated note payable in four years, plus interest and an earnout based upon the year-four operating profits generated by the TOHE business. The QSP transaction closed on August 22, 2008, for a purchase price of $110.0. The BAF transaction closed on December 19, 2008 and included the sale of intellectual property and product inventory for consideration of $16.8.  As of March 31, 2009, $1.3 has been paid, with the remaining $15.5 payable over three years, plus 7% interest, with principal repayments of $8.0, $5.0, and $2.5, paid in calendar years 2009, 2010 and 2011, respectively.

 

The businesses each qualify as a discontinued operation component of RDA under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  RDA has reported the results of operations and consolidated financial position of these businesses in discontinued operations within the Consolidated Statement of Operations, Consolidated Balance Sheets and Consolidated Statement of Cash Flows for all periods presented.

 

10



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The net loss from discontinued operations, net of taxes were as follows:

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

$

0.5

 

$

64.5

 

$

61.3

 

$

303.9

 

Loss from discontinued operations before income taxes

 

(1.4

)

(18.9

)

(76.6

)

(12.9

)

Income tax expense (benefit) on discontinued operations

 

0.9

 

(4.5

)

(0.8

)

(5.1

)

Loss from discontinued operations, net of tax, before loss on sales and curtailments

 

(2.3

)

(14.4

)

(75.8

)

(7.8

)

Loss on sale of divested businesses, net of taxes

 

 

 

(7.0

)

 

Curtailment of pension and postretirement benefits

 

 

 

11.2

 

 

Loss from discontinued operations, net of taxes

 

$

(2.3

)

$

(14.4

)

$

(71.6

)

$

(7.8

)

 

The consummation of these transactions resulted in a net loss $7.0 for the nine-months ended March 31, 2009.  These losses are reported in the Loss from discontinued operations, net of taxes and were calculated as follows:

 

 

 

Nine-months
ended

 

 

 

March 31, 2009

 

 

 

 

 

Sale price

 

$

126.8

 

Less: cash on hand

 

(1.9

)

Net sale price

 

124.9

 

 

 

 

 

Net assets of subsidiaries

 

97.6

 

Associated goodwill and intangible assets

 

45.1

 

Transaction costs

 

4.3

 

Loss on sale of divested businesses before taxes

 

(22.1

)

Income tax benefit

 

15.1

 

Loss of sales of divested businesses, net of taxes

 

$

(7.0

)

 

During the nine months ended March 31, 2009, Accumulated other comprehensive loss in the amount of $11.2 was attributable to the curtailment of pension and postretirement benefits for QSP.  The gain was removed from Accumulated other comprehensive loss upon the disposition of QSP and reflected in Loss from discontinued operations, net of taxes.

 

11



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The carrying amounts of the major classes of assets and liabilities included in the Assets held for sale and Liabilities held for sale in the Consolidated Balance Sheets at March 31, 2009 and June 30, 2008 were as follows:

 

 

 

March 31,

 

June 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Accounts receivable, net

 

$

 

$

12.7

 

Inventories

 

 

78.6

 

Other assets

 

0.9

 

31.0

 

Goodwill and other intangible assets, net

 

 

119.1

 

Total assets held for sale

 

$

0.9

 

$

241.4

 

 

 

 

 

 

 

Total liabilities held for sale

 

$

 

$

42.5

 

 

(4)                                 Impairment of Assets

 

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”), we are required to perform an impairment test on goodwill and indefinite-lived intangible assets annually or if certain circumstances indicate a possible impairment may exist.  Our policy is to complete the required annual impairment test in accordance with SFAS 142 in our fourth fiscal quarter.  In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS 144”), other long-lived assets that are amortized are required to be tested for impairment if certain circumstances indicate that a possible impairment may exist.

 

During the third quarter we concluded that an interim impairment test of our goodwill and long-lived assets was necessary for all of our reporting units.  This conclusion was based on certain indicators of impairment, including the significant deterioration of global market conditions combined with a recent downgrade in our credit rating and the decline in our most recent financial projections developed during the quarter as compared to the significant margin of excess fair value over carrying value that existed at our last impairment test.

 

As a result of the initial step of our impairment analysis, several of our reporting units indicated impairment and required us to proceed to step two of our impairment test as required by SFAS 142.  After considering the impact of indefinite lived asset impairments, our interim impairment analysis of goodwill for our United States Consumer and European reporting units had fair values that exceeded the carrying value.  If these units do not perform as expected and general market conditions continue to deteriorate, an impairment could result for a portion or all of the carrying value of goodwill.  The United States Consumer and European reporting units had $529.4 and $449.4 of goodwill at March 31, 2009.

 

12



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

We have not finalized our interim impairment analysis due to the timing and complexity of the calculations required.  However, we have recorded an estimated non-cash asset impairment charge in the three-months ended March 31, 2009.  The estimated impairment charge is $527.1 and is included in the line item Impairment of assets in the Company’s Consolidated Statements of Operations.  The estimated impairment charge recorded during the three-months ended March 31, 2009 is presented below by asset:

 

 

 

Pre-tax

 

Tax

 

After-tax

 

Goodwill

 

$

205.4

 

$

2.7

 

$

202.7

 

Other intangible assets, net

 

 

 

 

 

 

 

Indefinite-lived intangibies:

 

 

 

 

 

 

 

Reader’s Digest tradenames - indefinite

 

279.7

 

85.9

 

193.8

 

Other tradenames - indefinite

 

11.9

 

4.5

 

7.4

 

Definite-lived intangibles

 

 

 

 

 

 

 

Tradenames

 

1.5

 

0.6

 

0.9

 

Customer relationships

 

9.4

 

3.5

 

5.9

 

Technology and software

 

2.6

 

1.0

 

1.6

 

Property, plant and equipment, net

 

16.6

 

6.4

 

10.2

 

Total

 

$

527.1

 

$

104.6

 

$

422.5

 

 

The estimated goodwill and other long-lived asset impairment was required because the revenue and operating results in fiscal 2009 from the underlying businesses have softened from what was expected at the time of our last impairment analysis combined with a significant decline in our third quarter long term projected operating results when compared to the projected operating results from the prior quarter.  Other assumption changes since our last valuation which contributed to the impairment were the use of higher discounts rates, that correspond to companies with a similar financial position and credit rating, and decreases in market multiples.

 

The measurement of the fair value of goodwill was based on a combination of income and market-multiple approaches. The measurement of the fair value of indefinite-lived intangible assets was based on discounted cash flow analyses and other variations of the income approach. These evaluations utilized the best information available in the circumstances, including reasonable and supportable assumptions and projections. Certain key assumptions utilized, including changes in revenue, operating expenses, working capital requirements which include prepublication costs, and capital expenditures, are based on estimates related to strategic initiatives in place and current market conditions. Such assumptions also are consistent with those utilized in the Company’s annual planning process. The discounted cash flow analyses used a discount rate that corresponds to the weighted-average cost of capital for the industry and consideration of our current financial condition. The discount rate assumed was consistent with that used for investment decisions and takes into account the specific and detailed operating plans and strategies of the individual business operations. The market data utilized included publicly-traded prices and transaction values of comparable companies with operations considered to be similar to those of the Company’s individual businesses. Collectively, these evaluations were management’s best estimate of projected future cash flows and market values.  Goodwill associated with the acquisition of Reader’s Digest is comprised of two components.  The first component is tax deductible goodwill from Reader’s Digest’s acquisition of Reiman Media and Ripplewood’s acquisition of WRC media.  The remaining goodwill is not tax deductible since Reader’s Digest was acquired by Ripplewood in a tax-free transaction.

 

In connection with our required annual impairment test, we will test goodwill and indefinite-lived intangible assets in all reporting units in the fourth quarter of fiscal 2009.  Any impairment resulting from these tests would be recorded in the fourth quarter of fiscal 2009.

 

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Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

(5)                                 Inventories

 

Inventory balances consisted of the following:

 

 

 

March 31,

 

June 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Raw materials

 

$

11.4

 

$

11.2

 

Work-in-progress

 

5.1

 

4.9

 

Finished goods

 

91.6

 

95.9

 

Total inventories

 

$

108.1

 

$

112.0

 

 

(6)                                 Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill by segment for the nine-months ended March 31, 2009 are as follows:

 

 

 

Reader’s Digest
United States

 

Reader’s Digest
International

 

School &
Educational
Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2008

 

$

597.7

 

$

987.5

 

$

36.0

 

$

1,621.2

 

Adjustment to the fair values of assets acquired and liabilities assumed

 

(5.6

)

(16.2

)

(0.8

)

(22.6

)

Goodwill impairment

 

(28.2

)

(156.8

)

(20.4

)

(205.4

)

Currency translation adjustment

 

 

(220.9

)

 

(220.9

)

Balance at March 31, 2009

 

$

563.9

 

$

593.6

 

$

14.8

 

$

1,172.3

 

 

During the second quarter of fiscal 2008, our operating segments were modified to reflect the manner in which our chief operating decision maker reviews the business primarily due to the integration of WRC Media and Direct Holdings into our businesses.  See Note 15, Segments, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for further information.

 

Currency translation adjustments in the amount of $220.9 were recorded in order to reflect the affect of foreign currency changes.  Goodwill impairment charges in the amount of $205.4 were recorded in connection with our interim impairment test. The adjustments to the fair values of assets acquired and liabilities assumed in connection with the Acquisition Transaction on March 2, 2007, made subsequently to June 30, 2008, primarily consist of changes in other tax related liabilities.

 

14



Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The following categories of acquired intangible assets are included in other intangible assets, net as of March 31, 2009 and June 30, 2008:

 

 

 

2009

 

2008

 

 

 

Gross

 

Net

 

Gross

 

Net

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

 

 

Readers Digest tradename - indefinite

 

$

288.7

 

$

288.7

 

$

621.0

 

$

621.0

 

Other tradenames - indefinite

 

83.1

 

83.1

 

95.0

 

95.0

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

Tradenames

 

13.5

 

7.5

 

14.9

 

10.8

 

Customer relationships

 

141.2

 

54.0

 

157.5

 

90.2

 

Customer databases

 

83.7

 

58.6

 

89.4

 

72.4

 

Licensing agreements and technical support agreements

 

4.7

 

2.8

 

4.7

 

3.5

 

Favorable lease commitments

 

2.4

 

1.4

 

2.6

 

2.2

 

Technology and software

 

12.6

 

2.3

 

16.5

 

6.1

 

Other intangibles

 

1.8

 

0.2

 

1.9

 

0.3

 

Total intangible assets

 

$

631.7

 

$

498.6

 

$

1,003.5

 

$

901.5

 

 

Amortization related to intangible assets with finite lives amounted to $15.0 and $13.8, for the three-months ended March 31, 2009 and 2008, respectively.  The amortization for the nine-months ended March 31, 2009 and 2008 was $42.8 and $41.3, respectively.  Intangible impairment charges in the amount of $305.1 were recorded in connection with our interim impairment testing.

 

Estimated fiscal year amortization expense for intangible assets with finite lives is as follows:

 

 

 

Fiscal Year

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

Estimated amortization expense for intangibles with finite lives

 

$

29.5

 

$

25.6

 

$

21.7

 

$

18.6

 

$

12.6

 

 

(7)                                 Other Operating Items, Net

 

Items included in Other operating items, net within the Consolidated Statement of Operations for the nine-months ended March 31, 2009 and 2008, principally consist of: 1) restructuring charges, representing the streamlining of our organizational structure and 2) contractual charges related to the strategic repositioning of our businesses.

 

Restructuring charges are recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), or SFAS No. 112, Employers Accounting for Postemployment Benefits (“SFAS 112”).  Under SFAS 146, costs associated with restructuring actions including one-time severance benefits, are only recorded once a liability has been incurred.  However, employees terminated as a result of our restructuring activities were terminated under our normal severance policy, and consequently do not qualify as one time benefits; therefore, we recognize severance amounts pursuant to SFAS 112.  Severance charges represent the cost to separate employees from our operations to streamline the organization.  As such, severance amounts are recorded when a termination plan is developed and approved, including the identification of positions to be separated, and when payment is probable and estimable.  Other amounts related to restructuring actions, including charges to terminate contractual obligations in connection with streamlining activities, are recorded in accordance with SFAS 146.

 

2009 Restructuring Charges

 

During fiscal 2009, we recorded new severance accruals of $26.2 related to employee headcount reductions as part of our 2009 initiatives which were primarily the result of the planned outsourcing of our IT function and as part of our recession plan announced in January 2009.

 

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Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

These employee reductions are expected to be completed by the end of fiscal 2009 with severance payments expected to be substantially completed by the end of fiscal 2010.  Also during fiscal 2009, restructuring accruals attributed to prior period initiatives were adjusted by $1.6 primarily due to lower severance payments than originally estimated offset by an increase in the accrual for abandoned leases due to softness in the real estate sublease market.  All charges for restructuring appear as a component of Other operating items, net in the Consolidated Statement of Operations.

 

Effective April 2, 2009, our US qualified pension plan was amended to provide additional benefits to eligible employees who participate in the pension plan and whose employment is involuntarily terminated by the Company between April 2, 2009 and December 31, 2009.  Refer to Note 16, Subsequent Events, for more information.

 

2008 Restructuring Charges

 

During fiscal 2008, we recorded new restructuring accruals of $8.5 as part of our 2008 initiatives related to severance associated with employee reductions connected with various reorganizations and cost savings initiatives.  These employee reductions have been completed with severance payments expected to be substantially completed by the end of fiscal 2009.  Also during fiscal 2008, prior period initiatives had net restructuring accrual increases of $0.1 primarily due to lower severance payments than originally estimated offset by an increase in the accrual for abandoned leases due to softness in the real estate sublease market.

 

Prior Restructuring Charges

 

During fiscal 2007, in connection with the original RDA transaction, we recorded restructuring accruals related to severance associated with employee headcount reductions connected with local restructuring activities in the United States and Internationally.  These employee reductions have been completed with severance payments expected to be substantially completed by the end of 2010. Additional accruals were associated with abandoned leases with terms that extend through 2015.

 

The table below reflects changes to our restructuring accruals:

 

 

 

Severance

 

Contracts

 

 

 

 

 

2009
Initiatives

 

2008
Initiatives

 

Prior
Initiatives

 

Total
Severance

 

Prior
Initiatives

 

Grand
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2008

 

$

 

$

5.6

 

$

9.9

 

$

15.5

 

$

3.8

 

$

19.3

 

Accruals (Net of reversals)

 

26.2

 

(1.2

)

(1.3

)

23.7

 

0.9

 

24.6

 

Spending

 

(3.0

)

(3.2

)

(3.9

)

(10.1

)

(0.9

)

(11.0

)

Liabilities assumed in purchase of Reader’s Digest Association Inc.

 

 

 

(2.6

)

(2.6

)

 

(2.6

)

Balance at March 31, 2009

 

$

23.2

 

$

1.2

 

$

2.1

 

$

26.5

 

$

3.8

 

$

30.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruals (Net of reversals)

 

$

26.2

 

$

7.3

 

$

6.1

 

$

39.6

 

$

16.3

 

$

55.9

 

Spending

 

(3.0

)

(6.1

)

(35.9

)

(45.0

)

(13.6

)

(58.6

)

Liabilities assumed in purchase of Reader’s Digest Association Inc.

 

 

 

31.9

 

31.9

 

1.1

 

33.0

 

Balance at March 31, 2009

 

$

23.2

 

$

1.2

 

$

2.1

 

$

26.5

 

$

3.8

 

$

30.3

 

 

16



Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The table below reflects changes to our restructuring accruals by reportable segment:

 

 

 

Severance

 

Contracts

 

 

 

United
States

 

International

 

SES

 

Total

 

International

 

SES

 

Total

 

Grand
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2008

 

$

1.5

 

$

11.4

 

$

2.6

 

$

15.5

 

$

1.5

 

$

2.3

 

$

3.8

 

$

19.3

 

Accruals (Net of reversals)

 

7.6

 

15.9

 

0.2

 

23.7

 

 

0.9

 

0.9

 

24.6

 

Spending

 

(1.4

)

(7.9

)

(0.8

)

(10.1

)

(0.3

)

(0.6

)

(0.9

)

(11.0

)

Liabilities assumed in purchase of Reader’s Digest Association Inc.

 

(0.3

)

(2.0

)

(0.3

)

(2.6

)

 

 

 

(2.6

)

Balance at March 31, 2009

 

$

7.4

 

$

17.4

 

$

1.7

 

$

26.5

 

$

1.2

 

$

2.6

 

$

3.8

 

$

30.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruals (Net of reversals)

 

$

11.2

 

$

22.1

 

$

6.3

 

$

39.6

 

$

8.2

 

$

8.1

 

$

16.3

 

$

55.9

 

Spending

 

(6.0

)

(22.7

)

(16.3

)

(45.0

)

(7.0

)

(6.6

)

(13.6

)

(58.6

)

Liabilities assumed in purchase of Reader’s Digest Association Inc.

 

2.2

 

18.0

 

11.7

 

31.9

 

 

1.1

 

1.1

 

33.0

 

Balance at March 31, 2009

 

$

7.4

 

$

17.4

 

$

1.7

 

$

26.5

 

$

1.2

 

$

2.6

 

$

3.8

 

$

30.3

 

 

(8)                                 Debt

 

2007 Credit Agreement and Senior Subordinated Notes

 

As fully described in Note 12, Debt, to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, our borrowings include proceeds under our six-year senior secured $300.0 revolving credit facility, a seven-year $1,310.0 term loan (collectively, the “2007 Credit Agreement”) and $600.0 in 9% Senior Subordinated Notes due 2017.

 

At March 31, 2009 and June 30, 2008, $292.7 and $192.5, respectively, was outstanding under the revolving credit facility; $1,185.8 and $1,194.9, respectively, was outstanding under the term loan in the United States; $98.3 and $117.8, respectively, was outstanding under the term loan made available to one of our German subsidiaries; and $600.0, for both periods, was outstanding under the Senior Subordinated Notes.

 

Lines of Credit and Overdraft Facilities
 

As of March 31, 2009 and June 30, 2008, international lines of credit and overdraft facilities totaled $13.3 and $55.6, respectively, of which $2.4 and $12.3 were outstanding.  During the third quarter of fiscal 2009, some of our lending institutions closed five of our ten international lines of credit, and the outstanding balances were paid in full.  Furthermore, subsequent to March 31, 2009 a lending institution lowered the amount available to borrow on another international credit line.  The weighted average interest rates on outstanding borrowings at March 31, 2009 and June 30, 2008 were 5.4% and 5.5%, respectively. The remaining lines of credit are subject to renewal annually. As of both March 31, 2009 and June 30, 2008, there was $2.6 of stand-by letters of credit serving as security for real estate leases entered into by WRC Media.  As of March 31, 2009 and June 30, 2008 there was $3.7 and $2.0 held as security for surety bonds related to sweepstakes promotions.  There were no trade letters of credit as

 

17



Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

of March 31, 2009 and as of June 30, 2008, there were trade letters of credit of $0.8.  Additionally, other obligations of $0.7 were outstanding at March 31, 2009.

 

Interest Expense
 

Interest expense for the three-months ended March 31, 2009 and 2008 was $36.5 and $42.9, respectively, including amortization of deferred financing fees $2.1 for each period.  Interest expense for the nine-months ended March 31, 2009 and 2008 was $117.2 and $135.2, respectively, including the amortization of deferred financing fees of $6.3 for each period.  The weighted average interest rate on our borrowings for the three and nine-months ended March 31, 2009 was 6.1 % and 6.5%, respectively.  The weighted average interest rate on our borrowings for the three and nine-months ended March 31, 2008 was 7.4% and 7.6%, respectively.

 

(9)                                 Derivative Instruments

 

On April 19, 2007, we entered into interest rate swap agreements with a notional value totaling $750.0, involving the exchange of floating for fixed-rate interest payments, to reduce interest rate volatility and to comply with the interest rate hedging provisions of our 2007 Credit Agreement.  The transactions included $450.0 of 3-year interest rate swaps and $300.0 of 5-year interest rate swaps.  In each case, we will receive floating-rate interest payments that offset the LIBOR component of the interest due on some of our floating-rate debt and make fixed-rate interest payments over the life of the respective interest rate swaps.  The fixed interest rate under the 3-year swaps is 4.89% and the fixed interest rate under the 5-year swaps is 4.94%.

 

Since LIBOR-based loans can be prepaid without penalty (other than accrued interest) at any time during the contractual term of the loans and the swaps are not by their terms cancellable, the hedging relationship does not qualify for the use of the shortcut method of assessing hedge effectiveness.  However, we will evaluate the likelihood of whether we will continue to borrow using LIBOR-based loans based on our business plan, and whether the interest payments made on the outstanding loans being hedged will be sufficient to match the terms of the swaps during the life of the hedges (and therefore result in interest payments).

 

Since the (i) notional value of the swaps is the same as the principal value of the loans generating the hedged interest payments, (ii) floating-rate leg of the swaps and the hedged variable interest payments received on the loans are both based on 3-month LIBOR, (iii) interest rate reset dates applicable to both the floating-rate leg of the swaps and the hedged interest payments on the loans are the same, (iv) payment date on the loans and the settlement under the swaps occur on the same day each period, and (v) hedging relationship does not contain any other basis differences, except for the prepayment feature noted above, we will assess the effectiveness of our hedging strategy using the method described in Derivatives Implementation Group Statement 133 Implementation Issue No. G9, “Cash Flow Hedges: Assuming No Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedged Transaction Match in a Cash Flow Hedge.”  Accordingly, changes in the fair values of the interest rate swap agreements are expected to be exactly offset by changes in the fair value of the underlying debt.  In the event that the terms of our debt change, a portion of our cash flow hedge may become ineffective and may require the gain or loss associated with the hedging instrument to be recognized in earnings in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

 

Additionally, we evaluate whether the creditworthiness of each swap counterparty is such that default on its obligations under the swap is not probable.  We also assess whether the LIBOR-based interest payments are probable of being paid under the loans at the inception and, on an ongoing basis (no less than once each quarter), during the life of each hedging relationship.

 

The carrying value of our derivatives as of March 31, 2009 and June 30, 2008 is $42.9 and $23.3, respectively, and are included in the Other noncurrent liability line on the Consolidated Balance Sheets.  During the three-months ended March 31, 2009, the fair market value of our interest rate swaps increased, resulting in an unrealized gain of $7.9, net of deferred tax obligation of $4.7.  During the three-months ended March 31, 2008, the fair market value of our interest rate swaps decreased, resulting in an unrealized loss of $15.0, net of deferred tax benefits of $8.9. For the nine-months ended March 31, 2009 and 2008, the fair market value of our interest rate swaps decreased, resulting in an unrealized loss of $12.4 and $35.9, respectively, net of deferred tax benefits of $7.3 and $21.4, respectively.  These changes are reported in Accumulated other comprehensive (loss) gain, which is included in Stockholder’s (deficit) equity on the March 31, 2009 and June 30, 2008 Consolidated Balance Sheets.

 

18



Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

(10)                          Income Taxes

 

During the three-month periods ended March 31, 2009 and 2008, we recorded an income tax benefit of $112.1 and $10.2, respectively. The increase in the tax benefit for the three-month periods ended from March 2008 to March 2009 primarily relates to the change in discrete income tax benefits partially offset by the impact to the deferred tax expense due to the reversal of certain deferred tax liabilities.  For the three-month period ended March 31, 2009, a discrete income tax benefit of $114.8 was recorded including $104.6 realized from the impairment of goodwill and long-lived assets, for which no current tax expense is required due to the existence of valuation allowances on net operating loss carryforwards, and $10.8 related to a reduction in the balance of deferred tax liabilities due to income tax rate changes and the filing of our federal income tax return for the period ended June 30, 2008.  For the three-month period ended March 31, 2008, a discrete income tax benefit of $24.4 was recorded primarily related to a change in estimate resulting from the completion and filing of our federal income tax returns in March 2008 for the periods ended March 2, 2007 and June 30, 2007.

 

During the nine-month periods ended March 31, 2009 and 2008, we recorded an income tax benefit of $98.3 and $18.7, respectively. The increase in the tax benefit for the nine-month periods ended from March 2008 to March 2009 primarily relates to the change in discrete income tax benefits partially offset by the impact to the deferred tax expense due to the reversal of certain deferred tax liabilities.  For the nine-month period ended March 31, 2009, a discrete income tax benefit of $115.8 was recorded; including $104.6 realized from the impairment of goodwill and long-lived assets, for which no current tax expense is required due to the existence of valuation allowances on net operating loss carryforwards, and $10.8 related to a reduction in the balance of deferred tax liabilities due to income tax rate changes and the filing of our federal income tax return for the period ended June 30, 2008.  For the nine-month period ended March 31, 2008, a discrete income tax benefit of $24.2 was recorded primarily related to a change in estimate resulting from the completion and filing of our federal income tax returns in March 2008 for the periods ended March 2, 2007 and June 30, 2007.

 

The deferred tax assets related to the net operating losses, alternative minimum tax credits and foreign tax credits of our domestic companies and certain net operating losses of our foreign companies have been fully offset with valuation allowances as we have determined it is more likely than not that the benefit of these assets will not be realized.  On an ongoing basis, we reassess the need for such valuation allowances based on recent operating results, the assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions.

 

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (“FIN 48”).  Among other things, FIN 48 provides guidance to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold which income tax positions must achieve before being recognized in the financial statements.  We adopted FIN 48 on October 1, 2007, and were not required to record a change to retained earnings due to the adoption. The amount of unrecognized tax benefits, including interest, from uncertain tax positions at March 31, 2009 is $30.0 including $13.1 of uncertain tax positions arising from business combinations that, if recognized, would be recorded as an adjustment to goodwill and would not impact the effective tax rate.  During the quarter ended March 31, 2009, we decreased the uncertain tax positions by $3.0 for tax audit settlements and currency fluctuations.  Furthermore, for the nine-month period ended March 31, 2009, we recorded $7.6 of additional uncertain tax positions, the majority of which were offset by prepaid income taxes or fully reserved deferred tax assets.  We recognize interest and, if applicable, penalties which could be assessed related to unrecognized tax benefits in income tax expense.

 

As of October 2008, the Company has settled the federal IRS audits for the tax years ended June 30, 2004 and June 30, 2005.  The settlement of these audits did not have a material affect on the Company’s financial statements for the nine-month period ending March 31, 2009.  The Company continues to have routine ongoing income tax audits in various taxing jurisdictions.

 

We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.   It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or final decisions in transfer pricing matters. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

 

19



Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

(11)                          Accumulated Other Comprehensive (Loss) Gain

 

Accumulated other comprehensive (loss) gain as reported in the Consolidated Balance Sheets represents foreign currency translation adjustments, the unrealized gains and losses on our derivatives, deferred pension liabilities and other retirement benefits.  The components of Total comprehensive (loss) gain, net of related tax, for the three and nine-months ended March 31, 2009 and 2008 were as follows:

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net loss

 

$

(462.0

)

$

(53.6

)

$

(652.6

)

$

(159.3

)

Change in:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(106.6

)

80.0

 

(268.8

)

78.8

 

Unrealized gain (loss) on derivatives, net of deferred tax expense of $4.7 and deferred tax benefit of $8.9 for the three-months ended March 31, 2009 and 2008, respectively, and deferred tax benefits of $7.3 and $21.4, for the nine-months ended March 31, 2009 and 2008, respectively.

 

7.9

 

(15.0

)

(12.4

)

(35.9

)

Deferred pension liabilities and other retirement benefits, net of deferred tax benefit $4.2

 

 

 

(7.0

)

 

Total comprehensive (loss) gain

 

$

(560.7

)

$

11.4

 

$

(940.8

)

$

(116.4

)

 

The balance of unrealized loss on derivatives as of March 31, 2009 and June 30, 2008 is $26.9 and $14.5, respectively.

 

(12)                          Equity-Based Compensation

 

In July 2007, upon the recommendation of the Compensation Committee of our Board of Directors, the Board of Directors of RDA Holding Co. (the “Holding Co. Board”) approved the RDA Holding Co. 2007 Omnibus Incentive Compensation Plan (the “2007 Plan”).  All of our prior existing employee incentive compensation plans were terminated upon the completion of the Acquisition Transaction.  Under the 2007 Plan, the Holding Co. Board may grant to eligible directors, employees and consultants stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and other equity-based or equity related awards in RDA Holding Co. that the Holding Co. Board determines, in consultation with the Compensation Committee of our Board of Directors, are consistent with the purpose of the 2007 Plan and our best interests.  The Holding Co. Board may grant up to a maximum of 5.0 million shares under the 2007 Plan, net of forfeitures and expirations.  During the first quarter of fiscal 2009, the Holding Co. Board amended the 2007 Plan to increase the number of shares available for grant by 0.4 million, to 5.4 million, net of forfeitures and expirations.  During the third quarter of fiscal 2009, the Holding Co. Board amended the 2007 Plan to increase the number of shares available for grant by 0.2 million, to 5.6 million, net of forfeitures and expirations.

 

During the three and nine-months ended March 31, 2009 the Holding Co. Board granted approximately 0.6 and 1.1 million stock options; 0.06 and 0.1 million shares of RSAs; and 0.07 and 0.1 million shares of RSUs, respectively, to certain directors, employees and consultants of our company.  During the three and nine-months ended March 31, 2008 the Holding Co. Board granted approximately 0.04 and 3.3 million stock options; 0.02 and 1.3 million shares of RSAs; and 0.1 and 0.5 million shares of RSUs, respectively, to certain directors, employees and consultants of our company, respectively.

 

In general, granted stock options vest over four years, have 10-year contractual terms and are exercisable upon the occurrence of certain liquidity events, as defined in the 2007 Plan.  The weighted average exercise price of all stock options granted is $9.99.  The exercise price of all options was deemed equal to the estimated market value of RDA Holding Co.’s common stock at the date of grant.  Our estimated fair value is based upon an annual valuation of the Company performed in the fourth quarter.  The last valuation report completed was as of March 31, 2008.  The weighted average grant date fair value of RSAs and RSUs granted during the three-months ended March 31, 2009 and March 31, 2008 are $9.95 and $10.00, respectively.  The weighted average grant date fair value of RSAs and RSUs for the nine-months ended March 31, 2009 and March 31, 2008 is $9.96 and $10.00, respectively. 

 

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Table of Contents

 

The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

In general, 50% of granted RSAs and RSUs become vested upon the occurrence of a liquidity event, as defined, and the other 50% upon the first anniversary of the occurrence of a liquidity event.

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table.  As there is no public market for RDA Holding Co.’s stock, the expected volatility was based on the average volatility of historical closing stock prices of comparable companies over the expected term of the option. The risk-free interest rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted is based upon management’s estimate for the period of time for which options are expected to be outstanding. We have no historical stock option exercise experience and have estimated the expected term of options using the vesting period of the options, the expected period to consummate a liquidity event and the mid-point between the vesting date and the end of the contractual term.

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Assumptions

 

 

 

 

 

 

 

 

 

Expected volatility

 

46.79%

 

39.97%

 

40.66% - 46.79%

 

32.38% - 41.97%

 

Expected term (years)

 

6

 

6

 

6

 

4-6

 

Risk-free interest rate

 

1.88%

 

2.78%

 

1.88% - 2.68%

 

2.78%-5.05%

 

Expected dividend yield

 

0%

 

0%

 

0%

 

0%

 

 

A summary of stock option activity under the 2007 Plan for the nine-months ended March 31, 2009 is as follows:

 

 

 

Shares
(000’s)

 

Weighted Average
Exercise Price

 

Weighted Average
Remaining
Contractual Term

 

Options

 

 

 

 

 

 

 

Outstanding at June 30, 2008

 

2,991

 

$

10.00

 

9.2

 

Granted

 

1,093

 

9.97

 

 

 

Forfeited or expired

 

(185

)

10.00

 

 

 

Outstanding at March 31, 2009

 

3,899

 

$

9.99

 

8.8

 

Vested or expected to vest at March 31, 2009

 

3,708

 

 

 

 

 

Exercisable at March 31, 2009

 

1,085

 

$

10.00

 

8.5

 

 

The weighted-average fair value of options granted during the three and nine-months ended March 31, 2009 was $4.64 and $4.48, respectively.  The weighted average fair value of options granted during the three and nine-months ended March 31, 2008 was $4.28 and $4.58, respectively.  No options were exercised during the nine-months ended March 31, 2009 or 2008.

 

21



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

A summary of RSAs and RSUs activity under the 2007 Plan for the nine-months ended March 31, 2009 is as follows:

 

 

 

RSAs

 

RSUs

 

 

 

Shares
(000’s)

 

Weighted Average
Exercise Price

 

Shares
(000’s)

 

Weighted Average
Exercise Price

 

 

 

 

 

 

 

 

 

 

 

Nonvested at June 30, 2008

 

1,008

 

$

10.00

 

230

 

$

10.00

 

Granted

 

99

 

9.96

 

97

 

9.96

 

Vested

 

 

 

(55

)

9.95

 

Forfeited

 

(284

)

10.00

 

(20

)

10.00

 

Nonvested at March 31, 2009

 

823

 

$

10.00

 

252

 

$

9.98

 

 

Stock based compensation expense is pushed down to us from RDA Holding Co.  For the three-months ended March 31, 2009, stock based compensation expense of $1.0 and the related income tax benefit of $0.4, was recognized for stock options and RSUs that are not subject to the liquidity event provisions of the 2007 Plan. For the nine-months ended March 31, 2009, stock based compensation expense of $2.2 and the related income tax benefit of $0.8, was recognized for stock options and RSUs that are not subject to the liquidity event provisions of the 2007 Plan.  Total unrecognized compensation expense related to stock awards without a liquidity event provision, as defined, was $2.2, which will be recognized over a weighted average period of 2 years on a straight-line basis over the requisite service period for each separately vesting portion of the stock option award.

 

As of March 31, 2009, it was determined that it was not probable that the liquidity event, as defined, will be satisfied. As of March 31, 2009, total stock options, RSAs and RSUs outstanding with these liquidity provisions was 1.9 million, 0.8 million and 0.3 million, respectively. As a result, no compensation expense was recognized during the three or nine-months ended March 31, 2009 or March 31, 2008 for stock options, RSAs and RSUs with liquidity event provisions.  Total unrecognized compensation expense related to these stock options, RSAs and RSUs for the period ending March 31, 2009 are $8.9, $8.2 and $2.5, respectively.  Total unrecognized compensation expense related to these stock options, RSAs and RSUs for the period ended March 31, 2008 were $5.3, $10.9 and $2.3, respectively.

 

(13)              Pension Information

 

We sponsor various pension and postretirement benefit plans, including those for employees in the United States, international employees and supplemental plans for executives.

 

In fiscal year 2008, our other postretirement benefit plan was changed to cap the company subsidy for plan participants retiring after 1985. The subsidy will be eliminated after 10 years for pre-Medicare coverage, and after 5 years for post-Medicare coverage. The company may continue to offer benefits after this period, but all costs would be paid by the retirees.  In addition, effective July 1, 2008, the U.S. qualified and excess pension plans were harmonized for all participants who benefit under the plans.  In addition, in May of 2009 we closed our defined benefit plan in the United Kingdom to future accruals and contributions for future services. See Note 16, subsequent events, for more information.

 

22



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The table below details the components of our net periodic pension benefit:

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Service cost

 

$

2.3

 

$

4.0

 

$

7.4

 

$

12.3

 

Interest cost

 

11.5

 

12.5

 

35.7

 

37.4

 

Expected return on plan assets

 

(19.5

)

(20.8

)

(60.0

)

(62.6

)

Amortization of prior service credit

 

 

 

(0.1

)

 

Recognized actuarial gain

 

(0.5

)

(0.1

)

(1.6

)

(0.3

)

Curtailments

 

 

 

 

(1.2

)

Net periodic pension benefit

 

$

(6.2

)

$

(4.4

)

$

(18.6

)

$

(14.4

)

 

For the three-months ended March 31, 2009 and March 31, 2008 approximately $3.2 and $2.1, respectively, was contributed to our international pension plans.   For the nine-months ended March 31, 2009 and March 31, 2008 approximately $6.7 and $6.2, respectively, was contributed to our international pension plans.  Because our retirement plan in the United States is over-funded, we did not make any contributions during the three or nine-months ended March 31, 2009 and 2008.  The U.S. supplemental retirement plans are not qualified under the Internal Revenue Code because they are available only to certain executives.  We pay the benefits under these unfunded plans as the obligations are incurred.  For both the three-months ended March 31, 2009 and 2008 we paid $2.6.  We paid $6.7 and $7.7 during the nine-months ended March 31, 2009 and March 31, 2008, respectively.

 

We also sponsor certain postretirement benefit plans in the U.S. and Canada.  The table below details the components of our net periodic postretirement cost:

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Service cost

 

$

 

$

0.1

 

$

0.1

 

$

0.4

 

Interest cost

 

0.4

 

1.0

 

1.2

 

2.9

 

Amortization of prior service credit

 

(0.5

)

 

(1.4

)

 

Recognized actuarial gain

 

(0.4

)

 

(1.2

)

 

Net periodic postretirement (benefit) cost

 

$

(0.5

)

$

1.1

 

$

(1.3

)

$

3.3

 

 

(14)                          Revenues and Operating (Loss) Profit and Assets by Reportable Segment

 

The accounting policies of our segments are the same as those described in Note 15, Segments, in the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.  See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Our Reportable Segments in this Quarterly Report for additional information on our segment reporting.

 

Reportable segments are based on our method of internal reporting.  We present our segments’ revenues as if the intercompany transactions were with third parties.  Revenues and expenses attributable to intercompany transactions are eliminated to reconcile our reportable segment amounts to consolidated amounts, as reported in our consolidated statements of operations.  Identifiable assets by segment are those assets that are used in the operations of that business.  Corporate assets consist primarily of cash and cash equivalents, certain prepaid expenses, marketable securities, certain pension assets, certain fixed assets and certain other current assets.

 

As described in Note 3, Discontinued Operations, we sold TOHE, QSP and BAF.  TOHE was part of the Reader’s Digest United States reporting segment. QSP and BAF were part of the School & Educational Services reporting segment.  As a result, these entities have been removed from the March 31, 2009 and March 31, 2008 results and are now presented as Discontinued operations in our Consolidated Statements of Operations.

 

23



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The following table presents our net revenues and operating profit by segment:

 

 

 

Three-months Ended

 

Nine-months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

 

 

 

 

 

 

 

 

Reader’s Digest United States

 

$

162.2

 

$

180.8

 

$

557.6

 

$

609.2

 

Reader’s Digest International

 

298.4

 

390.4

 

1,055.0

 

1,222.3

 

School & Educational Services

 

24.5

 

25.4

 

70.9

 

88.1

 

Intercompany eliminations

 

(1.8

)

(4.6

)

(7.8

)

(17.0

)

Purchase accounting related adjustment (1)

 

(4.2

)

(16.9

)

(18.4

)

(100.7

)

Total revenues

 

$

479.1

 

$

575.1

 

$

1,657.3

 

$

1,801.9

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) profit

 

 

 

 

 

 

 

 

 

Reader’s Digest United States

 

$

7.7

 

$

13.9

 

$

32.8

 

$

51.6

 

Reader’s Digest International

 

9.2

 

28.8

 

22.2

 

90.6

 

School & Educational Services

 

(0.8

)

0.6

 

(8.1

)

4.7

 

Impairment of assets (4)

 

(527.1

)

 

(527.1

)

 

Corporate unallocated (2)

 

(11.1

)

(27.6

)

(30.6

)

(72.2

)

Other operating items, net (3)

 

(9.6

)

(7.0

)

(31.4

)

(15.6

)

Purchase accounting related adjustment (1)

 

(4.2

)

(16.9

)

(18.4

)

(100.7

)

Operating (loss) profit

 

$

(535.9

)

$

(8.2

)

$

(560.6

)

$

(41.6

)

 

 

 

 

 

 

 

 

 

 

Intercompany eliminations

 

 

 

 

 

 

 

 

 

Reader’s Digest United States

 

$

(0.8

)

$

(3.5

)

$

(4.5

)

$

(13.1

)

Reader’s Digest International

 

(1.0

)

(1.1

)

(3.3

)

(3.8

)

School & Educational Services

 

 

 

 

(0.1

)

Total intercompany eliminations

 

$

(1.8

)

$

(4.6

)

$

(7.8

)

$

(17.0

)

 


(1)        Purchase accounting related fair value adjustments to reduce unearned revenues.  This charge was not included in the segment results reviewed by the chief operating decision maker.

 

(2)        Corporate unallocated includes expenses for the cost of governance and centrally managed expenses, including adjustments related to our global management incentive plans, as well as the accounting for U.S. pension plans, postretirement healthcare costs, and other costs that are not allocated to the reportable segments, such as the amortization of intangible assets.  Governance and centrally managed expenses include costs for departments such as corporate finance, general corporate management, legal, public relations and treasury and for related information technology and facility costs incurred by these departments.

 

(3)        Other operating items, net, include restructuring, contractual charges and gain on sales of certain non-strategic assets.  Such items are not included in segment results reviewed by our chief operating decision maker.

 

(4)        Impairment of assets includes goodwill, intangible assets, and other asset impairment charges.

 

24



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

The following table presents our assets by reportable segment:

 

 

 

March 31, 2009

 

June 30, 2008

 

Assets

 

 

 

 

 

Reader’s Digest United States

 

$

1,002.2

 

$

1,178.8

 

Reader’s Digest International

 

1,356.8

 

2,105.4

 

School & Educational Services

 

82.9

 

199.3

 

Corporate

 

373.1

 

241.2

 

Total assets for reportable segments

 

$

2,815.0

 

$

3,724.7

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Total assets for reportable segments

 

$

2,815.0

 

$

3,724.7

 

Assets held for sale

 

0.9

 

241.4

 

Total consolidated assets

 

$

2,815.9

 

$

3,966.1

 

 

25



Table of Contents

 

The Reader’s Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(in millions, except share and per share data)

(unaudited)

 

(15)                          Guarantor and Non-Guarantor Financial Information

 

The Reader’s Digest Association, Inc. is the issuer of the Senior Subordinated Notes (“Notes”).  Our domestic subsidiaries that guarantee our 2007 Credit Agreement (collectively, the “Guarantor Subsidiaries”) jointly and severally irrevocably and unconditionally guarantee, on an unsecured senior subordinated basis, our obligations under the Notes.  The Guarantor Subsidiaries do not include foreign subsidiaries, domestic subsidiaries whose assets substantially consist of voting stock of one or more foreign subsidiaries, or non-wholly-owned subsidiaries (subject to certain limited exceptions such as in the event that such non-wholly-owned subsidiary guarantees debt issued in a capital markets transaction).  Our subsidiaries that are not Guarantor Subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes or the 2007 Credit Agreement.

 

The following tables present condensed consolidating financial information as of March 31, 2009, June 30, 2008 and for the three and nine-months ended March 31, 2009 and 2008 for the parent guarantor, (RDA on a standalone basis), Guarantor Subsidiaries on a combined basis, Non-Guarantor Subsidiaries on a combined basis and RDA on a consolidated basis.

 

Consolidated condensed balance sheet as of March 31, 2009:

 

 

 

Issuer
Parent - RDA

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Total
Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

92.6

 

$

512.2

 

$

346.4

 

$

(298.6

)

$

652.6

 

Property, plant and equipment, net

 

27.6

 

13.9

 

27.4

 

 

68.9

 

Goodwill

 

 

578.7

 

593.6

 

 

1,172.3

 

Other intangible assets, net

 

 

202.4

 

296.2

 

 

498.6

 

Prepaid pension assets

 

281.2

 

 

27.3

 

 

308.5

 

Investments in subsidiaries

 

1,569.8

 

6.2

 

 

(1,576.0

)

 

Intercompany noncurrent receivables

 

13.8

 

0.4

 

90.8

 

(105.0

)

 

Other noncurrent assets

 

28.2

 

70.0

 

16.8

 

 

115.0

 

Total assets

 

$

2,013.2

 

$

1,383.8

 

$

1,398.5

 

$

(1,979.6

)

$

2,815.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholder’s (deficit) equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

372.7

 

$

388.7

 

$

383.3

 

$

(298.6

)

$

846.1

 

Long-term debt

 

2,067.0

 

 

97.3

 

 

2,164.3

 

Unearned revenues

 

 

149.4

 

2.4

 

 

151.8

 

Accrued pension

 

59.7

 

 

11.6

 

 

71.3

 

Post-retirement and post-employment benefits other than pensions

 

18.8

 

 

2.0

 

 

20.8

 

Intercompany noncurrent payables

 

90.8

 

11.7

 

2.5

 

(105.0

)

 

Other noncurrent liabilities

 

89.1

 

70.4

 

86.0

 

 

245.5

 

Total liabilities

 

$

2,698.1

 

$

620.2

 

$

585.1

 

$

(403.6

)

$

3,499.8