Debt

6 Months Ended

Jun. 30, 2011

Debt

Debt

Note 11 Debt

The components of debt were as follows:

	Successor Company
	June 30, 2011			December 31, 2010
Senior Secured Notes	$	525.0		$	525.0
Senior Credit Facility	11.0			—
Discount on Senior Secured Notes	(13.4		)	(14.3		)
Long-term debt	$	522.6		$	510.7

Interest Expense

Interest expense attributable to our outstanding debt was $14.3 and $13.5 for the three months ended June 30, 2011 and 2010 respectively, including the amortization of deferred financing fees and bond discount of $1.2 and $0.9, respectively.  Interest expense attributable to our outstanding debt was $28.1 for the six months ended June 30, 2011, $25.4 for the periods February 20 to June 30, 2010 and $8.8 for January 1 to February 19, 2010, including the amortization of deferred financing fees and bond discount of $2.3, $5.8 and $3.8, respectively.  The weighted average interest rate on our borrowings for both the three months ended June 30, 2011 and 2010 was 9.5%.  The weighted average interest rates on our borrowings for the six months ended June 30, 2011 and the period February 20 to June 30, 2010 were both 9.5%, and the period January 1 to February 19, 2010 was 10.8%.

Since the Petition Date, we recorded post-petition interest on pre-petition obligations only to the extent that we believed the interest would have been paid during the chapter 11 proceedings or that it was probable that the interest would have been an allowed claim.  Had we recorded interest based on all of our pre-petition contractual obligations, interest expense would have increased by $18.1 for the period January 1 to February 19, 2010, including amortization of debt costs of $3.8.

Senior Secured Notes

On February 11, 2010, RD Escrow Corporation, a subsidiary of RDA, entered into an Indenture (“Indenture”) with RDA, RDA Holding Co., and substantially all of our existing wholly-owned direct and indirect domestic subsidiaries (collectively referred to as the “Guarantors”), Wells Fargo Bank, N.A., as Trustee, and Wilmington Trust FSB, as Collateral Agent, pursuant to which we issued the Floating Rate Senior Secured Notes due 2017 (“Senior Secured Notes”) in a private offering under the Securities Act of 1933.  We issued the Senior Secured Notes at 97% of their face value.  Financing fees of $16.0 related to the Senior Secured Notes were deferred and are amortized under the effective interest rate method over the life of the Senior Secured Notes.

In October 2010, RDA Holding Co. and its subsidiaries filed a Registration Statement on Form S-4 with the Securities and Exchange Commission, in connection with our offer to exchange up to $525.0 of our Senior Secured Notes for a like principal amount of Floating Rate Senior Secured Notes due 2017 (“Exchange Notes”).  We completed the exchange offer in March 2011.  The Exchange Notes are guaranteed by the Guarantors on a senior secured basis, with terms substantially identical in all material respects to the unregistered Senior Secured Notes, except that the Exchange Notes do not contain terms restricting their transfer.

The Senior Secured Notes mature on February 15, 2017.  The Senior Secured Notes bear interest at a rate per annum equal to LIBOR (as defined, subject to a three month LIBOR floor of 3.0%) plus 6.5%.  The LIBOR component of the interest rate will be reset quarterly and commenced on May 15, 2010.  Interest on the Senior Secured Notes will be payable on February 15, May 15, August 15 and November 15, as commenced on May 15, 2010, and began accruing from the issue date of the Senior Secured Notes.

The Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis, jointly and severally by RDA Holding Co., and by all of our existing and future wholly-owned direct and indirect domestic subsidiaries (other than Direct Holdings IP, L.L.C., an indirect bankruptcy remote subsidiary of RDA that holds our license to use the Time Life brand, and whose sole function is to license the brand to a guarantor).  The Senior Secured Notes are also fully and unconditionally guaranteed on a senior secured basis by our subsidiaries that guarantee our indebtedness or indebtedness of another guarantor.  Under certain circumstances, including the sale of subsidiary Guarantors and legal defeasance of the Senior Secured Notes, subsidiary Guarantors may be released from their guarantees without the consent of the holders of Senior Secured Notes.  The Senior Secured Notes are secured by a first priority security interest on substantially all of the assets of the Company and the Guarantors, including 100% of the capital stock of the Company and its domestic subsidiaries and 65% of the capital stock of its first-tier foreign subsidiaries, in each case subject to certain exceptions set forth in the Indenture and related documentation.

The Senior Secured Notes and guarantees are our general senior secured obligations and rank equally in right of payment with all of our and the Guarantors’ existing and future senior indebtedness but are, together with obligations under the Senior Credit Facility (as defined below) and any other secured obligations, effectively senior in right of payment to our existing and future unsecured obligations to the extent of the value of the collateral.

We may redeem, at our option, some or all of the Senior Secured Notes at any time on or after February 15, 2013, based on the redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to the date of redemption.

At any time prior to February 15, 2013, we may redeem up to 35% of the original principal amount of the Senior Secured Notes with the proceeds of certain equity offerings at the redemption price set forth in the Indenture.  We may also, prior to February 15, 2013, redeem some or all of the Senior Secured Notes, in each case, at a price equal to 100% of the principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, plus a “make-whole” premium.

We may be required to make offers to repurchase some of the Senior Secured Notes from the proceeds of certain asset sales or from excess cash flow, as defined in our Indenture.  The offers would be at a purchase price in cash equal to 100% of the principal amount of the Senior Secured Notes, plus accrued and unpaid interest.

Upon the occurrence of a change of control (as defined in the Indenture) of RDA holders of the Senior Secured Notes have the right to require us to repurchase all or a portion of the Senior Secured Notes at a purchase price in cash equal to 101% of the principal amount of the Senior Secured Notes, plus accrued and unpaid interest.  Refer to the “Board Change” section below for further information.

The Indenture, among other things, limits our ability and the ability of our restricted subsidiaries to (i) incur, assume or guarantee additional indebtedness; (ii) issue redeemable stock and preferred stock; (iii) pay dividends or make distributions or redeem or repurchase capital stock; (iv) prepay, redeem or repurchase certain debt; (v) make loans and investments; (vi) incur liens; (vii) restrict dividends, loans or asset transfers from our subsidiaries; (viii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (ix) consolidate or merge with or into, or sell substantially all of our assets to, another person; (x) enter into transactions with affiliates; and (xi) enter into new lines of business.  We were in compliance with our Indenture at June 30, 2011.

Senior Credit Facility

On February 19, 2010, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent; the Guarantors (which include us and are defined therein); J.P. Morgan Securities Inc., Banc of America Securities LLC, Credit Suisse Securities (U.S.A.) LLC and Goldman Sachs Credit Partners L.P., as joint lead arrangers and joint bookrunners; and JPMorgan Chase Bank, N.A., Bank of America, N.A., Credit Suisse AG and Goldman Sachs Credit Partners L.P., as lenders, providing for a three year revolving credit facility (“Senior Credit Facility”) of up to $50.0 with a $25.0 letter of credit sub-facility.  The proceeds of any revolving loans will be used for working capital and general corporate purposes.  Financing fees of $0.9 related to the Senior Credit Facility were deferred and are amortized under the effective interest rate method, over a life of three years.  On March 31, 2010, we entered into an amendment to the Senior Credit Facility to permit existing cash-collateralized letters of credit to be issued under the $25.0 letter of credit sub-facility of the Senior Credit Facility, thereby enabling the release of the related cash collateral.

Borrowings under the Senior Credit Facility are denominated in U.S. dollars and bear interest at a rate, at our option, of either (i) a base rate plus a margin of 3.0% per annum or (ii) a Eurodollar rate (not to be less than 2.0% per annum) plus a margin of 4.0% per annum.  In an event of default, we will be required to pay interest at an otherwise applicable rate plus 2.0% per annum.

We are required to pay a commitment fee of 1.0%, which will accrue on the unused portion of the commitments.  For issued but undrawn letters of credit, we are required to pay a fee of 4.0% per annum, payable quarterly.

As of June 30, 2011, there were borrowings of $11.0 under the Senior Credit Facility.  The Senior 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 Senior Credit Facility are secured by a first priority security interest in the same collateral that secures the Senior Secured Notes.

The Senior Credit Facility contains substantially the same covenants and limitations as the Senior Secured Notes.  In addition, there is a financial covenant that limits our maximum allowed leverage ratio.  The Company was in compliance with all covenants at June 30, 2011.

Board Change

On April 18, 2011, holders of a majority of the Company’s outstanding common stock, acting by written consent and in accordance with the provisions of our certificate of incorporation and bylaws and the stockholders agreement to which the Company and the holders of its common stock are parties, removed seven of the eight members of the Board and filled all vacancies with new members (“Board Change”).

The Board Change constituted an event of default under the Senior Credit Facility among the Company, The Reader’s Digest Association, Inc., the several banks and other financial institutions from time to time party thereto (“Lenders”) and JPMorgan Chase Bank, N.A., as administrative agent (“Administration Agent”) for the Lenders.

On May 11, 2011, we entered into an amendment to the Senior Credit Facility with the Administration Agent and the Lenders under which the Lenders unanimously waived the event of default arising from the Board Change.  The Senior Credit Facility was modified by, among other things, the following items:

· the financial covenant contained in the Senior Credit Facility  (which requires that we maintain a specified senior secured debt ratio that decreases quarter to quarter) was modified to (i) provide that the covenant is measured on a quarter end basis only (rather than daily, as originally required) and (ii) to change the ratio that we will have to meet for the quarter ending September 30, 2011 to 4.25:1 (from 4.00:1);

· in order to be able to incur additional permitted secured debt, we must be in compliance with the financial covenant and not be in default under the Senior Credit Facility;

· the restricted payment covenant contained in the Senior Credit Facility was amended to further limit our ability to pay dividends on, or repurchase, our equity interests, including, among other things, imposing a requirement that we satisfy the financial covenant referred to above, on a pro forma basis, at the then-applicable level set forth in the covenant, less 0.50;

· the definition of “change of control” was amended such that the percentage of equity interests acquired by any person or group necessary to trigger a change of control (and thereby give rise to an event of default) was reduced from 50.0% to 35.0%;

· the limitation of the amount of restructuring charges that we can add back in the calculation of EBITDA, which is used in a financial covenant and several ratios, to $35.0 in 2011 and any subsequent twelve month period; and

· a condition was imposed to borrowings or other extensions of credit under the Senior Credit Facility that our “net cash balance” (as defined therein) not exceed $125.0 after giving effect to such borrowing or extension of credit.

The Board Change did not constitute an event of default under the Indenture, nor did the event of default under the Senior Credit Facility trigger a cross-default under the Indenture.

Letters of Credit

There were $18.6 in standby letters of credit as of June 30, 2011 and December 31, 2010 against the $25.0 letter of credit sub-facility of the Senior Credit Facility which were serving as security, primarily related to real estate leases entered into by RDA, Direct Holdings, and Allrecipes.com, Inc.; certain contested tax liabilities in Russia; and as security for surety bonds related to sweepstakes promotions and customs duties.

Fair Values

Based on market prices at June 30, 2011, the fair value of our $525.0 Senior Secured Notes was approximately $544.7.  Based on market prices at December 31, 2010, the fair value of our $525.0 Senior Secured Notes was approximately $519.8.  There has been no trading activity on our Senior Credit Facility.  We estimated that the fair value of our Senior Credit Facility at June 30, 2011 was approximately $11.0.  There were no borrowings outstanding under the Senior Credit Facility at December 31, 2010.

The Senior Secured Notes and Senior Credit Facility are fair valued based on Level 2 of the fair value hierarchy, based on quoted prices for our Senior Secured Notes in markets which are not active.