RDA Holding Co-2012.9.30-10Q doc



	Successor Company
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenue	$	230.1		$	312.4		$	753.9		$	959.8
Product, distribution and editorial expenses	109.5			146.2			346.5			439.2
Promotion, marketing and administrative expenses	134.0			196.7			454.0			581.5
Impairment of assets	85.0			10.3			203.7			238.0
Other operating items, net	1.7			10.5			3.4			16.7
Operating loss	(100.1		)	(51.3		)	(253.7		)	(315.6		)
Interest expense	14.4			15.3			47.2			43.3
Gain on deconsolidation of subsidiary	—			—			(0.8		)	(8.5		)
Other income, net	(1.4		)	(2.3		)	(4.3		)	(2.7		)
Loss before income taxes and discontinued operations	(113.1		)	(64.3		)	(295.8		)	(347.7		)
Income tax (benefit) expense	(6.4		)	1.6			(55.9		)	(10.4		)
Loss from continuing operations	(106.7		)	(65.9		)	(239.9		)	(337.3		)
(Loss) income from discontinued operations, net of taxes	(0.5		)	(10.9		)	16.5			(61.7		)
Net loss	$	(107.2	)	$	(76.8	)	$	(223.4	)	$	(399.0	)
Comprehensive loss	$	(102.4	)	$	(121.7	)	$	(220.0	)	$	(394.7	)



	Successor Company
	September 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	88.1		$	112.3
Restricted cash	15.0			5.4
Accounts receivable, net	127.3			174.4
Inventories	64.4			62.3
Prepaid and deferred promotion costs	17.0			28.2
Prepaid expenses and other current assets	112.8			99.3
Assets held for sale	14.7			153.8
Total current assets	439.3			635.7
Property and equipment, net	44.3			51.1
Restricted cash	8.3			6.5
Goodwill	256.1			388.7
Other intangible assets, net	205.1			304.7
Prepaid pension assets	148.1			135.4
Other noncurrent assets	44.6			42.0
Total assets	$	1,145.8		$	1,564.1
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Current portion of long-term debt	$	58.0		$	—
Accounts payable	96.6			133.2
Accrued expenses	103.5			131.9
Income taxes payable	2.4			8.8
Unearned revenue	220.0			227.8
Other current liabilities	22.2			22.0
Liabilities held for sale	11.2			36.8
Total current liabilities	513.9			560.5
Long-term debt	454.7			603.8
Unearned revenue	106.5			89.6
Accrued pension	4.3			4.3
Postretirement and postemployment benefits other than pensions	8.2			9.2
Other noncurrent liabilities	134.3			154.1
Total liabilities	1,221.9			1,421.5
Common stock (Series A (voting) $0.001 par value: authorized - 39,000,000 shares; issued - 25,436,467 shares; outstanding - 24,394,640 and 24,378,151 shares)	—			—
Common stock (Series B (non-voting) $0.001 par value: authorized - 3,000,000 shares; issued and outstanding - 2,063,533 shares)	—			—
Treasury stock, at cost: 1,041,827 and 1,058,316 shares	(30.2		)	(30.7		)
Paid-in capital, including warrants	595.6			594.3
Accumulated deficit	(646.6		)	(422.8		)
Accumulated other comprehensive income	5.1			1.8
Total stockholders’ (deficit) equity	(76.1		)	142.6
Total liabilities and stockholders’ (deficit) equity	$	1,145.8		$	1,564.1



	Successor Company
	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(223.4	)	$	(399.0	)
Adjustments to reconcile net loss to operating cash flows:
(Income) loss from discontinued operations, net of taxes	(16.5		)	61.7
Depreciation and amortization	43.2			50.2
Benefit for deferred income taxes	(13.4		)	(19.2		)
Amortization of debt discounts	2.1			1.4
Amortization of debt issuance costs	3.9			1.8
Gain on deconsolidation of subsidiary	(0.8		)	(8.5		)
Impairment of assets	203.7			238.0
Gain on derivatives and warrants	(3.2		)	(1.1		)
Equity-based compensation expense	0.4			16.7
Net gain on sale or disposal of certain assets	(1.0		)	(1.9		)
Changes in assets and liabilities, net of effects of dispositions:
Restricted cash	(0.1		)	(0.4		)
Accounts receivable, net	45.1			23.0
Inventories	(2.7		)	(18.0		)
Prepaid and deferred promotion costs	11.4			3.6
Other assets	(21.7		)	(35.4		)
Unearned revenue	16.8			20.0
Income taxes	(55.9		)	0.2
Accounts payable and accrued expenses	(59.4		)	(10.0		)
Other liabilities	(0.4		)	(8.0		)
Net change in cash due to continuing operating activities	$	(71.9	)	$	(84.9	)
Net change in cash due to discontinued operating activities	(19.6		)	(12.7		)
Net change in cash due to operating activities	$	(91.5	)	$	(97.6	)
Cash flows from investing activities:
Capital expenditures	$	(8.0	)	$	(11.3	)
Purchase of a business	—			(2.7		)
Proceeds from sale of a business	175.0			—
Proceeds from sale of assets	2.8			9.5
Investing restricted cash	0.1			—
Net change in cash due to continuing investing activities	$	169.9		$	(4.5	)
Net change in cash due to discontinued investing activities	2.3			(1.2		)
Net change in cash due to investing activities	$	172.2		$	(5.7	)


See accompanying Notes to Consolidated Financial Statements



	Successor Company
	Nine months ended September 30,
	2012			2011
Cash flows from financing activities:
Proceeds from borrowings	$	50.0		$	55.0
Debt payments	(57.7		)	—
Proceeds from long-term revolving credit facility	—			40.0
Repayments of long-term revolving credit facility	(35.0		)	(4.0		)
Debt payments to related parties	(45.0		)	—
Cash paid for financing fees	(2.6		)	(2.2		)
Cash used to net settle equity-based compensation	—			(7.6		)
Repurchase of Successor Company common stock	—			(43.3		)
Tax effect of equity-based compensation	1.1			—
Financing restricted cash	(11.0		)	—
Payment of prepayment penalty to related parties	(5.0		)	—
Net change in cash due to continuing financing activities	$	(105.2	)	$	37.9
Net change in cash due to discontinued financing activities	(0.2		)	(0.1		)
Net change in cash due to financing activities	$	(105.4	)	$	37.8
Effect of exchange rate changes on cash and cash equivalents	0.5			(0.5		)
Net change in cash and cash equivalents	(24.2		)	(66.0		)
Cash and cash equivalents at beginning of period	112.3			169.4
Cash and cash equivalents at end of period	$	88.1		$	103.4
Supplemental information
Cash paid for interest	$	40.9		$	38.1
Cash paid for income taxes	$	3.7		$	6.0

RDA Holding Co. is principally a holding company. We conduct our operations primarily through our wholly-owned subsidiary, The Reader’s Digest Association, Inc. (“RDA”), and subsidiaries of RDA. RDA Holding Co.’s primary asset is its sole ownership of all issued and outstanding shares of common stock of RDA. References in the Notes to Consolidated Financial Statements to “we,” “us,” “our,” “HoldCo” and the “Company” are to RDA Holding Co., and its subsidiaries.

We are a global, multi-brand and multi-platform media and direct marketing company that educates, entertains and connects audiences around the world. We are dedicated to providing our customers with the inspiration, ideas and tools to simplify and enrich their lives. We produce and sell print and digital magazines, books, music and videos through multiple channels, such as direct mail (including catalogs), the Internet and retail. Through trusted partners and sourcing experts, we co-brand, market and sell other consumer goods and financial services.

As of September 30, 2012, the Company was in violation of the financial covenant under its Senior Credit Facility (as defined in Note 10, Debt). We obtained an amendment from our lender, dated November 9, 2012, to modify certain covenants. However, management believes that based on current projections and given the impact of continued business declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 Secured Term Loan for the next several quarters. Accordingly, we have reclassified the $50.0 secured term loan ("2012 Secured Term Loan") from non-current to current, in our consolidated balance sheet, as of September 30, 2012. See Note 10, Debt, and Note 18, Subsequent Events, for further information.

On July 31, 2012, the Company completed the sale of 100% of the outstanding stock of its businesses in Spain and Portugal. The financial impact of this transaction was immaterial. Concurrent with the sale agreement, we entered into a license agreement with the purchaser to publish the Spain and Portugal editions of Reader's Digest and sell other products under the Reader's Digest brand. These businesses were categorized as held for sale and classified within discontinued operations as of June 30, 2012. See Note 7, Discontinued Operations and Assets Held for Sale, for further information.

On July 2, 2012, the Company completed the sale of 100% of the outstanding stock of its Direct Holdings U.S. Corp and Saguaro Road Records, Inc. subsidiaries, and certain assets of Direct Entertainment Media Group, Inc., collectively considered to be LED. LED was categorized as a business held for sale and was classified within discontinued operations as of June 30, 2012. The purchase price was $1.1 and was paid in cash. The sale of LED resulted in an immaterial loss. See Note 7, Discontinued Operations and Assets Held for Sale, for further information.

On March 21, 2012, the Company repaid and terminated its Senior Credit Facility (as defined in Note 10, Debt), using $35.0 of net proceeds from our Allrecipes.com sale. In addition, we cash-collateralized our letters of credit, $11.4 as of March 21, 2012, which had been issued under the Senior Credit Facility. During the third quarter of 2012, we re-issued most of these standby letters of credit under our $11.0 letter of credit facility. We expect to receive the cash, previously used to as collateral, in the fourth quarter of 2012. See Note 10, Debt, for further information.

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

As discussed in Note 2, Reorganization and Emergence from Chapter 11, in our audited December 31, 2011 consolidated financial statements, the Company emerged from chapter 11 bankruptcy protection on February 19, 2010 (“Effective Date”), and adopted fresh start accounting in accordance with Accounting Standards Codification ("ASC") Topic 852, Reorganizations. The adoption of fresh start accounting resulted in our becoming a new entity for financial reporting purposes.

These statements, in the opinion of management, have been prepared following the requirements of U.S. GAAP for interim reporting, applying certain assumptions and estimates, including all normal, recurring 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, among other things, the seasonality of our business. In preparing the consolidated financial statements in conformity with U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates.

As discussed in Note 3, Fresh Start Accounting and Reorganization Items, in our audited December 31, 2011 consolidated financial statements, the basis to determine enterprise value and the values of various tangible and intangible assets were determined using a number of factors, including the use of certain valuation methodologies and certain operational assumptions and estimates. Due to the many variables inherent in the estimation of fair value, differences in assumptions and estimates may have a material effect on the result of our future goodwill and intangible asset impairment tests. We determined that an interim impairment test was necessary during the three months ended June 30, 2012. During the three months ended September 30, 2012, we finalized our second quarter 2012 interim test and determined a second interim impairment test was necessary. These analyses resulted in an impairment charge of $203.7 for goodwill, other intangible assets, and property and equipment, net. See Note 3, Impairment of Assets, for further information.

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

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which represents an update to ASC 220, Comprehensive Income (“ASC 220”). ASU 2011-05 provides new disclosure guidance for comprehensive income, requiring presentation of each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. An entity will have the option to present these items in one continuous statement or two separate but consecutive statements. An entity will no longer be permitted to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), which represents an update to ASC 220. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. These updates are effective for fiscal years beginning after December 15, 2011 and for interim periods within those years. The Company adopted this guidance effective January 1, 2012, and it did not have a material impact on our consolidated financial statements.

In connection with the preparation of our consolidated financial statements for the three and nine months ended September 30, 2012, we identified certain errors in our consolidated financial statements relating to certain prior periods. In accordance with ASC Topic 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), we assessed the materiality of the errors and concluded that the errors were not material to any of our previously issued consolidated financial statements. In accordance with ASC 250-10 (SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), we have revised our previously issued financial statements to correct the effect of these errors. These corrections, as summarized below, are non-cash in nature and do not impact our financial covenants under our debt agreements. These non-cash revisions do not impact the net change in cash due to operating activities, net change in cash due to investing activities or net change in cash due to financing activities, in our consolidated statements of cash flows, for any prior period.

We identified an error related to our interim impairment analyses for the second and third quarters of 2011, in calculating the fair value of our reporting units, where we omitted an adjustment to the deferred tax liability associated with the fair value of the intangible assets and deferred revenue used in the implied fair value of goodwill calculation under the Step 2 goodwill test. As a result, in the second quarter of 2011, we should have recorded $3.0 in additional impairment charges; and in the third quarter of 2011, we should have recorded $2.3 in additional impairment charges.



	Successor Company
	Three months ended March 31, 2012
	Previously Reported			Impact from Discontinued Operations			Adjustments			As Revised
Impairment of assets	$	—		$	—		$	5.3		$	5.3
Operating (loss) income	(56.8		)	1.7			(5.3		)	(60.4		)
(Loss) income from continuing operations	(55.6		)	1.2			(5.3		)	(59.7		)
Income (loss) from discontinued operations, net of taxes	47.8			(1.3		)	(9.1		)	37.4
Net loss	(7.8		)	—			(14.5		)	(22.3		)
Comprehensive income (loss)	7.9			—			(14.4		)	(6.5		)



	Successor Company
	March 31, 2012
	Previously Reported			Impact from Discontinued Operations			Adjustments			As Revised
Goodwill	$	396.5		$	(2.2	)	$	(5.3	)	$	389.0
Total assets	1,546.5			—			(5.3		)	1,541.2
Other noncurrent liabilities	163.6			—			9.2			172.8
Total liabilities	1,394.7			—			9.1			1,403.8
Accumulated deficit	(430.6		)	—			(14.5		)	(445.1		)
Accumulated other comprehensive income	17.5			—			0.1			17.6
Total stockholders' equity	151.8			—			(14.4		)	137.4
Total liabilities and stockholders' equity	1,546.5			—			(5.3		)	1,541.2

Goodwill and other indefinite-lived intangible assets are reviewed for impairment using a fair value based approach annually or earlier upon the occurrence of events or circumstances that indicate there may be an impairment charge. Our annual impairment test is performed on October 1. Asset impairments related to the carrying value of goodwill, indefinite-lived intangible assets and certain long-lived assets are calculated in accordance with the provisions of ASC 350, Intangibles—Goodwill and Other and ASC Topic 360, Property, Plant and Equipment (“ASC 360”), respectively.

The goodwill impairment analysis, after any qualitative analysis if applicable, is a two-step process. The first step, used to identify potential impairment, is a comparison of the reporting unit's estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is not considered to be impaired. If the carrying value exceeds the fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment. The second step requires the Company to compare the carrying value of the reporting unit's goodwill to determine the amount of the impairment charges if any.

We estimated the fair value of our reporting units based on a combination of the income and market multiple approaches. Our estimate of discounted cash flows for each reporting unit required significant judgment. Certain key assumptions utilized, including changes in revenue, operating expenses, working capital requirements and capital expenditures including pre-publication costs, are based on estimates related to strategic initiatives and current market conditions. The discounted cash flow analyses used a discount rate that corresponds to our weighted-average cost of capital. This assumed discount rate is consistent with that used for investment decisions and takes into account risk associated with the specific and detailed operating plans and strategies of the individual reporting units. 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 reporting units. Collectively, these evaluations were management's best estimate of projected fair values.

Our results in Europe have declined as we experience the continuing economic activity declines in Europe, softer response rates to our promotional campaigns, continuing declines in some of our books and home entertainment products and transformational change, as we implement our strategy towards a more customer-centric marketing approach and a digital-driven business model. The goal of this approach is a high-quality customer database, with higher-returns on a lower revenue base. While our financial projections anticipated some decline in revenue related to this strategy, the actual declines have occurred at rates higher than we predicted, and against factors that we were not able to predict, including continued challenging economic environments in our European markets. Our efforts to preserve profitability through aggressive cost reductions and operating efficiencies have somewhat mitigated the declines. However, these factors led us to conclude that interim impairment tests were necessary for Europe at June 30, 2012.

We estimated the fair value of our other intangible assets using the relief from royalty method and the income approach. The following table summarizes the significant quantitative unobservable inputs and assumptions used in the fair value measurements of our intangible assets for the three months ended June 30, 2012:



	Range					Weighted Average
Discount Rate	14.0	%	-	15.0	%	14.3%
Growth Rates	(0.7	)%	-	5.1	%	2.7%
Perpetual Growth Rates	—	%	-	2.0	%	1.7%
Royalty Rate	0.5	%	-	5.0	%	2.6%

Based on our June 30, 2012 interim impairment tests, our North America reportable segment had goodwill and other intangible asset impairment charges related to our Canada reporting unit of $36.8 and $13.1, respectively; and other intangible asset impairment charges related to certain tradenames in our United States reporting unit of $12.1. Our Europe reportable segment had goodwill and other intangible asset impairment charges of $26.8 and $24.6, respectively.

Our results in Europe experienced further, unanticipated declines, based on continuing unfavorable economic environments, softer results to our promotional campaigns, continuing declines in some of our books and home entertainment products, particularly on our single sale book products. It continues to be difficult to forecast our business in this transformational environment and the actual declines have occurred at rates higher than we predicted. These factors led us to conclude that interim impairment tests were necessary for Europe at September 30, 2012.



	Range					Weighted Average
Discount Rate	15.0	%	-	16.0	%	15.4%
Growth Rates	(21.2	)%	-	9.1	%	(4.0)%
Perpetual Growth Rates	—	%	-	2.0	%	1.7%
Royalty Rate	0.5	%	-	5.0	%	1.9%

Based on our third quarter 2012 interim impairment test, our Europe reportable segment had goodwill and other intangible asset impairment charges of $64.0 and $2.7, respectively. Further, our North America reportable segment had other intangible asset impairment charges related to certain tradenames in our United States and Canada reporting units of $13.5 and $1.1, respectively. Our North America segment had property and equipment impairment charges of $3.7, related to internally developed software.

As part of our interim impairment test, we were required to perform an impairment assessment and measure certain assets at fair value. These fair value measurements are considered non-recurring under ASC Topic 820, Fair Value Measurements and Disclosures. The assets and liabilities measured during the period at fair value on a non-recurring basis were as follows:



	Successor Company
	At the End of the Period		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Loss
For the nine months ended September 30, 2012
Goodwill	$	256.1	$	—	$	—	$	256.1	$	132.9
Other intangible assets, net	205.1		—		—		205.1		67.1
Property and equipment, net	44.3		—		—		44.3		3.7
									$	203.7

While the Company believes the assumptions used in the interim impairment analyses are reasonable, our analysis is sensitive to adverse changes in the assumptions used in the valuations. In particular, changes in the projected cash flows, the discount rate, the terminal year growth rate and market multiple assumptions could produce significantly different results for the impairment analyses. Further, our long-term plan currently reflects the stabilization and subsequent growth of our businesses. Certain assumptions are particularly sensitive if changes arise due to new facts, given that our book value was written down to fair value during our 2012 interim impairment tests. While we believe we have appropriately risk-adjusted our long-term plan to reflect the risk of non-performance, given the minimal excess of fair value over book value, any adverse changes in assumptions could result in further impairment charges.

We also have significant strategic initiatives in place across the Company, which in some cases, include the sale and subsequent license of a portion of our business. While we expect these initiatives to result in the ultimate realization of the fair values reflected in our impairment analysis, changes in our plans or adverse changes in actual results could lead to further impairment charges. We will continue to monitor the progress of the transformational changes to these businesses, the execution of performance against our financial projections and the impact on the value of our goodwill and other long-lived assets.

Items included in other operating items, net consist of the following: (i) restructuring charges, representing the streamlining of our organizational structure; (ii) professional, contractual charges and other periodic costs related to the strategic repositioning of our businesses; (iii) gain or loss on the sale or disposal of assets; and (iv) pension curtailments. The table below reflects our other operating items, net:



	Successor Company
	Three months ended September 30,					Nine months ended September 30,
	2012		2011			2012			2011
Restructuring charges	$	0.6	$	9.1		$	2.5		$	13.1
Professional fees and contractual charges related to reorganization and restructuring	1.1		1.6			2.2			5.5
Sale or disposal of certain assets	—		(0.2		)	(1.0		)	(1.9		)
Pension curtailments	—		—			(0.3		)	—
Total	$	1.7	$	10.5		$	3.4		$	16.7

Restructuring charges are recorded in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits (“ASC 712”) or ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”). Employees terminated as a result of our restructuring activities were terminated under our pre-existing severance policy; therefore, we recognized severance amounts pursuant to ASC 712. Severance charges represent the cost to separate employees from our operations to streamline the organization. As such, severance amounts are recorded when 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 ASC 420.

For the three months ended September 30, 2012, we recorded new restructuring activities of $3.2, primarily related to severance, principally related to continued headcount reductions in North America; along with an adjustment to sublease assumptions associated with the abandonment of one floor of our White Plains, New York facility. The associated employee severance payments are expected to be substantially completed by the end of June 2013. During the quarter, we also reversed $1.9 in accrued severance, primarily related to 2011 Successor Company initiatives, mainly due to several employee resignations, along with a $0.7 adjustment to sublease assumptions associated with the abandonment of one floor of our White Plains, New York facility.

For the nine months ended September 30, 2012, we recorded new restructuring activities of $7.1, primarily related to severance, principally related to continued headcount reductions in North America; along with a $1.1 adjustment to sublease assumptions associated with the abandonment of one floor of our White Plains, New York facility. The associated employee severance payments are expected to be substantially completed by the end of June 2013. During the nine months ended September 30, 2012, we also reversed $5.7 in accrued severance, primarily related to 2011 Successor Company initiatives, mainly due to several employee resignations and employees who are now expected to exit the business with a probable sale.

For the nine months ended September 30, 2011, we recorded new restructuring activities of $13.1. This was primarily related to severance, principally due to continued headcount reductions in our Europe and APLA regions. Additionally, we recorded contractual charges related to the abandonment of one floor of our White Plains, New York facility, due to additional charges to ready the space for sublease and adjustments to our expected sublease income; contractual charges related to abandonment of leases in Europe, APLA and North America; and fees related to a contract termination in France. Employee severance payments related to these activities are expected to be substantially completed by the end of 2012.

The table below reflects changes in our restructuring accruals, by type of initiative, for the nine months ended September 30, 2012:



	Successor Company
	Severance												Contracts
	2011			2010									2011			2010
	Successor Company Initiatives			Successor Company Initiatives			Predecessor Company Initiatives			Total Severance			Successor Company Initiatives			Successor Company Initiatives			Predecessor Company Initiatives			Total Contracts			Grand Total
Balance at December 31, 2011	$	25.7		$	1.0		$	0.6		$	27.3		$	0.9		$	5.3		$	—		$	6.2		$	33.5
Accruals, net	2.2			(0.7		)	(0.2		)	1.3			—			1.2			—			1.2			2.5
Spending	(13.5		)	(0.3		)	—			(13.8		)	(0.2		)	(1.1		)	—			(1.3		)	(15.1		)
Balance at September 30, 2012	$	14.4		$	—		$	0.4		$	14.8		$	0.7		$	5.4		$	—		$	6.1		$	20.9
Cumulative Accounts
Predecessor Company’s liabilities assumed in fresh start accounting	$	—		$	—		$	14.3		$	14.3		$	—		$	—		$	0.3		$	0.3		$	14.6
Accruals, net	35.4			19.3			(6.6		)	48.1			1.4			7.4			(0.2		)	8.6			56.7
Spending	(21.0		)	(19.3		)	(7.3		)	(47.6		)	(0.7		)	(2.0		)	(0.1		)	(2.8		)	(50.4		)
Balance at September 30, 2012	$	14.4		$	—		$	0.4		$	14.8		$	0.7		$	5.4		$	—		$	6.1		$	20.9

The table below reflects changes in our restructuring accruals, by reportable segment, for the nine months ended September 30, 2012:



	Successor Company
	Severance												Contracts
	North America			Europe			APLA			Total Severance			North America			Europe			APLA			Total Contracts			Grand Total
Balance at December 31, 2011	$	4.6		$	19.4		$	3.3		$	27.3		$	5.3		$	0.9		$	—		$	6.2		$	33.5
Accruals, net	5.2			(3.0		)	(0.9		)	1.3			1.1			—			0.1			1.2			2.5
Spending	(4.2		)	(8.1		)	(1.5		)	(13.8		)	(1.0		)	(0.3		)	—			(1.3		)	(15.1		)
Balance at September 30, 2012	$	5.6		$	8.3		$	0.9		$	14.8		$	5.4		$	0.6		$	0.1		$	6.1		$	20.9
Cumulative Accounts
Predecessor Company’s liabilities assumed in fresh start accounting	$	1.7		$	11.3		$	1.3		$	14.3		$	—		$	—		$	0.3		$	0.3		$	14.6
Accruals, net	20.9			21.4			5.8			48.1			7.9			0.8			(0.1		)	8.6			56.7
Spending	(17.0		)	(24.4		)	(6.2		)	(47.6		)	(2.5		)	(0.2		)	(0.1		)	(2.8		)	(50.4		)
Balance at September 30, 2012	$	5.6		$	8.3		$	0.9		$	14.8		$	5.4		$	0.6		$	0.1		$	6.1		$	20.9

Effective February 17, 2010, the Company deconsolidated our United Kingdom subsidiary, Reader’s Digest Association Limited (“RDA UK”), as a result of RDA UK filing for administration. As of the aforementioned date, the United Kingdom High Court of Justice appointed an administrator who replaced management and the Board of Directors of RDA UK, and is responsible for any decision making regarding the day-to-day operations, assets, liabilities and capital of RDA UK. As a result, we relinquished our controlling financial interest in RDA UK. Therefore, in accordance with ASC Topic 810, Consolidation, the financial results of RDA UK are no longer included in our consolidated financial results for periods beginning after February 17, 2010. On April 9, 2010, the Company entered into a license agreement with a third party to publish the United Kingdom edition of Reader’s Digest magazine and sell other products under the Reader’s Digest brand.

During the nine months ended September 30, 2011, we reduced the loss recorded upon the initial deconsolidation of RDA UK by $8.5, related to the settlement of remaining pre-petition and post-petition liabilities resulting from the RDA UK administration filing. In the nine months ended September 30, 2012, we further reduced the loss by $0.8, related to the final settlement of pre-petition and post-petition liabilities resulting from the RDA UK administration filing.

For the nine months ended September 30, 2012 and 2011, the Company recorded income tax benefits of $55.9 and $10.4, respectively, which were primarily driven by the Company's jurisdictional earnings mix. Included in the annual effective tax rate used to determine the income tax benefit for the nine months ended September 30, 2012 was the impact of impairment charges to non-deductible goodwill and identified other intangible assets, as they were no longer considered unusual in nature. The reported benefit for the nine months ended September 30, 2012 also included a $20.6 tax benefit related to our domestic continuing operations which is supported by taxable income generated by the sale of Allrecipes.com, a component of discontinued operations, as well as the discrete tax benefit for the settlement of tax audits and litigation discussed below. The income tax benefit of $10.4 for the nine months ended September 30, 2011 was impacted by the impairment charge in the quarter of non-deductible goodwill and identified other intangibles previously recorded in fresh start accounting. This was recorded as a discrete benefit. The income tax benefit was further impacted by the establishment of a valuation allowance on certain U.S. tax assets, offset by the reversal of valuation allowance previously recorded on certain of our state net operating loss carryforward.

We consider many factors when evaluating and estimating our uncertain tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes. During the nine months ended September 30, 2012, we settled foreign tax audit and litigation related to the years 2007 through 2010, resulting in a $10.2 decrease in the amount of reserves for uncertain tax positions related to these items. We also increased our reserves by $9.1 for an uncertain tax position related to the tax impact of bankruptcy cancellation of indebtedness associated with certain of our international reorganizations. See Note 2, Revision of Prior Period Consolidated Financial Statements, for further information. The amount of unrecognized tax benefits, including interest from uncertain tax positions at September 30, 2012 and December 31, 2011, were $26.3 and $26.9, respectively.

During the three months ended June 30, 2012, we committed to a plan to sell our Reader's Digest Mexico and Argentina businesses, previously classified within our APLA segment. We met the criteria under ASC 360 to classify these businesses as held for sale. There is no expectation of continuing cash flows (other than royalty income) or involvement in the operations after they are sold. The operating results for these businesses are included in discontinued operations for all periods presented. The assets and liabilities for these businesses are classified as held for sale for all periods presented. We believe that the sale of these businesses within the next twelve months is probable.

During the three months ended June 30, 2012, we closed our Reader's Digest Ukraine, Kazakhstan and China businesses. Additionally, during the three months ended March 31, 2012, we closed our Worldwide Country Tours and Reader’s Digest Bulgaria businesses. These businesses met the criteria under ASC 205, Presentation of Financial Statements, for discontinued operations classification. There is no expectation of continuing cash flows or operations after the closure of these businesses.

(Loss) income from discontinued operations, net of taxes, was as follows:



	Successor Company
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenue	$	6.9		$	44.5		$	76.8		$	132.6
Loss from discontinued operations before income taxes and gain on sales	(0.6		)	(12.1		)	(25.2		)	(68.3		)
Income tax benefit on discontinued operations	(2.2		)	(1.2		)	(7.5		)	(6.6		)
Income (loss) from discontinued operations, net of taxes, before (loss) gain on sales	1.6			(10.9		)	(17.7		)	(61.7		)
(Loss) gain on sales of divested businesses, net of taxes	(2.1		)	—			34.2			—
(Loss) income from discontinued operations, net of taxes	$	(0.5	)	$	(10.9	)	$	16.5		$	(61.7	)

(Loss) gain on the sales of divested businesses, net of taxes was as follows:



	Successor Company
	Three months ended September 30,			Nine months ended September 30,
	2012			2012
Sales price	$	1.1		$	179.5
Less: cash on hand	—			—
Net sales price	1.1			179.5
Net tangible assets	0.9			4.5
Associated intangible assets	—			87.6
Transaction costs	1.3			6.6
(Loss) gain on sales of divested businesses, before taxes	(1.1		)	80.8
Income tax expense	1.0			46.6
(Loss) gain on sales of divested businesses, net of taxes	$	(2.1	)	$	34.2

The carrying amounts of major classes of assets and liabilities included in assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets, were as follows:



	Successor Company
	September 30, 2012		December 31, 2011
Assets held for sale
Accounts receivable, net	$	8.4	$	33.9
Inventories	1.7		7.1
Other current assets	3.5		11.7
Other non-current assets	0.6		5.9
Goodwill and other intangible assets, net	0.5		95.2
Total assets held for sale	$	14.7	$	153.8
Liabilities held for sale
Accounts payable	$	3.9	$	13.5
Accrued expenses	1.5		8.8
Deferred revenue	5.7		11.0
Other current liabilities	—		2.0
Other non-current liabilities	0.1		1.5
Total liabilities held for sale	$	11.2	$	36.8

The components of debt were as follows:



			Successor Company
	Interest Rate	Maturity	September 30, 2012			December 31, 2011
Senior Credit Facility	6.0%	February 2013	$	—		$	35.0
2011 Secured Term Loan	7.0%	November 2013	—			45.0
2011 Unsecured Term Loan	11.0%	May 2014	10.0			10.0
2012 Secured Term Loan	8.0%	March 2015	49.9			—
Senior Secured Notes	9.5%	February 2017	464.4			525.0
Discount on 2011 Secured Term Loan			—			(1.5		)
Discount on 2011 Unsecured Term Loan			(1.8		)	(2.6		)
Discount on Senior Secured Notes			(9.8		)	(12.5		)
Fair Value of Embedded Derivative			—			5.4
Total Debt			512.7			603.8
Less: Current portion of long-term debt			58.0			—
Long-term debt			$	454.7		$	603.8

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

The 2012 Secured Credit Facility contains mandatory prepayment provisions in the event of certain events, including certain asset sales (excluding the sale of the LED business). Subject to an exception for prepayments made from the Company’s Excess Cash Flow (as defined in the Credit Agreement), the Company will be required to pay a prepayment premium of 1.00% of the principal amount prepaid for any optional and mandatory prepayments prior to March 30, 2013.

We were in violation of the financial covenants under our 2012 Secured Credit Facility as of September 30, 2012. We obtained an amendment from our lender, dated November 9, 2012, to modify the covenant levels as follows, to prevent a default under the agreement governing the 2012 Secured Credit Facility: the total leverage ratio was modified from 6.25 to 7.50; the first-out first lien leverage ratio was modified from 0.70 to 0.85; and the cash interest coverage ratio was modified from 1.50 to 1.20. In addition, the amendment modified the variable rate per annum to plus 5.0% in the case of prime rate borrowings and 6.0% in the case of LIBOR borrowings. Management believes however, that based on current projections and given the impact of continued business declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 Secured Credit Facility for the next several quarters. Accordingly, we have reclassified the 2012 Secured Credit Facility from non-current to current, in our consolidated balance sheet, as of September 30, 2012. Additionally, we have reclassified the 2011 Unsecured Term Loan from non-current to current in our consolidated balance sheet, as of September 30, 2012, due to certain cross-default provisions. We continue to classify the Senior Secured Notes as non-current, in our consolidated balance sheet, as of September 30, 2012, as there is no expectation of a cross-default because the 2012 Secured Term Loan was not accelerated by the lender.

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

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

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

On August 12, 2011, the Company entered into a term loan and guarantee agreement with Luxor Capital Group, as administrative agent; the Guarantors (defined therein); and the lenders thereunder, consisting of funds affiliated with Luxor Capital Group and Point Lobos Capital, who are shareholders of the Company’s common stock, providing the Company with a $45.0 secured term loan (“2011 Secured Term Loan”). The 2011 Secured Term Loan would have matured in November 2013 and bore interest at the rate of 7.0% per annum.

Also on August 12, 2011, the Company entered into an unsecured term loan and guarantee agreement with Luxor Capital Group, as administrative agent; the Guarantors (defined therein) and the lenders thereunder, consisting of funds affiliated with Luxor Capital Group and Point Lobos Capital, who are shareholders of the Company’s common stock, providing the Company with a $10.0 unsecured term loan (“2011 Unsecured Term Loan” and, together with the 2011 Secured Term Loan, “2011 Credit Facilities”). The 2011 Unsecured Term Loan matures in May 2014 and bears interest at the rate of 11.0% per annum.

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.

On June 15, 2012, the Company completed a cash tender offer to purchase up to $60.7 of its Senior Secured Notes, using proceeds from the sale of our Allrecipes.com business, at a purchase price of 95% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. The Company received tenders of approximately $509.0 aggregate principal amount of Senior Secured Notes. Under the terms of the tender offer, holders who tendered Senior Secured Notes that were accepted for payment received approximately 95% principal amount of the Senior Secured Notes. On June 15, 2012, we accepted for purchase $60.6 aggregate principal amount on a pro rata basis, pursuant to the tender offer, at a total cost of $58.1, including principal of $57.6, along with accrued and unpaid interest to the date of purchase.

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., Bank 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 3 year revolving credit facility (“Senior Credit Facility”) of up to $50.0 with a $25.0 letter of credit sub-facility. On March 21, 2012, the Company repaid and terminated its Senior Credit Facility, using $35.0 of net proceeds from our Allrecipes.com sale and we cash-collateralized our letters of credit, $11.4 as of March 21, 2012, which had been issued under the Senior Credit Facility. During the third quarter of 2012, we re-issued most of these standby letters of credit under our 2012 Secured Credit Facility. We expect to receive the cash, previously used to as collateral, in the fourth quarter of 2012.

On August 23, 2012, we announced that DEMG and Direct Holdings Americas Inc. (“DHA”), a former subsidiary of RDA that was sold on July 2, 2012, had reached a settlement of all legal proceedings with the FTC on the FTC's allegations regarding the marketing campaign for the Ab Circle Pro fitness product, under a Consent Order that provides for injunctive relief and consumer redress. RDA, as the parent company, was named in the Consent Order as a relief defendant. Under the terms of the settlement, none of the parties have admitted any wrongdoing or liability.

Pursuant to the Consent Order, RDA, DEMG and DHA agreed to pay between approximately $13.8 and $23.8 for consumer redress. As the parent company of DEMG and former parent company of DHA, RDA is responsible for payment of the settlement amount but is not subject to the injunctive provisions of the Consent Order. In light of the discontinuation of the operations of DEMG and the sale of DHA, the injunctive provisions of the Consent Order are not expected to materially impact RDA's future marketing activities.

The FTC Stipulated Final Judgment was approved by the United States District Court for the Southern District of Florida and the Consent Order was entered on August 28, 2012. The settlement required payment of $5.0 within 5 days of the entry of the consent order and requires another payment of $5.0 within 180 days of the entry of the consent order, and $3.8 within 270 days of the entry of the consent order. In addition, the order requires a payment of up to an additional $10.0, payable within 365 days of the entry of the consent order, such amount to be determined based on the consumer refund claims received by the FTC. Upon a failure to make any payment when due, a judgment in the amount of $31.7 (less any amounts previously paid) would become immediately due and payable. No cash reserve has been established for the settlement; however, the liability has been accrued in accordance with U.S. GAAP.

On December 30, 2011, the Polish Office for the Protection of Consumers and Competition ("UOKiK") issued a decision in its consumer protection proceeding against Reader's Digest Przeglad Sp. z o.o. (Reader's Digest Poland, "RDP"). UOKiK takes the position that RDP's sweepstakes-based direct mail marketing model makes use of practices which may mislead consumers and/or fail to provide clear and complete information on the details of the distance-selling contracts executed between RDP and the consumers. The decision requires RDP to (i) pay a fine of approximately $1.3, (ii) announce the decision on its website and in two national papers and (iii) change certain of its promotional materials. RDP filed an appeal on January 16, 2012, with the consumer protection/competition court and UOKiK's decision is not binding prior to the consumer protection/competition court's ruling on appeal. A ruling by the appellate court is expected in six to twelve months. Although we cannot predict the final outcome of this matter, based on the information presently available to us, management does not believe that the ultimate resolution of this investigation will have a material adverse effect on the Company's financial condition, results of operations or cash flows.

In August 2011, an adverse decision against the Company was rendered in the Brazilian Federal Court of Appeals that overturned a favorable decision in the lower court that was rendered in 2007, in which the Company challenged the constitutionality of a 2004 law change in the method of determining the tax base and the applicable tax rate used to assess local operating taxes related to certain federal social contribution programs. The Court of Appeals ruled unfavorably on the issue of constitutionality of the tax rate, but did not address the tax base, and specifically the Company’s ability to claim certain offsets in the form of credits against the tax. The Company asked the Court of Appeals to clarify its ruling in respect of the tax base and in February 2012, the Court of Appeals issued an adverse ruling that prevents the Company from claiming the aforementioned tax credits. In May 2012, the Company appealed the decision to the Superior Court of Brazil, and together with local tax counsel, believes it is possible that it will ultimately prevail in this litigation, which is expected to take several years to resolve. Based on the facts and circumstances, in April 2012, the Company elected to pay approximately $4.5 related to prior year taxes in dispute. The Company also elected to continue to pay the tax, excluding the benefit of the aforementioned tax credits in dispute, until the litigation is resolved. Our April 2012 payment of $4.5, related to taxes in dispute, was accrued at December 31, 2011.

For the nine months ended September 30, 2012 and 2011, we recognized stock-based compensation expense of $0.4 and $16.7, respectively. The stock-based compensation expense in the nine months ended September 30, 2012 included the reversal of $5.0 related to the remeasurement of our liability-classified awards to reflect the estimated fair value of our common stock. The stock-based compensation expense in the nine months ended September 30, 2011 consisted of $12.4, net of forfeitures, specifically for the accelerated vesting due to our April 2011 Board Change, as discussed in Note 1, Organization and Summary of Significant Accounting Policies, in our audited December 31, 2011 consolidated financial statements; along with $2.8 for normal course vesting and $1.5 for the quarterly mark-to-market on liability-classified RSUs.

During the nine months ended September 30, 2012, there were 904,000 RSUs granted to certain directors and employees of our Company. During the three months ended June 30, 2012, we had a modification to RSUs awarded to non-employee directors, which resulted in reclassification as liability instruments. RSUs awarded to non-employee directors and employee participants are accounted for as liability instruments and recorded in accrued expenses in our consolidated balance sheets.

In connection with the Successor Company grant of stock-based compensation awards, we perform a valuation of our common stock equity. Our valuation analysis consists of a combination of the income and market comparable approach, discounted for lack of marketability based on an options pricing method proposed by John Finnerty (“Finnerty Model”) under Level 3 of the fair value hierarchy. We also consider, but have not used, the market transaction approach due to the lack of relevant transactions. The income approach utilizes cash flows based on our long-term outlook through the valuation date. Terminal value was calculated using a modified Gordon growth formula. Market multiples of peer companies were calculated and utilized in application of a market comparable approach. We applied multiple ranges for revenue and EBITDA.



	Successor Company
	Valuation Date
	September 30, 2012			June 30, 2012			March 31, 2012
Income approach
Discount rate	19.0		%	16.0		%	16.0		%
Perpetual growth rate	2.0		%	2.0		%	2.0		%
Market comparable approach
EBITDA market multiples	5.00 to 5.50			5.00 to 5.50			5.50 to 6.00
Revenue market multiples	0.35 to 0.40			0.45 to 0.50			0.50 to 0.55
Finnerty model
Discount for lack of marketability	30.0		%	20.0		%	20.0		%
Volatility (a)	120.0		%	65.0		%	50.0		%
Risk-free rate (b)	0.2		%	0.3		%	0.3		%
Dividend yield (c)	—		%	—		%	—		%
Estimated fair value of our common stock	$	0.52		$	6.03		$	12.27

Separately, in connection with the Plan of Reorganization (“Plan”) executed upon our emergence from chapter 11 proceedings, holders of the Predecessor Company’s Senior Subordinated Notes who voted in favor of the Plan received warrants, each eligible to purchase 1.04 shares, as adjusted, of Class A common stock of the Successor Company. The Company has accounted for these warrants as equity instruments in accordance with ASC 815, and as such, are classified in stockholders’ equity.

The components of net periodic pension benefit were as follows:



	Successor Company
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Service cost	$	1.1		$	1.1		$	3.3		$	3.3
Interest cost	5.5			6.1			16.5			18.4
Expected return on plan assets	(10.7		)	(10.4		)	(32.1		)	(31.1		)
Curtailments (a)	—			—			(0.3		)	—
Cost for special termination benefits (b)	—			0.6			1.2			1.2
Net periodic pension benefit	$	(4.1	)	$	(2.6	)	$	(11.4	)	$	(8.2	)

Luxor Capital Group and Point Lobos Capital and their affiliated funds are considered related parties due to their equity interest in the Company. The 2011 Credit Facilities between the Company and Luxor Capital Group, Point Lobos Capital and their affiliated funds are described in Note 10, Debt. On March 6, 2012, we executed repayment of the 2011 Secured Term Loan, using net proceeds from our Allrecipes.com sale. Our repayment included $45.0 to satisfy principal debt, along with $5.0 due under early repayment provisions.

Our reportable segments reflect the manner in which our chief operating decision maker reviews the business. Our Chief Executive Officer acts as our chief operating decision maker. Revenue and expense attributable to intercompany transaction are eliminated to reconcile our reportable segment amounts to consolidated amounts, as reported in our consolidated statements of comprehensive loss. In addition to the reportable segments, we separately report corporate unallocated expenses, which are expenses not directly attributable to business unit performance. Similarly, we separately report the effects of goodwill and intangible asset impairment charges, certain purchase accounting related fair value adjustments and other operating items, net because our chief operating decision maker does not factor these items when assessing business unit performance.

Reportable Segment Financial Information:



	Successor Company
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenue
North America	$	105.0		$	133.8		$	359.3		$	459.2
Europe	85.5			130.9			281.2			388.0
Asia Pacific & Latin America	44.5			57.3			135.4			158.2
Intercompany eliminations	(2.7		)	(1.9		)	(5.5		)	(5.1		)
Fair value adjustments (a)	(2.2		)	(7.7		)	(16.5		)	(40.5		)
Total revenue	$	230.1		$	312.4		$	753.9		$	959.8
Operating (loss) profit
North America	$	(2.5	)	$	(6.0	)	$	18.0		$	34.9
Europe	(5.1		)	(4.5		)	(17.4		)	(0.9		)
Asia Pacific & Latin America	3.0			3.6			4.8			6.2
Corporate unallocated	(7.6		)	(19.8		)	(43.3		)	(75.7		)
Fair value adjustments (a)	(1.2		)	(3.8		)	(8.7		)	(25.4		)
Impairment of assets	(85.0		)	(10.3		)	(203.7		)	(238.0		)
Other operating items, net (b)	(1.7		)	(10.5		)	(3.4		)	(16.7		)
Operating loss	$	(100.1	)	$	(51.3	)	$	(253.7	)	$	(315.6	)

RDA Holding Co., and our domestic subsidiaries guarantee the Senior Secured Notes issued by RDA (collectively, the “Guarantor Subsidiaries”) jointly and severally, fully and unconditionally. 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 Senior Secured Notes.

In the three months ended September 30, 2012, we revised our consolidated condensed statement of cash flows for the three months ended March 31, 2012 and six months ended June 30, 2012, to adjust the effect of exchange rate changes on cash and cash equivalents. The impact of this revision was to increase Issuer Parent-RDA by $1.0 and increase Non-Guarantor Subsidiaries by $0.1, with an offset to Eliminations in the three months ended March 31, 2012. In the six months ended June 30, 2012, the impact is to decrease Non-Guarantor Subsidiaries by $4.3, with an offset to Eliminations. This revision is not material to the related consolidated financial statements for any prior periods and had no impact on our consolidated statements of cash flows. As prior period financial information is presented in future filings, we will similarly revise the consolidated condensed statements of cash flows.

Consolidated Statements of Comprehensive (Loss) Income for the three months ended September 30, 2012 (Successor Company):



	Guarantor Parent HoldCo			Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	—		$	12.9		$	73.5		$	146.4		$	(2.7	)	$	230.1
Product, distribution and editorial expenses	—			9.6			35.3			67.3			(2.7		)	109.5
Promotion, marketing and administrative expenses	—			12.8			37.9			83.3			—			134.0
Impairment of assets	—			—			17.2			67.8			—			85.0
Other operating items, net	—			2.1			0.8			(1.2		)	—			1.7
Operating loss	—			(11.6		)	(17.7		)	(70.8		)	—			(100.1		)
Interest expense	—			14.4			—			—			—			14.4
Loss from investment in subsidiaries	107.2			31.6			—			—			(138.8		)	—
Other expense (income), net	—			50.2			(45.3		)	(6.3		)	—			(1.4		)
(Loss) income before income taxes	(107.2		)	(107.8		)	27.6			(64.5		)	138.8			(113.1		)
Income tax benefit	—			(1.4		)	(3.6		)	(1.4		)	—			(6.4		)
(Loss) income from continuing operations	(107.2		)	(106.4		)	31.2			(63.1		)	138.8			(106.7		)
(Loss) income from discontinued operations, net of taxes	—			(0.8		)	0.3			—			—			(0.5		)
Net (loss) income	$	(107.2	)	$	(107.2	)	$	31.5		$	(63.1	)	$	138.8		$	(107.2	)
Comprehensive (loss) income	$	(102.4	)	$	(106.6	)	$	31.5		$	(58.7	)	$	133.8		$	(102.4	)

Consolidated Statements of Comprehensive (Loss) Income for the nine months ended September 30, 2012 (Successor Company):



	Guarantor Parent HoldCo			Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	—		$	44.8		$	244.8		$	471.5		$	(7.2	)	$	753.9
Product, distribution and editorial expenses	—			29.9			113.6			210.2			(7.2		)	346.5
Promotion, marketing and administrative expenses	—			60.0			116.3			277.7			—			454.0
Impairment of assets	—			—			29.2			174.5			—			203.7
Other operating items, net	—			5.0			1.7			(3.3		)	—			3.4
Operating loss	—			(50.1		)	(16.0		)	(187.6		)	—			(253.7		)
Interest expense	—			47.2			—			—			—			47.2
Gain on deconsolidation of subsidiary	—			—			(0.3		)	(0.5		)	—			(0.8		)
Loss from investment in subsidiaries	223.4			12.8			3.1			—			(239.3		)	—
Other expense (income), net	—			157.3			(148.8		)	(12.8		)	—			(4.3		)
(Loss) income before income taxes	(223.4		)	(267.4		)	130.0			(174.3		)	239.3			(295.8		)
Income tax (benefit) expense	—			(44.8		)	24.3			(35.4		)	—			(55.9		)
(Loss) income from continuing operations	(223.4		)	(222.6		)	105.7			(138.9		)	239.3			(239.9		)
(Loss) income from discontinued operations, net of taxes	—			(0.8		)	26.2			(8.9		)	—			16.5
Net (loss) income	$	(223.4	)	$	(223.4	)	$	131.9		$	(147.8	)	$	239.3		$	(223.4	)
Comprehensive (loss) income	$	(220.0	)	$	(231.2	)	$	131.9		$	(137.9	)	$	237.2		$	(220.0	)

Consolidated Condensed Balance Sheet as of September 30, 2012 (Successor Company):



	Guarantor Parent HoldCo			Issuer Parent-RDA			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets	$	—		$	87.6		$	99.1	$	322.6	$	(70.0	)	$	439.3
Property and equipment, net	—			28.1			7.3		8.9		—			44.3
Restricted cash	—			1.8			—		6.5		—			8.3
Goodwill	—			—			243.5		12.6		—			256.1
Other intangible assets, net	—			—			100.8		104.3		—			205.1
Prepaid pension assets	—			124.7			—		23.4		—			148.1
Investments in subsidiaries	—			312.2			115.0		—		(427.2		)	—
Intercompany noncurrent receivables	—			14.0			—		8.7		(22.7		)	—
Other noncurrent assets	—			19.1			22.8		2.7		—			44.6
Total assets	$	—		$	587.5		$	588.5	$	489.7	$	(519.9	)	$	1,145.8
Liabilities and stockholders’ (deficit) equity
Current liabilities	$	—		$	122.1		$	213.3	$	248.5	$	(70.0	)	$	513.9
Long-term debt	—			454.7			—		—		—			454.7
Unearned revenue	—			—			105.2		1.3		—			106.5
Accrued pension	—			—			—		4.3		—			4.3
Postretirement and postemployment benefits other than pensions	—			6.9			—		1.3		—			8.2
Deficiency in excess of investments in subsidiaries	76.1			—			—		—		(76.1		)	—
Intercompany noncurrent payables	—			8.7			8.0		6.0		(22.7		)	—
Other noncurrent liabilities	—			71.2			24.9		38.2		—			134.3
Total liabilities	76.1			663.6			351.4		299.6		(168.8		)	1,221.9
Stockholders’ (deficit) equity	(76.1		)	(76.1		)	237.1		190.1		(351.1		)	(76.1		)
Total liabilities and stockholders’ (deficit) equity	$	—		$	587.5		$	588.5	$	489.7	$	(519.9	)	$	1,145.8

Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2012 (Successor Company):



	Guarantor Parent HoldCo		Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net change in cash due to continuing operating activities	$	—	$	(62.4	)	$	2.8		$	(12.3	)	$	—	$	(71.9	)
Net change in cash due to discontinued operating activities	—		(6.0		)	(11.0		)	(2.6		)	—		(19.6		)
Net change in cash due to operating activities	—		(68.4		)	(8.2		)	(14.9		)	—		(91.5		)
Cash flows from investing activities:
Capital expenditures	—		(6.1		)	(0.1		)	(1.8		)	—		(8.0		)
Proceeds from sale of a business	—		175.0			—			—			—		175.0
Proceeds from sale of assets	—		2.8			—			—			—		2.8
Investing restricted cash	—		0.1			—			—			—		0.1
Net change in cash due to continuing investing activities	—		171.8			(0.1		)	(1.8		)	—		169.9
Net change in cash due to discontinued investing activities	—		—			2.7			(0.4		)	—		2.3
Net change in cash due to investing activities	—		171.8			2.6			(2.2		)	—		172.2
Cash flows from financing activities:
Proceeds from borrowings	—		50.0			—			—			—		50.0
Debt payments	—		(57.7		)	—			—			—		(57.7		)
Repayments of long-term revolving credit facility	—		(35.0		)	—			—			—		(35.0		)
Debt payments to related parties	—		(45.0		)	—			—			—		(45.0		)
Cash paid for financing fees	—		(2.6		)	—			—			—		(2.6		)
Tax effect of equity-based compensation	—		1.1			—			—			—		1.1
Financing restricted cash	—		(11.0		)	—			—			—		(11.0		)
Payment of prepayment penalty to related parties	—		(5.0		)	—			—			—		(5.0		)
Net change in cash due to continuing financing activities	—		(105.2		)	—			—			—		(105.2		)
Net change in cash due to discontinued financing activities	—		—			(0.2		)	—			—		(0.2		)
Net change in cash due to financing activities	—		(105.2		)	(0.2		)	—			—		(105.4		)
Effect of exchange rate changes on cash and cash equivalents	—		—			—			0.5			—		0.5
Net change in cash and cash equivalents	—		(1.8		)	(5.8		)	(16.6		)	—		(24.2		)
Cash and cash equivalents at beginning of the period	—		21.4			7.4			83.5			—		112.3
Cash and cash equivalents at end of the period	$	—	$	19.6		$	1.6		$	66.9		$	—	$	88.1

Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2011 (Successor Company):



	Guarantor Parent HoldCo			Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	—		$	16.5		$	87.2		$	210.7		$	(2.0	)	$	312.4
Product, distribution and editorial expenses	—			12.1			45.3			90.8			(2.0		)	146.2
Promotion, marketing and administrative expenses	—			34.4			46.0			116.3			—			196.7
Impairment of assets	—			—			—			10.3			—			10.3
Other operating items, net	—			2.2			1.6			6.7			—			10.5
Operating loss	—			(32.2		)	(5.7		)	(13.4		)	—			(51.3		)
Interest expense	—			15.3			—			—			—			15.3
Other (income) expense, net	—			(36.0		)	(1.1		)	34.8			—			(2.3		)
Loss (income) from investment in subsidiaries	76.8			61.0			(10.9		)	—			(126.9		)	—
(Loss) income before income taxes and discontinued operations	(76.8		)	(72.5		)	6.3			(48.2		)	126.9			(64.3		)
Income tax expense (benefit)	—			4.4			0.9			(3.7		)	—			1.6
(Loss) income from continuing operations	(76.8		)	(76.9		)	5.4			(44.5		)	126.9			(65.9		)
Income (loss) from discontinued operations, net of taxes	—			0.1			(9.1		)	(1.9		)	—			(10.9		)
Net loss	$	(76.8	)	$	(76.8	)	$	(3.7	)	$	(46.4	)	$	126.9		$	(76.8	)
Comprehensive loss	$	(121.7	)	$	(113.8	)	$	(3.8	)	$	(55.0	)	$	172.6		$	(121.7	)

Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2011 (Successor Company):



	Guarantor Parent HoldCo			Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	—		$	47.9		$	304.4		$	612.9		$	(5.4	)	$	959.8
Product, distribution and editorial expenses	—			37.7			143.7			263.2			(5.4		)	439.2
Promotion, marketing and administrative expenses	—			94.2			139.5			347.8			—			581.5
Impairment of assets	—			0.1			—			237.9			—			238.0
Other operating items, net	—			8.3			1.4			7.0			—			16.7
Operating (loss) profit	—			(92.4		)	19.8			(243.0		)	—			(315.6		)
Interest expense	—			43.3			—			—			—			43.3
Gain on deconsolidation of subsidiary	—			(8.5		)	—			—			—			(8.5		)
Other (income) expense, net	—			(45.0		)	0.1			42.2			—			(2.7		)
Loss (income) from investment in subsidiaries	399.0			319.1			(5.9		)	—			(712.2		)	—
(Loss) income before income taxes and discontinued operations	(399.0		)	(401.3		)	25.6			(285.2		)	712.2			(347.7		)
Income tax (benefit) expense	—			(2.8		)	4.5			(12.1		)	—			(10.4		)
(Loss) income from continuing operations	(399.0		)	(398.5		)	21.1			(273.1		)	712.2			(337.3		)
Loss from discontinued operations, net of taxes	—			(0.5		)	(40.8		)	(20.4		)	—			(61.7		)
Net loss	$	(399.0	)	$	(399.0	)	$	(19.7	)	$	(293.5	)	$	712.2		$	(399.0	)
Comprehensive loss	$	(394.7	)	$	(388.7	)	$	(19.7	)	$	(301.8	)	$	710.2		$	(394.7	)

Consolidated Condensed Balance Sheet as of December 31, 2011 (Successor Company):



	Guarantor Parent HoldCo		Issuer Parent-RDA		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets	$	—	$	38.9	$	241.2	$	370.3	$	(14.7	)	$	635.7
Property and equipment, net	—		33.2		8.0		9.9		—			51.1
Restricted cash	—		1.7		—		4.8		—			6.5
Goodwill	—		—		243.5		145.2		—			388.7
Other intangible assets, net	—		—		139.4		165.3		—			304.7
Prepaid pension assets	—		114.0		—		21.4		—			135.4
Investments in subsidiaries	142.6		617.1		202.4		—		(962.1		)	—
Intercompany noncurrent receivables	—		84.1		—		8.1		(92.2		)	—
Other noncurrent assets	—		21.2		16.8		4.0		—			42.0
Total assets	$	142.6	$	910.2	$	851.3	$	729.0	$	(1,069.0	)	$	1,564.1
Liabilities and stockholders’ equity
Current liabilities	$	—	$	72.8	$	254.9	$	247.5	$	(14.7	)	$	560.5
Long-term debt	—		603.8		—		—		—			603.8
Unearned revenue	—		—		88.0		1.6		—			89.6
Accrued pension	—		—		—		4.3		—			4.3
Postretirement and postemployment benefits other than pensions	—		8.0		—		1.2		—			9.2
Intercompany noncurrent payables	—		8.1		8.0		76.1		(92.2		)	—
Other noncurrent liabilities	—		74.9		23.1		56.1		—			154.1
Total liabilities	—		767.6		374.0		386.8		(106.9		)	1,421.5
Stockholders’ equity	142.6		142.6		477.3		342.2		(962.1		)	142.6
Total liabilities and stockholders’ equity	$	142.6	$	910.2	$	851.3	$	729.0	$	(1,069.0	)	$	1,564.1

Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2011 (Successor Company):



	Guarantor Parent HoldCo		Issuer Parent-RDA			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net change in cash due to continuing operating activities	$	—	$	(46.0	)	$	4.0		$	(33.3	)	$	(9.6	)	$	(84.9	)
Net change in cash due to discontinued operating activities	—		—			—			(12.7		)	—			(12.7		)
Net change in cash due to operating activities	—		(46.0		)	4.0			(46.0		)	(9.6		)	(97.6		)
Cash flows from investing activities:
Capital expenditures	—		(9.1		)	(0.6		)	(1.6		)	—			(11.3		)
Purchase of a business	—		—			(2.7		)	—			—			(2.7		)
Proceeds from sale of assets	—		1.1			—			8.4			—			9.5
Net change in cash due to continuing investing activities	—		(8.0		)	(3.3		)	6.8			—			(4.5		)
Net change in cash due to discontinued investing activities	—		—			(1.0		)	(0.2		)	—			(1.2		)
Net change in cash due to investing activities	—		(8.0		)	(4.3		)	6.6			—			(5.7		)
Cash flows from financing activities:
Proceeds from borrowings	—		55.0			—			—			—			55.0
Proceeds from long-term revolving credit facility	—		40.0			—			—			—			40.0
Repayments of long-term revolving credit facility	—		(4.0		)	—			—			—			(4.0		)
Debt payments to related parties	—		—			—			—			—			—
Cash paid for financing fees	—		(2.2		)	—			—			—			(2.2		)
Repurchase of Successor Company common stock	—		(43.3		)	—			—			—			(43.3		)
Cash used to net settle equity-based compensation	—		(7.6		)	—			—			—			(7.6		)
Net change in cash due to continuing financing activities	—		37.9			—			—			—			37.9
Net change in cash due to discontinued financing activities	—		—			(0.1		)	—			—			(0.1		)
Net change in cash due to financing activities	—		37.9			(0.1		)	—			—			37.8
Effect of exchange rate changes on cash and cash equivalents	—		(1.8		)	—			(8.3		)	9.6			(0.5		)
Net change in cash and cash equivalents	—		(17.9		)	(0.4		)	(47.7		)	—			(66.0		)
Cash and cash equivalents at beginning of the period	—		64.8			3.8			100.8			—			169.4
Cash and cash equivalents at end of the period	$	—	$	46.9		$	3.4		$	53.1		$	—		$	103.4

We were in violation of the financial covenants under our 2012 Secured Credit Facility as of September 30, 2012. We obtained an amendment from our lender, dated November 9, 2012, to modify the covenant levels as follows, to prevent a default under the agreement governing the 2012 Secured Credit Facility: the total leverage ratio was modified from 6.25 to 7.50; the first-out first lien leverage ratio was modified from 0.70 to 0.85; and the cash interest coverage ratio was modified from 1.50 to 1.20. In addition, the amendment modified the variable rate per annum to plus 5.0% in the case of prime rate borrowings and 6.0% in the case of LIBOR borrowings. See Note 10, Debt, for further information.

This discussion should be read in conjunction with the Consolidated Financial Statements and related notes presented elsewhere in this report and with our December 31, 2011 Consolidated Financial Statements filed with the Securities and Exchange Commission on Form 10-K. This discussion contains forward-looking statements about our plans, our markets, the demand for our products and services and our expectations regarding future results, as discussed in the section “Cautionary Note Regarding Forward-Looking Statements” below.

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

Certain statements in this MD&A and in future oral and written statements that we make, may be “forward-looking statements”. These statements reflect our beliefs and expectations as to future events and trends affecting our business, consolidated financial condition and results of operations and discuss, among other things, anticipated future performance and future business plans. Forward-looking statements are identified by such words and phrases as “prospects,” “outlook,” “believes,” “estimates,” “intends,” “may,” “will,” “should,” “anticipates,” “expects” or “plans,” or the negative or other similar expressions, or by discussion of trends and conditions, strategy or risks and uncertainties.

Forward-looking statements are necessarily subject to risks and uncertainties, many of which are outside our control or ability to predict with accuracy and some of which we might not even anticipate, because they relate to events and depend on circumstances that may or may not occur in the future. These could cause actual results to differ materially from our forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity, and our business strategy and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that our expectations will be achieved. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements, those results or developments may not be indicative of results or developments in subsequent periods. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

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

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

During 2012, our core businesses have continued to face negative pressures. Factors affecting our international businesses have included unfavorable macro-economic environments, particularly in Europe, investment constraints restricting acquisition of new customers, and declining active customer bases. Our North America businesses have been negatively affected by lower sales on our traditional book product lines, and declining subscription renewals, along with lower per-copy rates on some print magazines.

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

At the same time, we continue to transition our business model. In North America, we continue to expand our digital delivery capabilities to provide consumers with their choice of traditional print or digital access to our magazines and direct mail product offerings. We are also divesting or existing unprofitable business lines to mitigate the impact of negative pressures affecting performance. Internationally, we are working towards transforming our international businesses from a more traditional direct marketing model to a customer-centric and affinity-based approach. We have already seen early signs of success for this transformation in some markets in our Asia Pacific and Latin America ("APLA") segment. Within our international markets, our response rates are improving, year-over-year, as a result of our customer-centric promotional mailing approach. However, the trends in our overall orders remain negative due to declines in our active customer base and lower quantities on promotional mailings. Further, due to the investment requirements to continue and complete this transformation and our current financial constraints, we believe that strategic partners may be better positioned to help transition the international businesses. Towards this goal, we are exploring options to license or sell some of our international businesses to third parties and exit unprofitable markets. During the second quarter of 2012, we committed to a plan to sell our businesses in Mexico and Argentina. During the third quarter of 2012, we sold our businesses in Spain and Portugal. We have also shut down our operations in China, Kazakhstan and the Ukraine. See our “Discontinued Operations” section below for further information. If our strategy towards licensing additional international businesses is not successful, we expect to continue to experience declining operating results in our international operations in the short-term.

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

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

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

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

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

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

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

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

We present our segment revenue and operating (losses) profits consistently with how we manage our operations and how our chief operating decision maker reviews our results. Revenue and expenses attributable to intercompany transactions are included in the results of our reportable segments. However, we separately report corporate unallocated expenses, which cover expenses that are not directly attributable to business unit performance. Corporate unallocated expenses include the cost of corporate governance and other corporate-related expenses, as well as certain income and expenses associated with our U.S. pension plans and postretirement healthcare costs, stock awards and other executive compensation programs that are not allocated to our reportable segments. Our segments include employee bonus expense, assuming we have met and earned 100% of our targeted bonus, to report our segments on a consistent basis. Any adjustments to the actual payouts and expected funding targets are recorded as an increase or decrease to corporate unallocated expenses. We separately report the effects of goodwill and other intangible asset impairment charges, certain fair value adjustments related to emergence from bankruptcy and other operating items, net, because our chief operating decision maker does not consider these items when assessing business unit performance.

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

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

Reportable segment financial information for three months ended September 30, 2012, compared to three months ended September 30, 2011:



	Successor Company
	Three months ended September 30,
	2012			2011
Revenue
North America	$	105.0		$	133.8
Europe	85.5			130.9
Asia Pacific & Latin America	44.5			57.3
Subtotal	235.0			322.0
Intercompany eliminations	(2.7		)	(1.9		)
Fair value adjustments (a)	(2.2		)	(7.7		)
Total revenue	$	230.1		$	312.4
Operating (loss) profit
North America	$	(2.5	)	$	(6.0	)
Europe	(5.1		)	(4.5		)
Asia Pacific & Latin America	3.0			3.6
Subtotal	(4.6		)	(6.9		)
Corporate unallocated	(7.6		)	(19.8		)
Fair value adjustments (a)	(1.2		)	(3.8		)
Impairment of assets	(85.0		)	(10.3		)
Other operating items, net (b)	(1.7		)	(10.5		)
Operating loss	(100.1		)	(51.3		)
Interest expense	14.4			15.3
Other income, net	(1.4		)	(2.3		)
Income tax (benefit) expense	(6.4		)	1.6
Loss from discontinued operations	(0.5		)	(10.9		)
Net loss	$	(107.2	)	$	(76.8	)

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

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

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

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

During the three months ended September 30, 2012, we concluded that interim impairment tests were necessary for our Europe and North America businesses. This conclusion was based on certain indicators of impairment. Our results in Europe experienced further, unanticipated declines, based on continuing unfavorable economic environments, softer results to our promotional campaigns, continuing declines in some of our books and home entertainment products, particularly on our single sale book products. It continues to be difficult to forecast our business in this transformational environment and the actual declines have occurred at rates higher than we predicted. In addition, revenue declines in certain brands in our North America businesses resulted in the need to perform an interim impairment analysis on certain tradenames.

Based on our interim impairment test, our Europe reportable segment had goodwill and other intangible asset impairment charges of $64.0 and $2.7, respectively. Our North America reportable segment had other intangible asset impairment charges related to certain tradenames of $13.5 and $1.1 for our United States and Canada reporting units, respectively. We also had property and equipment impairment charges of $3.7 in our North America segment. We will also continue to monitor the progress of our transformational changes to these businesses, the execution of performance against our financial projections and the impact on the value of our goodwill and other long-lived assets. See Note 3, Impairment of Assets, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

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

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

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

The income tax benefit for the three months ended September 30, 2012 increased $8.0, to $6.4, as compared to an expense of $1.6 for the three months ended September 30, 2011. The income tax benefit for the three months ended September 30, 2012 is driven by the Company's jurisdictional earnings mix. Additionally, the income tax benefit for the three months ended September 30, 2012 reflected the impact of impairments to non-deductible goodwill and identified intangible assets which were included in our annual effective tax rate as they were no longer considered unusual in nature unlike in the prior year's quarter when the impairments charges were considered as discrete events. The income tax expense for the three months ended September 30, 2011 is driven by the Company's jurisdictional earnings mix and the impairment in the quarter of non-deductible goodwill and identified intangible assets previously recorded in fresh start accounting. Additionally, the income tax expense recorded in the prior year quarter reflects the limitation under ASC-740 that the income tax benefit for the year to date loss can not be greater than the anticipated full year tax benefit.

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

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

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

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

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

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

Reportable segment financial information for nine months ended September 30, 2012, compared to nine months ended September 30, 2011:



	Successor Company
	Nine months ended September 30,
	2012			2011
Revenue
North America	$	359.3		$	459.2
Europe	281.2			388.0
Asia Pacific & Latin America	135.4			158.2
Subtotal	775.9			1,005.4
Intercompany eliminations	(5.5		)	(5.1		)
Fair value adjustments (a)	(16.5		)	(40.5		)
Total revenue	$	753.9		$	959.8
Operating profit (loss)
North America	$	18.0		$	34.9
Europe	(17.4		)	(0.9		)
Asia Pacific & Latin America	4.8			6.2
Subtotal	5.4			40.2
Corporate unallocated	(43.3		)	(75.7		)
Fair value adjustments (a)	(8.7		)	(25.4		)
Impairment of assets	(203.7		)	(238.0		)
Other operating items, net (b)	(3.4		)	(16.7		)
Operating loss	(253.7		)	(315.6		)
Interest expense	47.2			43.3
Gain on deconsolidation of subsidiary	(0.8		)	(8.5		)
Other income, net	(4.3		)	(2.7		)
Income tax benefit	(55.9		)	(10.4		)
Income (loss) from discontinued operations	16.5			(61.7		)
Net loss	$	(223.4	)	$	(399.0	)

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

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

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

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

We determined that an interim impairment test was necessary during the three months ended June 30, 2012. During the three months ended September 30, 2012, we finalized our second quarter 2012 interim test and determined a second interim impairment test was necessary. These analyses resulted in an impairment charge of $203.7 for goodwill, other intangible assets, and property and equipment, net. This conclusion to perform these interim impairment tests was based on certain indicators of impairment, including lower than expected results and a decline in our then most recent financial projections developed during the year. Our interim impairment test has also been impacted by declines in market comparables since our last annual impairment test. In addition, revenue declines in certain brands in our North America and Europe businesses resulted in the need to perform an interim impairment analysis on certain tradenames. Based on our interim impairment tests, our Europe reportable segment had goodwill and other intangible asset impairment charges of $92.7 and $27.3, respectively. Our North America reportable segment had goodwill and other intangible asset impairment charges related to our Canada reporting unit of $36.8 and $14.2, respectively; and other intangible asset impairment charges related to certain tradenames in our United States reporting unit of $25.6. We also had property and equipment impairment charges of $3.7 in our North America segment. We will continue to monitor the progress of our transformational changes to these businesses, the execution of performance against our financial projections and the impact on the value of our goodwill and other long-lived assets. See Note 3, Impairment of Assets, in the Notes to our September 30, 2012 Consolidated Financial Statements for further information.

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

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

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

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

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

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

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

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

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

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

The consolidated statements of cash flows are summarized below:



	Successor Company
	Nine months ended September 30,
	2012			2011
Net change in cash due to:
Continuing operating activities	$	(71.9	)	$	(84.9	)
Discontinued operating activities	(19.6		)	(12.7		)
Operating activities	(91.5		)	(97.6		)
Continuing investing activities	169.9			(4.5		)
Discontinued investing activities	2.3			(1.2		)
Investing activities	172.2			(5.7		)
Continuing financing activities	(105.2		)	37.9
Discontinued financing activities	(0.2		)	(0.1		)
Financing activities	(105.4		)	37.8
Effect of exchange rate changes on cash and cash equivalents	0.5			(0.5		)
Net change in cash and cash equivalents	(24.2		)	(66.0		)
Cash and cash equivalents at beginning of period	112.3			169.4
Cash and cash equivalents at end of period	$	88.1		$	103.4

At September 30, 2012, we had $88.1 of cash and cash equivalents. During the nine months ended September 30, 2012, there was a net decrease in cash of $24.2, which was driven by lower operating cash flows and cash-collateralization of our stand-by letters of credit, which were previously supported by the Senior Credit Facility. Additionally, we repaid a portion of our debt, funded by the net proceeds from our sale of Allrecipes.com and our 2012 Secured Term Loan.

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

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

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

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

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

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

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

The 2012 Secured Credit Facility is fully and unconditionally guaranteed on a first priority secured basis, jointly and severally by ourselves and by substantially all of our existing and future wholly-owned direct and indirect domestic subsidiaries. The obligations and guaranty under the 2012 Secured Credit Facility are secured by a first priority security interest in the same collateral that secures our Senior Secured Notes. The 2012 Secured Credit Facility and the Senior Secured Notes are secured by the same collateral and rank pari passu with each other under the documentation governing such collateral; however, the 2012 Secured Credit Facility constitutes “Priority Payment Lien Obligations” under such documentation and enjoys priority (“first out”) treatment with respect to post-default dispositions and realizations of collateral thereunder. The 2012 Secured Credit Facility contains mandatory prepayment provisions in the event of certain events, including certain asset sales. The 2012 Secured Credit Facility includes various covenants that, among other things, restrict certain payments by us, restrict our ability to merge with another entity, incur or guarantee debt and sell or transfer assets and require us to meet certain financial ratios. The 2012 Secured Credit Facility also contains events of default customary for agreements of its type, including a cross-default provision that is triggered by an “event of default” under either the 2011 Unsecured Term Loan or the Indenture governing the Senior Secured Notes, the failure to make a payment on any other indebtedness in a principal amount of $18.0 or more, or a default that causes or permits the holder of such indebtedness to become due prior to its stated maturity (i.e. accelerated). On November 9, 2012, we obtained an amendment for the 2012 Secured Term Loan from the lender thereunder, which modified the financial covenants contained in the 2012 Secured Term Loan.

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

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

We were in violation of the financial covenants under our 2012 Secured Credit Facility as of September 30, 2012. We obtained an amendment from our lender, dated November 9, 2012, to modify the financial covenant levels for the fiscal quarter ended September 30, 2012 as follows, to prevent a default under the agreement governing the 2012 Secured Credit Facility: the total leverage ratio was modified from 6.25:1.00 to 7.50:1.00; the first-out first lien leverage ratio was modified from 0.70:1.00 to 0.85:1.00; and the cash interest coverage ratio was modified from 1.50:1.00 to 1.20:1.00. In addition, the amendment modified the variable rate per annum to plus 5.00% in the case of prime rate borrowings and 6.00% in the case of LIBOR borrowings and waived the requirement to deliver financial statements for the fiscal quarter ended September 30, 2012 within forty-five days of the end of such quarter, and provided that the financial statements for the fiscal quarter ended September 30, 2012 must be delivered within fifty days of the end of such fiscal quarter. Management believes however, that based on current projections and given the impact of continued business declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 Secured Credit Facility for the next several quarters. Accordingly, we have reclassified the 2012 Secured Credit Facility from non-current to current, in our consolidated balance sheet, as of September 30, 2012. Additionally, we have reclassified the 2011 Unsecured Term Loan from non-current to current in our consolidated balance sheet, as of September 30, 2012, due to certain cross-default provisions. We continue to classify the Senior Secured Notes as non-current, in our consolidated balance sheet, as of September 30, 2012, as there is no expectation of a cross-default because the 2012 Secured Term Loan was not accelerated by the lender.

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

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

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

Since emerging from Chapter 11 in February 2010, we have experienced operating losses and cash flow deficits. Deteriorating macroeconomic and industry conditions and uncertainty have had a significant negative impact on the demand for our products and, therefore, the cash flows of our businesses. Most of our revenue is based upon discretionary spending by consumers, which is influenced by customer preferences and general economic conditions. Customer demand has declined in recent periods due to changing preferences as a result of increased competition from alternative content providers and pricing pressures. In addition, a longer term trend has been a decrease in revenue from advertising as budgets have scaled back and advertisers have shifted their investments to more directed platforms, including the internet. We initiated various measures in 2011 and 2012 to mitigate the impact on our cash flows, including reducing our cost structure by lowering headcount and overhead expenses. In addition, we decided to pursue a strategy of licensing our international businesses to provide a more predictable and stable income stream and thereby reduce debt. Notwithstanding these initiatives, in recent periods our business continued to face a number of challenges, including declines in our active customer and subscriber bases, declining sales of our book products and softness in our international markets and in advertising in several of our publications, which have had an adverse impact on our results of operations. Further, our businesses continue to be impacted by the continued reduction in promotional investments, as we migrate towards a more focused customer-centric and digital-based approach and discontinue efforts towards acquiring new customers for traditional direct marketing purposes and as we continue to reduce costs. We expect some of these conditions to continue throughout 2012 and through 2013.

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

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

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

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

Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include, but are not limited to, changes in our operating performance, the economic environment, conditions in the markets and industries in which we operate, our financial position and changes in our business strategy. Although the impact that these ratings changes will have on our ability to raise new capital, receive other forms of credit extensions or the cost at which the new capital may be negotiated has yet to be seen, it is likely to be more challenging for us to do so.

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

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

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

The functional currency for our foreign operations is the local currency. In the normal course of business, significantly all of the transactions of our foreign operations occur in local currencies. However, on occasion, certain transactions are conducted in currencies that differ from the local currency. Our earnings are sensitive to the impact of changes in foreign currency exchange rates on certain identifiable transactions. We seek to manage this exposure in part through operational means, to the extent possible, by matching functional currency revenue and costs, and matching functional currency assets and liabilities. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our consolidated statements of comprehensive loss along with the underlying transactions. As of September 30, 2012, our financial instruments consisted of short-term receivables and payables whose carrying value approximated fair value.

The Company's management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2012 because of a material weakness in its internal control over financial reporting described below. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company did not maintain effective internal control over its goodwill impairment analyses, including related review. Specifically, the Company did not appropriately perform its Step 2 analyses in accordance with ASC Topic 350, Intangibles - Goodwill and Other. This control deficiency resulted in errors in the Company's 2011 and 2012 interim and 2011 annual consolidated financial statements. See Note 2, Revision of Prior Period Consolidated Financial Statements, for further information.

While we did not consider the errors identified to be material to the total impairment charge or overall consolidated financial statements for the periods affected, we believe it is reasonably possible this control deficiency could have resulted in a material misstatement to the Company's consolidated financial statements that would not have been prevented or detected. Accordingly, management determined that this control deficiency constituted a material weakness as of September 30, 2012.

Management believes that the remediation measures described above will strengthen the Company's internal control over financial reporting and will remediate the identified material weakness. As management continues to evaluate and work to enhance internal control over financial reporting, management may determine that additional measures must be taken to address this control deficiency or may determine that it needs to modify or otherwise adjust the remediation measures described above.

On December 30, 2011, the Polish Office for the Protection of Consumers and Competition ("UOKiK") issued a decision in its consumer protection proceeding against Reader's Digest Przeglad Sp. z o.o. (Reader's Digest Poland, "RDP"). UOKiK takes the position that RDP's sweepstakes-based direct mail marketing model makes use of practices which may mislead consumers and/or fail to provide clear and complete information on the details of the distance-selling contracts executed between RDP and the consumers. The decision requires RDP to (i) pay a fine of approximately $1.3, (ii) announce the decision on its website and in two national papers and (iii) change certain of its promotional materials. RDP filed an appeal on January 16, 2012, with the consumer protection/competition court, and UOKiK's decision is not binding prior to the consumer protection/competition court's ruling on appeal. A ruling by the appellate court is expected in six to twelve months. Although we cannot predict the final outcome of this matter, based on the information presently available to us, management does not believe that the ultimate resolution of this investigation will have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Since emerging from chapter 11 in February 2010, we have experienced recurring operating losses and cash flow deficits. Deteriorating macroeconomic and industry conditions and uncertainty have had a significant negative impact on the demand for our products and, therefore, the cash flows of our businesses. Our ability to fund operations and make payments on our indebtedness will depend on our ability to generate cash in the future. In addition, our business is highly seasonal, which results in working capital fluctuations during the year.

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

We currently do not have any other sources of funds, other than cash on hand and operating cash flows. We therefore may need to raise additional cash to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise capital, if needed, will depend on, among other things, conditions in the capital and financial markets at the time, which are outside of our control, our financial performance and the limitations under our debt agreements. If we were unable to obtain additional financing, we would need to pursue one or more alternative solutions to generate cash and reduce our cash requirements, such as selling additional assets or restructuring our balance sheet through, among other things, amendments, modifications, tender or exchange offers or other negotiated transactions with our lenders, bondholders and other constituents. We cannot assure you that any such transactions will be successful.

The carrying value of goodwill represents the fair value of our business in excess of identifiable assets and liabilities. The carrying value of other intangibles represents the fair value of trademarks, tradenames, copyrights, customer relationships and other acquired intangibles. Goodwill and other acquired intangibles that are expected to contribute indefinitely to our cash flows are not amortized but must be evaluated by management at least annually for impairment, or earlier upon the occurrence of events or circumstances that indicate there may be an impairment charge. If carrying value exceeds current fair value, the goodwill or intangible asset is considered impaired and is reduced to fair value via a charge to earnings. Some factors that have affected our impairment assessment include the operating cash flows of our business, the volatility of the market with respect to the industry in which we operate, and our ability to predict the timing and success of implementation of our business transformation initiatives. Although these charges would be non-cash in nature and would not affect our operations or cash flow, they would adversely affect stockholders' equity and reported results of operations in the period charged. During the nine months ended September 30, 2012, we performed two interim impairment tests, resulting in impairment charges of $132.9 for goodwill and $67.1 for tradenames and other intangible assets. Although we impaired the remaining goodwill balances of Europe and Canada as part of these 2012 interim impairment tests, further impairment charges against goodwill in the United States or APLA, or against our other intangible assets, are possible. Refer to Note 3, Impairment of Assets in the Notes to our September 30, 2012 Consolidated Financial Statements for further information. Should management determine in the future that our goodwill or other intangible assets have become further impaired, our earnings may be materially and adversely affected.

Our ability to comply with the covenants in our debt agreements depends on our results of operations and the extent to which we can execute our operational and strategic initiatives. Given the continuing impact of adverse economic, financial and industry conditions on the demand for consumer products and advertising, as well as the negative pressures our core businesses have continued to face, including declining active customer and subscriber bases, investment constraints restricting acquisition of new customers and lower sales on traditional book product lines, there is uncertainty as to whether we will be able to generate results from operations or reduce our debt through asset sales sufficiently to enable us to remain in compliance with the covenants in our debt agreements, particularly the financial covenants contained in our 2012 Secured Credit Facility, for future periods. As noted elsewhere in this report, we were in violation of the financial covenants in our 2012 Secured Credit Facility as of September 30, 2012, for which we obtained an amendment to prevent a default, and we believe that based on current projections and given the impact of continued businesses declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 Secured Credit Facility for the next several quarters.

A breach of the financial covenants in our 2012 Secured Credit Facility could result in a default under that facility, and we may in the future need to obtain amendments or waivers from the lenders to avoid such a default. We may be unable to obtain any such waiver or amendment, which would result in an event of default under the 2012 Secured Credit Facility, and by reason of cross-acceleration or cross-default provisions, could create a default under our Senior Secured Notes or our 2011 Unsecured Term Loan. Upon such a default, our creditors could declare all amounts outstanding to be immediately due and payable, and we may be unable to meet those obligations.

If we were unable to repay amounts due under our debt agreements, the lenders under our 2012 Secured Credit Facility and the Senior Secured Notes could proceed against the collateral granted to them to secure that indebtedness and institute foreclosure proceedings against our assets. A substantial portion of our assets serve as collateral under the 2012 Secured Credit Facility and the Senior Secured Notes. If those lenders accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the 2012 Secured Credit Facility and the Senior Secured Notes, as well as our unsecured indebtedness. We could be forced to sell assets or to restructure our balance sheet through, among other things, amendments, modifications, tender or exchange offers or other negotiated transactions with our lenders, bondholders and other constituents. We cannot be certain that any such transactions will be successful.

Item 6. Exhibits



Exhibit Number			Description
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			Interactive Data File.



Delaware		37-1537045
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)



Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o



		Page
PART I — FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements

	Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine months ended September 30, 2012 and 2011	2

	Unaudited Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	3

	Unaudited Consolidated Statements of Cash Flows for the Nine months ended September 30, 2012 and 2011	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 6.	Exhibits	56



	Successor Company
	September 30, 2012			December 31, 2011
Gross trade accounts receivable	$	237.0		$	313.2
Reserve for returns	(47.7		)	(60.1		)
Reserve for bad debts and allowances	(62.0		)	(78.7		)
Total accounts receivable, net	$	127.3		$	174.4



	Successor Company
	RSUs
	Shares (000’s)		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011	54		$	22.80
Granted	904		11.25
Vested	(388	)	12.96
Forfeited	(180	)	11.64
Nonvested at September 30, 2012	390		$	10.97



	Successor Company
	Six months ended June 30, 2012
	Previously Reported			Adjustments			As Revised
Impairment of assets	$	113.4		$	5.3		$	118.7
Operating loss	(148.2		)	(5.4		)	(153.6		)
Loss from continuing operations	(127.9		)	(5.3		)	(133.2		)
Income (loss) from discontinued operations, net of taxes	26.2			(9.2		)	17.0
Net loss	(101.7		)	(14.5		)	(116.2		)
Comprehensive loss	(103.5		)	(14.1		)	(117.6		)


(b)	Cost for special termination benefits is included in other operating items, net. Our U.S. Qualified Pension Plan was temporarily amended to provide additional benefits to employees involuntarily terminated.


(a)	Fair value adjustments include the amortization of the fair value reduction to unearned revenue and related deferred cost accounts, which resulted from the application of fresh start accounting upon our emergence from bankruptcy.


·	significant financial restrictions placed on us by the indenture governing our Senior Secured Notes and the agreements governing our 2012 Secured Credit Facility and 2011 Unsecured Term Loan (each as defined below) and our ability to comply with the covenants contained in those agreements or, if we are unable to comply with such covenants, to obtain a waiver or amendment from our lenders;



Rating Agency	Rating	Outlook
Moody’s	Caa1	Negative
Standard & Poor’s	CCC-	Negative


•	Develop enhanced policies and procedures around the monitoring and review of the goodwill impairment analysis.


•	Develop enhanced analytical procedures around the goodwill impairment analysis.



	RDA HOLDING CO.


Dated: November 19, 2012	By:	/s/ Robert E. Guth
		Robert E. Guth
		President and Chief Executive Officer