Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For thequarter ended March 31, 2009**

 

**Commissionfile number 001-10434**

 

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**THEREADER’S DIGEST ASSOCIATION, INC.**

(Exact name of registrant as specified in itscharter)

 

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| **Delaware**                                                    | ** ** | **13-1726769**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) | ** ** | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **Reader’s  Digest Road, Pleasantville, New York**         | ** ** | **10570**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |

 

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

 

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

 

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

 

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

 
| Large  accelerated filer  o |   | Accelerated  filer  o         |
|---------------------------------------|--------|-----------------------------------------|
|                                  |   |                                    |
| Non-accelerated  filer  x   |   | Smaller  reporting company  o |

 

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

 

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

 

 

 

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**THEREADER’S DIGEST ASSOCIATION, INC.**

 

**QUARTERLYREPORT**

**FORTHE QUARTERLY PERIOD ENDED March 31, 2009**

 

**INDEX**

 
| ** **         | ** **                                                                                              | **Page**   |
|--------------------|---------------------------------------------------------------------------------------------------------|------------|
|               |                                                                                                    |       |
| **Part I -**  | **Financial Information**                                                                               |       |
|               |                                                                                                    |       |
| Item  1.           | Financial  Statements (unaudited):                                                                      | ** ** |
|               |                                                                                                    |       |
|               | Consolidated Statements of Operations for the three  and nine-months ended March 31, 2009 and 2008 | 4          |
|               |                                                                                                    |       |
|               | Consolidated Balance Sheets as of March 31, 2009  and June 30, 2008                           | 5          |
|               |                                                                                                    |       |
|               | Consolidated Statements of Cash Flows for the  nine-months ended March 31, 2009 and 2008           | 6          |
|               |                                                                                                    |       |
|               | Notes to Consolidated Financial Statements                                                              | 7          |
|               |                                                                                                    |       |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             | 35         |
|               |                                                                                                    |       |
| Item 3.            | Quantitative  and Qualitative Disclosures about Market Risk                                             | 43         |
|               |                                                                                                    |       |
| Item 4T.           | Controls and  Procedures                                                                                | 43         |
|               |                                                                                                    |       |
| **Part II -** | **Other Information**                                                                                   |       |
|               |                                                                                                    |       |
| Item 1.            | Legal Proceedings                                                                                       | 45         |
|               |                                                                                                    |       |
| Item 1A.           | Risk Factors                                                                                            | 45         |
|               |                                                                                                    |       |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                            | 48         |
|               |                                                                                                    |       |
| Item 3.            | Defaults  Upon Senior Securities                                                                        | 48         |
|               |                                                                                                    |       |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                                    | 48         |
|               |                                                                                                    |       |
| Item 5.            | Other Information                                                                                       | 48         |
|               |                                                                                                    |       |
| Item  6.           | Exhibits                                                                                                | 49         |

 

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PART I

FINANCIAL INFORMATION

 

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

 

**DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS**

 

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

 

Forward-looking statements are inherently subject torisks, trends and uncertainties, many of which are beyond our ability tocontrol or predict with accuracy, and some of which we might not evenanticipate, because they relate to events and depend on circumstances that mayor may not occur in the future. We caution you that forward-looking statementsare not guarantees of future performance and that our actual results ofoperations, financial condition and liquidity, and the development of theindustry in which we operate, may differ materially from those made in orsuggested by the forward-looking statements contained in this quarterly report.Although we believe that the expectations reflected in such forward-lookingstatements are based upon reasonable assumptions at the time made, we can giveno assurance that our expectations will be achieved. In addition, even if ourresults of operations, financial condition and liquidity, and the developmentof the industry in which we operate are consistent with the forward-lookingstatements contained in this quarterly report, those results or developmentsmay not be indicative of results or developments in subsequent periods. Futureevents and actual results, financial and otherwise, may differ materially fromthe results discussed in the forward-looking statements. Readers are cautionednot to place undue reliance on these forward-looking statements.

 

Important factors that may cause actual results todiffer materially from forward-looking statements include, but are not limitedto, the risks and uncertainties set forth in the *Risk Factors*and *Management’s Discussion and Analysis of FinancialCondition and Results of Operations* sections in this report and inthe *Business*, *Risk Factors*and *Management’s Discussion and Analysis of FinancialCondition and Results of Operations* sections in our Annual Report onForm 10-K for the year ended June 30, 2008.

 

Any forward-looking statements that we make in thisquarterly report speak only as of the dates of such statements. We assume noobligation to update or supplement any forward-looking statements that maybecome untrue because of subsequent events, whether because of new information,future events or otherwise. Comparisons of results for current and any priorperiods are not intended to express any future trends or indications of futureperformance, unless expressed as such, and should only be viewed as historicaldata.

 

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ITEM 1. FINANCIAL STATEMENTS

** **

**The Reader’s Digest Association, Inc. andSubsidiaries**

Consolidated Statements ofOperations

*(in millions)*

*(unaudited)*

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                                                                                                                                                                                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| **Revenues**                                                                                                                                                                                                                                               | ** ** | **$**                  | **479.1**  | ** **            | **$**      | **575.1** | ** ** | **$** | **1,657.3** | ** ** | **$** | **1,801.9** | ** ** |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Product,  distribution and editorial expenses                                                                                                                                                                                                              |       | 207.4                  |       | 244.1                 |       | 721.5 |   | 784.0 |   |
| Promotion, marketing  and administrative expenses                                                                                                                                                                                                          |       | 270.9                  |       | 332.2                 |       | 937.9 |   | 1,043.9 |   |
| Impairment of  assets                                                                                                                                                                                                                                      |       | 527.1                  |       | —                |       | 527.1 |   | — |   |
| Other operating  items, net                                                                                                                                                                                                                                |       | 9.6                    |       | 7.0                   |       | 31.4 |   | 15.6 |   |
| **Operating  loss**                                                                                                                                                                                                                                        | ** ** | **(535.9**             | **)**      | **(8.2**              | **)**      | **(560.6** | **)** | **(41.6** | **)** |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Interest expense                                                                                                                                                                                                                                           |       | 36.5                   |       | 42.9                  |       | 117.2 |   | 135.2 |   |
| Other (income)  expense , net                                                                                                                                                                                                                              |       | (0.6                   | )          | (1.7                  | )          | 1.5 |   | (6.6 | ) |
| **Loss  before income taxes and discontinued operations**                                                                                                                                                                                                  | ** ** | **(571.8**             | **)**      | **(49.4**             | **)**      | **(679.3** | **)** | **(170.2** | **)** |
| ** **                                                                                                                                                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  benefit                                                                                                                                                                                                                                        |       | (112.1                 | )          | (10.2                 | )          | (98.3 | ) | (18.7 | ) |
| **Loss  from continuing operations**                                                                                                                                                                                                                       | ** ** | **(459.7**             | **)**      | **(39.2**             | **)**      | **(581.0** | **)** | **(151.5** | **)** |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Loss from  discontinued operations, net of tax expense (benefits) of $0.9 and $(15.9)  for the three and nine-months ended March 31, 2009, respectively and  $(4.5) and $(5.1) for the three and nine-months ended March 31, 2008,  respectively |       | (2.3                   | )          | (14.4                 | )          | (71.6 | ) | (7.8 | ) |
| **Net  loss**                                                                                                                                                                                                                                              | ** ** | **$**                  | **(462.0** | **)**                 | **$**      | **(53.6** | **)** | **$** | **(652.6** | **)** | **$** | **(159.3** | **)** |

 

*See accompanying Notes to theConsolidated Financial Statements*

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

Consolidated Balance Sheets

*(in millions, except share andper share data)*

*(unaudited)*

 
| ** **                                                                                                                   | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                   | ** ** | **2009**           | ** **  | **2008**          | ** ** |
| **Assets**                                                                                                                   |       |               |        |              |       |
| Current assets:                                                                                                              |       |               |        |              |       |
| Cash and cash  equivalents                                                                                                   |       | $                  | 102.4       |              | $          | 79.4 |   |
| Accounts  receivable, net                                                                                                    |       | 220.7              |        | 291.5             |       |
| Inventories                                                                                                                  |       | 108.1              |        | 112.0             |       |
| Prepaid and  deferred promotion costs                                                                                        |       | 38.2               |        | 54.5              |       |
| Prepaid expenses  and other current assets                                                                                   |       | 182.3              |        | 157.1             |       |
| Assets held for  sale                                                                                                        |       | 0.9                |        | 241.4             |       |
| **Total  current assets**                                                                                                    | ** ** | **652.6**          | ** **  | **935.9**         | ** ** |
| Property, plant  and equipment, net                                                                                          |       | 68.9               |        | 99.1              |       |
| Goodwill                                                                                                                     |       | 1,172.3            |        | 1,621.2           |       |
| Other intangible  assets, net                                                                                                |       | 498.6              |        | 901.5             |       |
| Prepaid pension  assets                                                                                                      |       | 308.5              |        | 290.9             |       |
| Other noncurrent  assets                                                                                                     |       | 115.0              |        | 117.5             |       |
| **Total  assets**                                                                                                            | ** ** | **$**              | **2,815.9** | ** **        | **$**      | **3,966.1** | ** ** |
| **Liabilities  and stockholder’s (deficit) equity**                                                                     |       |               |        |              |       |
| Current  liabilities:                                                                                                        |       |               |        |              |       |
| Current portion  of long-term debt and short term debt                                                                       |       | $                  | 15.6        |              | $          | 25.6 |   |
| Accounts payable                                                                                                             |       | 200.3              |        | 229.4             |       |
| Accrued expenses                                                                                                             |       | 214.1              |        | 270.0             |       |
| Income taxes  payable                                                                                                        |       | 14.9               |        | 26.9              |       |
| Unearned  revenues                                                                                                           |       | 388.0              |        | 377.9             |       |
| Other current  liabilities                                                                                                   |       | 13.2               |        | 10.9              |       |
| Liabilities held  for sale                                                                                                   |       | —             |        | 42.5              |       |
| **Total  current liabilities**                                                                                               | ** ** | **846.1**          | ** **  | **983.2**         | ** ** |
| Long-term debt                                                                                                               |       | 2,164.3            |        | 2,091.9           |       |
| Unearned  revenues                                                                                                           |       | 151.8              |        | 137.6             |       |
| Accrued pension                                                                                                              |       | 71.3               |        | 84.0              |       |
| Post-retirement  and post-employment benefits other than pensions                                                            |       | 20.8               |        | 25.5              |       |
| Other noncurrent  liabilities                                                                                                |       | 245.5              |        | 388.9             |       |
| **Total  liabilities**                                                                                                       | ** ** | **$**              | **3,499.8** | ** **        | **$**      | **3,711.1** | ** ** |
| Common stock  (par value $1.00 per share, authorized and issued 1,000 shares at  March 31, 2009 and June 30, 2008) |       | —             |        | —            |       |
| Paid-in capital                                                                                                              |       | 1,010.7            |        | 1,008.8           |       |
| Accumulated  deficit                                                                                                         |       | (1,559.8           | )           | (907.2            | )          |
| Accumulated  other comprehensive (loss) gain                                                                                 |       | (134.8             | )           | 153.4             |       |
| **Total  stockholder’s (deficit) equity**                                                                               | ** ** | **(683.9**         | **)**       | **255.0**         | ** ** |
| **Total  liabilities and stockholder’s (deficit) equity**                                                               | ** ** | **$**              | **2,815.9** | ** **        | **$**      | **3,966.1** | ** ** |

 

*See accompanying Notes to theConsolidated Financial Statements*

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

Consolidated Statements of Cash Flows

*(in millions)*

*(unaudited)*

 
| ** **                                                          | ** ** | **Nine-months Ended** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **March 31,**    | ** ** |
| ** **                                                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities:**                          |       |                  |       |   |   |
| Net loss                                                            |       | $                     | (652.6     | ) | $ | (159.3 | ) |
|                                                                |       |                  |       |   |   |
| Adjustments to  reconcile net loss to operating cash flows:         |       |                  |       |   |   |
| Loss from  discontinued operations, net of tax expense              |       | 71.6                  |       | 7.8 |   |
| Depreciation and  amortization                                      |       | 59.0                  |       | 59.4 |   |
| Impairment of  assets, net of tax                                   |       | 422.5                 |       | — |   |
| Amortization of  debt issuance costs                                |       | 6.3                   |       | 6.3 |   |
| Net gain on sale  of certain assets                                 |       | 0.7                   |       | (0.2 | ) |
| Stock-based  compensation                                           |       | 2.2                   |       | 6.5 |   |
| Changes in  assets and liabilities, net of effects of dispositions: |       |                  |       |   |   |
| Accounts  receivable, net                                           |       | 24.7                  |       | 35.6 |   |
| Inventories                                                         |       | (11.8                 | )          | (3.2 | ) |
| Prepaid and  deferred promotion costs                               |       | 7.1                   |       | 20.2 |   |
| Other assets                                                        |       | (68.1                 | )          | (28.8 | ) |
| Unearned  revenues                                                  |       | 59.2                  |       | 145.1 |   |
| Income and  deferred taxes, net                                     |       | (18.5                 | )          | (42.9 | ) |
| Accounts payable  and accrued expenses                              |       | (32.5                 | )          | (85.5 | ) |
| Other liabilities                                                   |       | (6.7                  | )          | 16.7 |   |
| **Net  change in cash due to continuing operating activities**      | ** ** | **(136.9**            | **)**      | **(22.3** | **)** |
| **Net  change in cash due to discontinued operating activities**    | ** ** | **(38.2**             | **)**      | **(20.4** | **)** |
| **Net  change in cash due to operating activities**                 | ** ** | **(175.1**            | **)**      | **(42.7** | **)** |
| **Cash  flows from investing activities:**                          |       |                  |       |   |   |
| Proceeds from  sales of certain businesses, net                     |       | 108.1                 |       | 17.3 |   |
| Purchases of  intangibles                                           |       | —                |       | (1.1 | ) |
| Capital  expenditures                                               |       | (10.1                 | )          | (18.9 | ) |
| Other investing  activity                                           |       | 13.8                  |       | — |   |
| **Net  change in cash due to investing activities**                 | ** ** | **111.8**             | ** ** | **(2.7** | **)** |
| **Cash  flows from financing activities:**                          |       |                  |       |   |   |
| Proceeds from  borrowings                                           |       | 489.1                 |       | 252.1 |   |
| Debt payments                                                       |       | (398.9                | )          | (161.0 | ) |
| Short-term  borrowings, net                                         |       | (6.5                  | )          | — |   |
| Repurchase of  preferred stock                                      |       | —                |       | (17.3 | ) |
| Other, net                                                          |       | (0.2                  | )          | (0.1 | ) |
| **Net  change in cash due to financing activities**                 | ** ** | **83.5**              | ** ** | **73.7** | ** ** |
| Effect of  exchange rate changes on cash and cash equivalents       |       | 2.8                   |       | 4.0 |   |
| Net change in  cash and cash equivalents                            |       | 23.0                  |       | 32.3 |   |
| Cash and cash  equivalents at beginning of period                   |       | 79.4                  |       | 50.2 |   |
| **Cash  and cash equivalents at end of period**                     | ** ** | **$**                 | **102.4**  | ** ** | **$** | **82.5** | ** ** |

 

*See accompanying Notes to theConsolidated Financial Statements*

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

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

 

**(1)****                                ****Basis ofPresentation**

 

***Description of Our Business***

 

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

 

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

 

In connection with the interim review of theCompany’s goodwill and long-lived assets for recoverability, the Companydetermined that its goodwill and long-lived assets were impaired and recordedestimated impairment charges of $205.4 and $321.7, respectively, during thethree-months ended March 31, 2009, which is included in the line itemImpairment of assets in the Company’s Consolidated Statements ofOperations.  Refer to Note 4, Impairmentof Assets, for more information.

 

***Basis of Presentation***

 

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

 

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

 

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

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

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

 

Priorto the acquisition of The Reader’s Digest Association, Inc., investmentfunds affiliated with Ripplewood controlled a majority of the voting rights inboth WRC Media and Direct Holdings.  WRCMedia is treated as the predecessor company since Ripplewood acquired itscontrolling ownership position in WRC Media in 1999, prior to its ownershipposition in Direct Holdings and The Reader’s Digest Association, Inc. Thecombination of WRC Media and Direct Holdings for the periods prior to March 2,2007 was accounted for using the accounting method prescribed in the Statementof Financial Accounting Standard (“SFAS”) No. 141, *BusinessCombinations*, (“SFAS 141”) for a combination of entities undercommon control.

 

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

 

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

 

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

 

***Use of Estimates and Interim Reporting***

 

The unaudited interim consolidated financialstatements included in this Form 10-Q should be read in conjunction withthe audited consolidated financial statements and accompanying notes that areincluded in our Annual Report on Form 10-K for the fiscal year ended June 30,2008. These statements, in the opinion of management, have been preparedfollowing the requirements of the Securities and Exchange Commission andgenerally accepted accounting principles in the United States of America (“GAAP”)for interim reporting, applying certain assumptions and estimates, includingall adjustments considered necessary to present such information fairly.  Operating results for any interim period arenot necessarily indicative of the results for an entire year due to theseasonality of our business among other things. In preparing the consolidated financial statements in conformity withGAAP, we must make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues, expenses and related disclosures at the dateof the financial statements and during the reporting period.  Actual results could differ from thoseestimates.

 

***Reclassifications***

 

Certain amounts in the Company’s prior periodconsolidated financial statements have been reclassified to conform to thepresentation as of and for the three and nine-months ended March 31,2009.  Such amounts include the Company’sreclassification of assets and liabilities held for sale and discontinuedoperations.

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

***Accounting Policies***

 

We adopted the provisions of SFAS No. 157, *Fair ValueMeasurements,* (“SFAS 157”) on July 1, 2008. We recorded nochange to our opening balance of retained earnings as of July 1, 2008 aswe do not hold any financial instruments requiring retrospective applicationper the provisions of SFAS 157.

 

*Fair Value Hierarchy*

 

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

 
| Level  1 |   | Quoted  prices in active markets that are unadjusted and accessible at themeasurement  date for identical, unrestricted assets or liabilities;                                                                                                             |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level  2 |   | Quoted  prices for identical assets and liabilities in markets that are not active,quoted prices  for similar assets and liabilities in active markets or financialinstruments  for which significant inputs are observable, either directly orindirectly; |
| Level  3 |   | Prices  or valuations that require inputs that are both significant to the fair valuemeasurement  and unobservable.                                                                                                                                        |

 

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

 

*Measurement of Fair Value*

 

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

 

We have interest rate swaps, described in Note 9, DerivativesInstruments, which are fair valued as required by SFAS 157 and fall into level2 of the fair value hierarchy. We evaluate whether the creditworthiness of eachswap counterparty is such that default on its obligations under the swap is notprobable.  We also assess whether theLIBOR-based interest payments are probable of being paid under the loans at theinception and, on an ongoing basis (no less than once each quarter), during thelife of each hedging relationship. In addition, we use an independent source toascertain market values to assist us in determining the fair value of thefinancial instruments.

 

Effective January 1, 2009, we adopted theprovisions of SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*—*an amendmentof FASB Statement No. 133* (“SFAS 161”). SFAS 161 requiresenhanced disclosures concerning (1) the manner in which an entity usesderivatives (and the reasons it uses them), (2) the manner in whichderivatives and related hedged items are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* and interpretations thereof, and (3) the effectsthat derivatives and related hedged items have on an entity’s financialposition, financial performance, and cash flows.  Refer to Note 9, Derivative Instruments, forthese disclosures.

 

***Recent Accounting Pronouncements***

 

InDecember 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 141(R), *Business Combinations*(“SFAS141(R)”).  SFAS 141(R) clarifies theaccounting for business combinations and provides additional guidance ondisclosure requirements.  SFAS 141(R) willrequire the recognition of 100% of the fair values of assets acquired,liabilities assumed and non-controlling interests in acquisitions of less than100% controlling interest when the acquisition constitutes a change in controlin the acquired entity, all acquisition-related transaction costs will beexpensed as incurred and will require the expensing of acquisition-related restructuringcosts as incurred unless the criteria in SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*are met, as of the acquisition date. SFAS 141(R) is effective for business combination transactions forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  We are currently evaluating the provisions ofSFAS 141(R) and plan on adopting this new standard, as required, beginningJuly 1, 2009.  

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

Theimpact of this standard will be dependent on the level of our acquisitions inthe future and the level of adjustments to our tax estimates related to prioracquisitions.

 

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

 

**(2)****                                ****Acquisition of The Reader’s DigestAssociation, Inc.**

 

On March 2, 2007, RDA Holding Co. acquired100% of the outstanding common stock of The Reader’s Digest Association, Inc.for $1,517.1; net of cash acquired of $119.6, plus capitalized transactioncosts of $36.0. In connection with the Acquisition Transaction, certain holdersof preferred stock executed their preferred stock appraisal rights.

 

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

 

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

 

**(3)****                                ****DiscontinuedOperations**

 

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

 

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

 

The businesses each qualify as a discontinuedoperation component of RDA under SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  RDA has reported the results of operationsand consolidated financial position of these businesses in discontinuedoperations within the Consolidated Statement of Operations, ConsolidatedBalance Sheets and Consolidated Statement of Cash Flows for all periodspresented.

 

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Tableof Contents

 

**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

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

 
| ** **                                                                                | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                                                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                                                  |       | $                      | 0.5        |                  | $          | 64.5 |   | $ | 61.3 |   | $ | 303.9 |   |
| Loss from  discontinued operations before income taxes                                    |       | (1.4                   | )          | (18.9                 | )          | (76.6 | ) | (12.9 | ) |
| Income tax  expense (benefit) on discontinued operations                                  |       | 0.9                    |       | (4.5                  | )          | (0.8 | ) | (5.1 | ) |
| **Loss  from discontinued operations, net of tax, before loss on sales and curtailments** | ** ** | **(2.3**               | **)**      | **(14.4**             | **)**      | **(75.8** | **)** | **(7.8** | **)** |
| Loss on sale of  divested businesses, net of taxes                                        |       | —                 |       | —                |       | (7.0 | ) | — |   |
| Curtailment of  pension and postretirement benefits                                       |       | —                 |       | —                |       | 11.2 |   | — |   |
| **Loss  from discontinued operations, net of taxes**                                      | ** ** | **$**                  | **(2.3**   | **)**                 | **$**      | **(14.4** | **)** | **$** | **(71.6** | **)** | **$** | **(7.8** | **)** |

 

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

 
| ** **                                              | ** ** | **Nine-months  ended**  | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **March 31, 2009** | ** ** |
|                                                    |       |                    |       |
| Sale price                                              |       | $                       | 126.8      |   |
| Less: cash on  hand                                     |       | (1.9                    | )          |
| Net sale price                                          |       | 124.9                   |       |
|                                                    |       |                    |       |
| Net assets of  subsidiaries                             |       | 97.6                    |       |
| Associated  goodwill and intangible assets              |       | 45.1                    |       |
| Transaction  costs                                      |       | 4.3                     |       |
| Loss on sale of  divested businesses before taxes       |       | (22.1                   | )          |
| Income tax  benefit                                     |       | 15.1                    |       |
| **Loss of  sales of divested businesses, net of taxes** | ** ** | **$**                   | **(7.0**   | **)** |

 

Duringthe nine months ended March 31, 2009, Accumulated other comprehensive lossin the amount of $11.2 was attributable to the curtailment of pension andpostretirement benefits for QSP.  Thegain was removed from Accumulated other comprehensive loss upon the dispositionof QSP and reflected in Loss from discontinued operations, net of taxes.

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

Thecarrying amounts of the major classes of assets and liabilities included in theAssets held for sale and Liabilities held for sale in the Consolidated BalanceSheets at March 31, 2009 and June 30, 2008 were as follows:

 
| ** **                                 | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**          | ** ** |
|                                       |       |               |       |              |       |
| Accounts  receivable, net                  |       | $                  | —     |              | $          | 12.7 |   |
| Inventories                                |       | —             |       | 78.6              |       |
| Other assets                               |       | 0.9                |       | 31.0              |       |
| Goodwill and  other intangible assets, net |       | —             |       | 119.1             |       |
| **Total  assets held for sale**            | ** ** | **$**              | **0.9**    | ** **        | **$**      | **241.4** | ** ** |
|                                       |       |               |       |              |       |
| **Total  liabilities held for sale**       | ** ** | **$**              | **—** | ** **        | **$**      | **42.5** | ** ** |

 

**(4)****                                ****Impairmentof Assets**

 

In accordance with SFAS No. 142, *Goodwill andOther Intangible Assets,*(“SFAS 142”), we are required to perform animpairment test on goodwill and indefinite-lived intangible assets annually orif certain circumstances indicate a possible impairment may exist.  Ourpolicy is to complete the required annual impairment test in accordance withSFAS 142 in our fourth fiscal quarter.  In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets,*(“SFAS 144”), other long-lived assets that areamortized are required to be tested for impairment if certain circumstancesindicate that a possible impairment may exist.

 

During the third quarter we concluded that an interim impairment test ofour goodwill and long-lived assets was necessary for all of our reportingunits.  This conclusion was based oncertain indicators of impairment, including the significant deterioration ofglobal market conditions combined with a recent downgrade in our credit ratingand the decline in our most recent financial projections developed during thequarter as compared to the significant margin of excess fair value overcarrying value that existed at our last impairment test.

 

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

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

** **

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

 
| ** **                                    | ** ** | **Pre-tax** | ** ** | **Tax**    | ** ** | **After-tax** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|
| Goodwill                                      |       | $           | 205.4      |       | $          | 2.7           |       | $ | 202.7 |   |
| Other intangible  assets, net                 |       |        |       |       |       |          |       |
| Indefinite-lived  intangibies:                |       |        |       |       |       |          |       |
| Reader’s Digest  tradenames - indefinite |       | 279.7       |       | 85.9       |       | 193.8         |       |
| Other tradenames  - indefinite                |       | 11.9        |       | 4.5        |       | 7.4           |       |
| Definite-lived  intangibles                   |       |        |       |       |       |          |       |
| Tradenames                                    |       | 1.5         |       | 0.6        |       | 0.9           |       |
| Customer  relationships                       |       | 9.4         |       | 3.5        |       | 5.9           |       |
| Technology and  software                      |       | 2.6         |       | 1.0        |       | 1.6           |       |
| Property, plant  and equipment, net           |       | 16.6        |       | 6.4        |       | 10.2          |       |
| **Total**                                     | ** ** | **$**       | **527.1**  | ** ** | **$**      | **104.6**     | ** ** | **$** | **422.5** | ** ** |

 

The estimated goodwill and other long-lived asset impairment was requiredbecause the revenue and operating results in fiscal 2009 from the underlyingbusinesses have softened from what was expected at the time of our lastimpairment analysis combined with a significant decline in our third quarterlong term projected operating results when compared to the projected operatingresults from the prior quarter.  Otherassumption changes since our last valuation which contributed to the impairmentwere the use of higher discounts rates, that correspond to companies with asimilar financial position and credit rating, and decreases in marketmultiples.

 

The measurement of the fair value of goodwill was based on a combinationof income and market-multiple approaches. The measurement of the fair value of indefinite-livedintangible assets was based on discounted cash flow analyses and othervariations of the income approach. These evaluations utilized the bestinformation available in the circumstances, including reasonable andsupportable assumptions and projections. Certain key assumptions utilized,including changes in revenue, operating expenses, working capital requirements whichinclude prepublication costs, and capital expenditures, are based on estimatesrelated to strategic initiatives in place and current market conditions. Suchassumptions also are consistent with those utilized in the Company’s annualplanning process. The discounted cash flow analyses used a discount rate thatcorresponds to the weighted-average cost of capital for the industry andconsideration of our current financial condition. The discount rate assumed wasconsistent with that used for investment decisions and takes into account thespecific and detailed operating plans and strategies of the individual businessoperations. The market data utilized included publicly-traded prices andtransaction values of comparable companies with operations considered to besimilar to those of the Company’s individual businesses. Collectively, theseevaluations were management’s best estimate of projected future cash flows andmarket values.  Goodwill associated withthe acquisition of Reader’s Digest is comprised of two components.  The first component is tax deductiblegoodwill from Reader’s Digest’s acquisition of Reiman Media and Ripplewood’sacquisition of WRC media.  The remaininggoodwill is not tax deductible since Reader’s Digest was acquired by Ripplewoodin a tax-free transaction.

 

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

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

* *

**(5)****                                ****Inventories**

 

Inventory balances consisted of the following:

 
| ** **             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------|------------|--------------------|------------|-------------------|------------|
| ** **             | ** ** | **2009**           | ** ** | **2008**          | ** ** |
|                   |       |               |       |              |       |
| Raw materials          |       | $                  | 11.4       |              | $          | 11.2 |   |
| Work-in-progress       |       | 5.1                |       | 4.9               |       |
| Finished goods         |       | 91.6               |       | 95.9              |       |
| **Total  inventories** | ** ** | **$**              | **108.1**  | ** **        | **$**      | **112.0** | ** ** |

 

**(6)****                                ****Goodwilland Other Intangible Assets**

 

Thechanges in the carrying amount of goodwill by segment for the nine-months endedMarch 31, 2009 are as follows:

 
| ** **                                                                | ** ** | **Reader’s Digest  United States** | ** ** | **Reader’s Digest  International** | ** ** | **School &   Educational  Services** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|
|                                                                      |       |                                    |       |                                    |       |                                          |       |      |       |
| Balance at  June 30, 2008                                            |       | $                                       | 597.7      |                                    | $          | 987.5                                         |       | $         | 36.0       |   | $ | 1,621.2 |   |
| Adjustment to  the fair values of assets acquired and liabilities assumed |       | (5.6                                    | )          | (16.2                                   | )          | (0.8                                          | )          | (22.6     | )          |
| Goodwill  impairment                                                      |       | (28.2                                   | )          | (156.8                                  | )          | (20.4                                         | )          | (205.4    | )          |
| Currency  translation adjustment                                          |       | —                                  |       | (220.9                                  | )          | —                                        |       | (220.9    | )          |
| **Balance  at March 31, 2009**                                       | ** ** | **$**                                   | **563.9**  | ** **                              | **$**      | **593.6**                                     | ** ** | **$**     | **14.8**   | ** ** | **$** | **1,172.3** | ** ** |

 

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

 

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

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

Thefollowing categories of acquired intangible assets are included in otherintangible assets, net as of March 31, 2009 and June 30, 2008:

 
| ** **                                             | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|--------------------------------------------------------|------------|-----------|------------|------------|------------|
| ** **                                             | ** ** | **Gross** | ** ** | **Net**    | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **Intangible  assets with indefinite lives:**          |       |      |       |       |       |   |   |   |   |
| Readers Digest  tradename - indefinite                 |       | $         | 288.7      |       | $          | 288.7 |   | $ | 621.0 |   | $ | 621.0 |   |
| Other tradenames  - indefinite                         |       | 83.1      |       | 83.1       |       | 95.0 |   | 95.0 |   |
| **Intangible  assets with finite lives:**              |       |      |       |       |       |   |   |   |   |
| Tradenames                                             |       | 13.5      |       | 7.5        |       | 14.9 |   | 10.8 |   |
| Customer  relationships                                |       | 141.2     |       | 54.0       |       | 157.5 |   | 90.2 |   |
| Customer  databases                                    |       | 83.7      |       | 58.6       |       | 89.4 |   | 72.4 |   |
| Licensing  agreements and technical support agreements |       | 4.7       |       | 2.8        |       | 4.7 |   | 3.5 |   |
| Favorable lease  commitments                           |       | 2.4       |       | 1.4        |       | 2.6 |   | 2.2 |   |
| Technology and  software                               |       | 12.6      |       | 2.3        |       | 16.5 |   | 6.1 |   |
| Other  intangibles                                     |       | 1.8       |       | 0.2        |       | 1.9 |   | 0.3 |   |
| **Total  intangible assets**                           | ** ** | **$**     | **631.7**  | ** ** | **$**      | **498.6** | ** ** | **$** | **1,003.5** | ** ** | **$** | **901.5** | ** ** |

 

Amortizationrelated to intangible assets with finite lives amounted to $15.0 and $13.8, forthe three-months ended March 31, 2009 and 2008, respectively.  The amortization for the nine-months ended March 31,2009 and 2008 was $42.8 and $41.3, respectively.  Intangible impairment charges in the amountof $305.1****were recorded in connection with ourinterim impairment testing.

 

Estimatedfiscal year amortization expense for intangible assets with finite lives is asfollows:

 
| ** **                                                        | ** ** | **Fiscal Year** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                        | ** ** | **2010**        | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** |
| Estimated  amortization expense for intangibles with finite lives |       | $               | 29.5       |   | $ | 25.6 |   | $ | 21.7 |   | $ | 18.6 |   | $ | 12.6 |   |
|                                                                   |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(7)****                                ****OtherOperating Items, Net**

 

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

 

Restructuring charges are recorded in accordancewith SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*(“SFAS 146”),**or SFAS No. 112, *Employers Accounting forPostemployment Benefits*(“SFAS 112”)*.*  Under SFAS 146, costs associated withrestructuring actions including one-time severance benefits, are only recordedonce a liability has been incurred. However, employees terminated as a result of our restructuring activitieswere terminated under our normal severance policy, and consequently do notqualify as one time benefits; therefore, we recognize severance amountspursuant to SFAS 112.  Severance chargesrepresent the cost to separate employees from our operations to streamline theorganization.  As such, severance amountsare recorded when a termination plan is developed and approved, including theidentification of positions to be separated, and when payment is probable andestimable.  Other amounts related to restructuringactions, including charges to terminate contractual obligations in connectionwith streamlining activities, are recorded in accordance with SFAS 146.

 

*2009Restructuring Charges*

 

Duringfiscal 2009, we recorded new severance accruals of $26.2 related to employee headcountreductions as part of our 2009 initiatives which were primarily the result of theplanned outsourcing of our IT function and as part of our recession plan announcedin January 2009.

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

Theseemployee reductions are expected to be completed by the end of fiscal 2009 withseverance payments expected to be substantially completed by the end of fiscal2010.  Also during fiscal 2009,restructuring accruals attributed to prior period initiatives were adjusted by $1.6primarily due to lower severance payments than originally estimated offset byan increase in the accrual for abandoned leases due to softness in the realestate sublease market.  All charges forrestructuring appear as a component of Other operating items, net in the ConsolidatedStatement of Operations.

 

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

 

*2008Restructuring Charges*

 

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

 

*PriorRestructuring Charges*

 

Duringfiscal 2007, in connection with the original RDA transaction, we recordedrestructuring accruals related to severance associated with employee headcount reductionsconnected with local restructuring activities in the United States andInternationally.  These employeereductions have been completed with severance payments expected to besubstantially completed by the end of 2010. Additional accruals were associatedwith abandoned leases with terms that extend through 2015.

 

Thetable below reflects changes to our restructuring accruals:

 
| ** **                                                                | ** ** | **Severance**          | ** ** | **Contracts**          | ** ** | ** **              | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                | ** ** | **2009   Initiatives** | ** ** | **2008   Initiatives** | ** ** | **Prior   Initiatives** | ** ** | **Total  Severance** | ** ** | **Prior   Initiatives** | ** ** | **Grand   Total** | ** ** |
|                                                                      |       |                   |       |                   |       |                    |       |   |   |   |   |   |   |
| **Balance  at June 30, 2008**                                        |       | $                      | —     |                   | $          | 5.6                     |       | $ | 9.9 |   | $ | 15.5 |   | $ | 3.8 |   | $ | 19.3 |   |
| Accruals (Net of  reversals)                                              |       | 26.2                   |       | (1.2                   | )          | (1.3                    | )          | 23.7 |   | 0.9 |   | 24.6 |   |
| Spending                                                                  |       | (3.0                   | )          | (3.2                   | )          | (3.9                    | )          | (10.1 | ) | (0.9 | ) | (11.0 | ) |
| Liabilities  assumed in purchase of Reader’s Digest Association Inc. |       | —                 |       | —                 |       | (2.6                    | )          | (2.6 | ) | — |   | (2.6 | ) |
| **Balance  at March 31, 2009**                                       |       | $                      | 23.2       |                   | $          | 1.2                     |       | $ | 2.1 |   | $ | 26.5 |   | $ | 3.8 |   | $ | 30.3 |   |
|                                                                      |       |                   |       |                   |       |                    |       |   |   |   |   |   |   |
| **Cumulative  Amounts**                                                   |       |                   |       |                   |       |                    |       |   |   |   |   |   |   |
| Accruals (Net of  reversals)                                              |       | $                      | 26.2       |                   | $          | 7.3                     |       | $ | 6.1 |   | $ | 39.6 |   | $ | 16.3 |   | $ | 55.9 |   |
| Spending                                                                  |       | (3.0                   | )          | (6.1                   | )          | (35.9                   | )          | (45.0 | ) | (13.6 | ) | (58.6 | ) |
| Liabilities  assumed in purchase of Reader’s Digest Association Inc. |       | —                 |       | —                 |       | 31.9                    |       | 31.9 |   | 1.1 |   | 33.0 |   |
| **Balance  at March 31, 2009**                                       |       | $                      | 23.2       |                   | $          | 1.2                     |       | $ | 2.1 |   | $ | 26.5 |   | $ | 3.8 |   | $ | 30.3 |   |

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

Thetable below reflects changes to our restructuring accruals by reportablesegment:

 
| ** **                                                                | ** ** | **Severance**      | ** ** | **Contracts**     | ** ** |
|---------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                | ** ** | **United  States** | ** ** | **International** | ** ** | **SES** | ** ** | **Total** | ** ** | **International** | ** ** | **SES** | ** ** | **Total** | ** ** | **Grand  Total** | ** ** |
|                                                                      |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance  at June 30, 2008**                                        |       | $                  | 1.5        |              | $          | 11.4 |   | $ | 2.6 |   | $ | 15.5 |   | $ | 1.5 |   | $ | 2.3 |   | $ | 3.8 |   | $ | 19.3 |   |
| Accruals (Net of  reversals)                                              |       | 7.6                |       | 15.9              |       | 0.2 |   | 23.7 |   | — |   | 0.9 |   | 0.9 |   | 24.6 |   |
| Spending                                                                  |       | (1.4               | )          | (7.9              | )          | (0.8 | ) | (10.1 | ) | (0.3 | ) | (0.6 | ) | (0.9 | ) | (11.0 | ) |
| Liabilities  assumed in purchase of Reader’s Digest Association Inc. |       | (0.3               | )          | (2.0              | )          | (0.3 | ) | (2.6 | ) | — |   | — |   | — |   | (2.6 | ) |
| **Balance  at March 31, 2009**                                       |       | $                  | 7.4        |              | $          | 17.4 |   | $ | 1.7 |   | $ | 26.5 |   | $ | 1.2 |   | $ | 2.6 |   | $ | 3.8 |   | $ | 30.3 |   |
|                                                                      |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cumulative  Amounts**                                                   |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accruals (Net of  reversals)                                              |       | $                  | 11.2       |              | $          | 22.1 |   | $ | 6.3 |   | $ | 39.6 |   | $ | 8.2 |   | $ | 8.1 |   | $ | 16.3 |   | $ | 55.9 |   |
| Spending                                                                  |       | (6.0               | )          | (22.7             | )          | (16.3 | ) | (45.0 | ) | (7.0 | ) | (6.6 | ) | (13.6 | ) | (58.6 | ) |
| Liabilities  assumed in purchase of Reader’s Digest Association Inc. |       | 2.2                |       | 18.0              |       | 11.7 |   | 31.9 |   | — |   | 1.1 |   | 1.1 |   | 33.0 |   |
| **Balance  at March 31, 2009**                                       |       | $                  | 7.4        |              | $          | 17.4 |   | $ | 1.7 |   | $ | 26.5 |   | $ | 1.2 |   | $ | 2.6 |   | $ | 3.8 |   | $ | 30.3 |   |

 

**(8)****                                ****Debt**

 

***2007 Credit Agreement and SeniorSubordinated Notes***

 

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

 

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

 

##### ***Lines ofCredit and Overdraft Facilities***

#####  

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

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

ofMarch 31, 2009 and as of June 30, 2008, there were trade letters ofcredit of $0.8.  Additionally, otherobligations of $0.7 were outstanding at March 31, 2009.

 

##### ***InterestExpense***

#####  

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

 

**(9)****                                ****DerivativeInstruments**

 

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

 

Since LIBOR-based loans can be prepaid withoutpenalty (other than accrued interest) at any time during the contractual termof the loans and the swaps are not by their terms cancellable, the hedgingrelationship does not qualify for the use of the shortcut method of assessinghedge effectiveness.  However, we willevaluate the likelihood of whether we will continue to borrow using LIBOR-basedloans based on our business plan, and whether the interest payments made on theoutstanding loans being hedged will be sufficient to match the terms of theswaps during the life of the hedges (and therefore result in interestpayments).

 

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

 

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

 

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

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

**(10)****                         ****IncomeTaxes**

 

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

 

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

 

Thedeferred tax assets related to the net operating losses, alternative minimumtax credits and foreign tax credits of our domestic companies and certain netoperating losses of our foreign companies have been fully offset with valuationallowances as we have determined it is more likely than not that the benefit ofthese assets will not be realized.  On anongoing basis, we reassess the need for such valuation allowances based on recentoperating results, the assessment of the likelihood of future taxable incomeand developments in the relevant tax jurisdictions.

 

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

 

Asof October 2008, the Company has settled the federal IRS audits for thetax years ended June 30, 2004 and June 30, 2005.  The settlement of these audits did not have amaterial affect on the Company’s financial statements for the nine-month periodending March 31, 2009.  The Companycontinues to have routine ongoing income tax audits in various taxingjurisdictions.

 

Weconsider many factors when evaluating and estimating our tax positions and taxbenefits, which may require periodic adjustments and which may not accuratelyanticipate actual outcomes.   It isreasonably possible that the amount of the unrecognized benefit with respect tocertain of our unrecognized tax positions will significantly increase ordecrease within the next 12 months. These changes may be the result ofsettlement of ongoing audits or final decisions in transfer pricing matters. Atthis time, an estimate of the range of the reasonably possible outcomes cannotbe made.

 

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** **

**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

**(11)****                         ****AccumulatedOther Comprehensive (Loss) Gain**

 

Accumulated other comprehensive (loss) gain as reported in the ConsolidatedBalance Sheets represents foreign currency translation adjustments, theunrealized gains and losses on our derivatives, deferred pension liabilitiesand other retirement benefits.  Thecomponents of Total comprehensive (loss) gain, net of related tax, for thethree and nine-months ended March 31, 2009 and 2008 were as follows:

 
| ** **                                                                                                                                                                                                                                                                                                | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                                                                                                                                                                                                                                                                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                                                                                                                                                                                                                                                                                                  |       | $                      | (462.0     | )                     | $          | (53.6 | ) | $ | (652.6 | ) | $ | (159.3 | ) |
| Change in:                                                                                                                                                                                                                                                                                                |       |                   |       |                  |       |   |   |   |   |
| Foreign currency  translation adjustments                                                                                                                                                                                                                                                                 |       | (106.6                 | )          | 80.0                  |       | (268.8 | ) | 78.8 |   |
| Unrealized gain  (loss) on derivatives, net of deferred tax expense of $4.7 and deferred tax  benefit of $8.9 for the three-months ended March 31, 2009 and 2008,  respectively, and deferred tax benefits of $7.3 and $21.4, for the  nine-months ended March 31, 2009 and 2008, respectively. |       | 7.9                    |       | (15.0                 | )          | (12.4 | ) | (35.9 | ) |
| Deferred pension  liabilities and other retirement benefits, net of deferred tax benefit $4.2                                                                                                                                                                                                             |       | —                 |       | —                |       | (7.0 | ) | — |   |
| **Total  comprehensive (loss) gain**                                                                                                                                                                                                                                                                      | ** ** | **$**                  | **(560.7** | **)**                 | **$**      | **11.4** | ** ** | **$** | **(940.8** | **)** | **$** | **(116.4** | **)** |

 

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

 

**(12)****                         ****Equity-BasedCompensation**

 

InJuly 2007, upon the recommendation of the Compensation Committee of ourBoard of Directors, the Board of Directors of RDA Holding Co. (the “Holding Co.Board”) approved the RDA Holding Co. 2007 Omnibus Incentive Compensation Plan(the “2007 Plan”).  All of our priorexisting employee incentive compensation plans were terminated upon thecompletion of the Acquisition Transaction. Under the 2007 Plan, the Holding Co. Board may grant to eligibledirectors, employees and consultants stock options, stock appreciation rights,restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and otherequity-based or equity related awards in RDA Holding Co. that the Holding Co.Board determines, in consultation with the Compensation Committee of our Boardof Directors, are consistent with the purpose of the 2007 Plan and our bestinterests.  The Holding Co. Board maygrant up to a maximum of 5.0 million shares under the 2007 Plan, net offorfeitures and expirations.  During thefirst quarter of fiscal 2009, the Holding Co. Board amended the 2007 Plan toincrease the number of shares available for grant by 0.4 million, to 5.4million, net of forfeitures and expirations. During the third quarter of fiscal 2009, the Holding Co. Board amendedthe 2007 Plan to increase the number of shares available for grant by 0.2million, to 5.6 million, net of forfeitures and expirations.

 

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

 

Ingeneral, granted stock options vest over four years, have 10-year contractualterms and are exercisable upon the occurrence of certain liquidity events, asdefined in the 2007 Plan.  The weightedaverage exercise price of all stock options granted is $9.99.  The exercise price of all options was deemedequal to the estimated market value of RDA Holding Co.’s common stock at thedate of grant.  Our estimated fair valueis based upon an annual valuation of the Company performed in the fourthquarter.  The last valuation reportcompleted was as of March 31, 2008. The weighted average grant date fair value of RSAs and RSUs grantedduring the three-months ended March 31, 2009 and March 31, 2008 are$9.95 and $10.00, respectively.  Theweighted average grant date fair value of RSAs and RSUs for the nine-monthsended March 31, 2009 and March 31, 2008 is $9.96 and $10.00,respectively.  

 

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**The Reader's Digest Association, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

*(in millions, except share and per share data)*

*(unaudited)*

 

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

 

Thefair value of each stock option award is estimated on the date of grant usingthe Black-Scholes option valuation model that uses the assumptions noted in thefollowing table.  As there is no publicmarket for RDA Holding Co.’s stock, the expected volatility was based on theaverage volatility of historical closing stock prices of comparable companiesover the expected term of the option. The risk-free interest rate for theperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant. The expected term of optionsgranted is based upon management’s estimate for the period of time for whichoptions are expected to be outstanding. We have no historical stock optionexercise experience and have estimated the expected term of options using thevesting period of the options, the expected period to consummate a liquidityevent and the mid-point between the vesting date and the end of the contractualterm.

 
| ** **               | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|--------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **               | ** ** | **2009**                    | ** ** | **2008**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Assumptions**          |       |                        |       |                       |       |   |   |   |   |
| Expected  volatility     |       | 46.79%                      |       | 39.97%                     |       | 40.66% - 46.79% |   | 32.38% - 41.97% |   |
| Expected term  (years)   |       | 6                           |       | 6                          |       | 6 |   | 4-6 |   |
| Risk-free  interest rate |       | 1.88%                       |       | 2.78%                      |       | 1.88% - 2.68% |   | 2.78%-5.05% |   |
| Expected  dividend yield |       | 0%                          |       | 0%                         |       | 0% |   | 0% |   |

 

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

 
| ** **                                         | ** ** | **Shares  (000’s)** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Options**                                        |       |                     |       |                                           |       |                                                        |       |
| Outstanding at  June 30, 2008                 |       | 2,991                    |       | $                                              | 10.00      |                                                        | 9.2        |   |
| Granted                                            |       | 1,093                    |       | 9.97                                           |       |                                                        |       |
| Forfeited or  expired                              |       | (185                     | )          | 10.00                                          |       |                                                        |       |
| **Outstanding  at March 31, 2009**            | ** ** | **3,899**                | ** ** | **$**                                          | **9.99**   | ** **                                                  | **8.8**    | ** ** |
| Vested or  expected to vest at March 31, 2009 |       | 3,708                    |       |                                           |       |                                                        |       |
| **Exercisable  at March 31, 2009**            | ** ** | **1,085**                | ** ** | **$**                                          | **10.00**  | ** **                                                  | **8.5**    | ** ** |

 

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

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

A summary of RSAs and RSUs activityunder the 2007 Plan for the nine-months ended March 31, 2009 is asfollows:

 
| ** **                            | ** ** | **RSAs**                 | ** ** | **RSUs**                             | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **Shares  (000’s)** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Shares  (000’s)** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|                                  |       |                     |       |                                 |       |   |   |   |   |
| Nonvested at  June 30, 2008      |       | 1,008                    |       | $                                    | 10.00      |   | 230 |   | $ | 10.00 |   |
| Granted                               |       | 99                       |       | 9.96                                 |       | 97 |   | 9.96 |   |
| Vested                                |       | —                   |       | —                               |       | (55 | ) | 9.95 |   |
| Forfeited                             |       | (284                     | )          | 10.00                                |       | (20 | ) | 10.00 |   |
| **Nonvested  at March 31, 2009** | ** ** | **823**                  | ** ** | **$**                                | **10.00**  | ** ** | **252** | ** ** | **$** | **9.98** | ** ** |

 

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

 

Asof March 31, 2009, it was determined that it was not probable that theliquidity event, as defined, will be satisfied. As of March 31, 2009,total stock options, RSAs and RSUs outstanding with these liquidity provisionswas 1.9 million, 0.8 million and 0.3 million, respectively. As a result, nocompensation expense was recognized during the three or nine-months ended March 31,2009 or March 31, 2008 for stock options, RSAs and RSUs with liquidityevent provisions.  Total unrecognizedcompensation expense related to these stock options, RSAs and RSUs for theperiod ending March 31, 2009 are $8.9, $8.2 and $2.5, respectively.  Total unrecognized compensation expenserelated to these stock options, RSAs and RSUs for the period ended March 31,2008 were $5.3, $10.9 and $2.3, respectively.

 

**(13)****             ****PensionInformation**

 

We sponsor various pensionand postretirement benefit plans, including those for employees in the UnitedStates, international employees and supplemental plans for executives.

 

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

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

The table below details the components of our net periodic pensionbenefit:

 
| ** **                            | ** ** | **Three-months  Ended** | ** ** | **Nine-months  Ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **March 31,**      | ** ** | **March 31,**     | ** ** |
| ** **                            | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                          |       | $                       | 2.3        |                   | $          | 4.0 |   | $ | 7.4 |   | $ | 12.3 |   |
| Interest cost                         |       | 11.5                    |       | 12.5                   |       | 35.7 |   | 37.4 |   |
| Expected return  on plan assets       |       | (19.5                   | )          | (20.8                  | )          | (60.0 | ) | (62.6 | ) |
| Amortization of  prior service credit |       | —                  |       | —                 |       | (0.1 | ) | — |   |
| Recognized  actuarial gain            |       | (0.5                    | )          | (0.1                   | )          | (1.6 | ) | (0.3 | ) |
| Curtailments                          |       | —                  |       | —                 |       | — |   | (1.2 | ) |
| **Net  periodic pension benefit**     | ** ** | **$**                   | **(6.2**   | **)**                  | **$**      | **(4.4** | **)** | **$** | **(18.6** | **)** | **$** | **(14.4** | **)** |

 

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

 

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

 
| ** **                                      | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                                    |       | $                      | —     |                  | $          | 0.1 |   | $ | 0.1 |   | $ | 0.4 |   |
| Interest cost                                   |       | 0.4                    |       | 1.0                   |       | 1.2 |   | 2.9 |   |
| Amortization of  prior service credit           |       | (0.5                   | )          | —                |       | (1.4 | ) | — |   |
| Recognized  actuarial gain                      |       | (0.4                   | )          | —                |       | (1.2 | ) | — |   |
| **Net  periodic postretirement (benefit) cost** | ** ** | **$**                  | **(0.5**   | **)**                 | **$**      | **1.1** | ** ** | **$** | **(1.3** | **)** | **$** | **3.3** | ** ** |

 

**(14)****                         ****Revenuesand Operating (Loss) Profit andAssets by Reportable Segment**

 

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

 

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

 

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

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

The following table presents our net revenues and operating profit bysegment:

 
| ** **                                  | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenues**                                |       |                   |       |                  |       |   |   |   |   |
| Reader’s Digest  United States         |       | $                      | 162.2      |                  | $          | 180.8 |   | $ | 557.6 |   | $ | 609.2 |   |
| Reader’s Digest International          |       | 298.4                  |       | 390.4                 |       | 1,055.0 |   | 1,222.3 |   |
| School &  Educational Services     |       | 24.5                   |       | 25.4                  |       | 70.9 |   | 88.1 |   |
| Intercompany  eliminations                  |       | (1.8                   | )          | (4.6                  | )          | (7.8 | ) | (17.0 | ) |
| Purchase  accounting related adjustment (1) |       | (4.2                   | )          | (16.9                 | )          | (18.4 | ) | (100.7 | ) |
| **Total  revenues**                         | ** ** | **$**                  | **479.1**  | ** **            | **$**      | **575.1** | ** ** | **$** | **1,657.3** | ** ** | **$** | **1,801.9** | ** ** |
|                                        |       |                   |       |                  |       |   |   |   |   |
| **Operating  (loss) profit**                |       |                   |       |                  |       |   |   |   |   |
| Reader’s Digest  United States         |       | $                      | 7.7        |                  | $          | 13.9 |   | $ | 32.8 |   | $ | 51.6 |   |
| Reader’s Digest  International         |       | 9.2                    |       | 28.8                  |       | 22.2 |   | 90.6 |   |
| School &  Educational Services     |       | (0.8                   | )          | 0.6                   |       | (8.1 | ) | 4.7 |   |
| Impairment of  assets (4)                   |       | (527.1                 | )          | —                |       | (527.1 | ) | — |   |
| Corporate  unallocated (2)                  |       | (11.1                  | )          | (27.6                 | )          | (30.6 | ) | (72.2 | ) |
| Other operating  items, net (3)             |       | (9.6                   | )          | (7.0                  | )          | (31.4 | ) | (15.6 | ) |
| Purchase  accounting related adjustment (1) |       | (4.2                   | )          | (16.9                 | )          | (18.4 | ) | (100.7 | ) |
| **Operating  (loss) profit**                | ** ** | **$**                  | **(535.9** | **)**                 | **$**      | **(8.2** | **)** | **$** | **(560.6** | **)** | **$** | **(41.6** | **)** |
|                                        |       |                   |       |                  |       |   |   |   |   |
| **Intercompany  eliminations**              |       |                   |       |                  |       |   |   |   |   |
| Reader’s Digest  United States         |       | $                      | (0.8       | )                     | $          | (3.5 | ) | $ | (4.5 | ) | $ | (13.1 | ) |
| Reader’s Digest  International         |       | (1.0                   | )          | (1.1                  | )          | (3.3 | ) | (3.8 | ) |
| School &  Educational Services     |       | —                 |       | —                |       | — |   | (0.1 | ) |
| **Total  intercompany eliminations**        | ** ** | **$**                  | **(1.8**   | **)**                 | **$**      | **(4.6** | **)** | **$** | **(7.8** | **)** | **$** | **(17.0** | **)** |

 

----

(1)        Purchase accounting related fair value adjustmentsto reduce unearned revenues.  This chargewas not included in the segment results reviewed by the chief operatingdecision maker.

 

(2)        Corporate unallocated includes expenses forthe cost of governance and centrally managed expenses, including adjustmentsrelated to our global management incentive plans, as well as the accounting forU.S. pension plans, postretirement healthcare costs, and other costs that arenot allocated to the reportable segments, such as the amortization ofintangible assets.  Governance andcentrally managed expenses include costs for departments such as corporatefinance, general corporate management, legal, public relations and treasury andfor related information technology and facility costs incurred by thesedepartments.

 

(3)        Other operating items, net, includerestructuring, contractual charges and gain on sales of certain non-strategicassets.  Such items are not included insegment results reviewed by our chief operating decision maker.

 

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

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

The following table presents our assets by reportable segment:

 
| ** **                                | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **Assets**                                |       |                    |       |                   |       |
| Reader’s Digest  United States       |       | $                       | 1,002.2    |                   | $          | 1,178.8 |   |
| Reader’s Digest  International       |       | 1,356.8                 |       | 2,105.4                |       |
| School &  Educational Services   |       | 82.9                    |       | 199.3                  |       |
| Corporate                                 |       | 373.1                   |       | 241.2                  |       |
| **Total  assets for reportable segments** |       | $                       | 2,815.0    |                   | $          | 3,724.7 |   |
|                                      |       |                    |       |                   |       |
| **Assets**                                |       |                    |       |                   |       |
| Total assets for  reportable segments     |       | $                       | 2,815.0    |                   | $          | 3,724.7 |   |
| Assets held for  sale                     |       | 0.9                     |       | 241.4                  |       |
| **Total  consolidated assets**            |       | $                       | 2,815.9    |                   | $          | 3,966.1 |   |

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**(15)**                          **Guarantorand Non-Guarantor Financial Information**

 

The Reader’s Digest Association, Inc. isthe issuer of the Senior Subordinated Notes (“Notes”).  Our domestic subsidiaries that guarantee our2007 Credit Agreement (collectively, the “Guarantor Subsidiaries”) jointly andseverally irrevocably and unconditionally guarantee, on an unsecured seniorsubordinated basis, our obligations under the Notes.  The Guarantor Subsidiaries do not include foreignsubsidiaries, domestic subsidiaries whose assets substantially consist ofvoting stock of one or more foreign subsidiaries, or non-wholly-ownedsubsidiaries (subject to certain limited exceptions such as in the event thatsuch non-wholly-owned subsidiary guarantees debt issued in a capital marketstransaction).  Our subsidiaries that arenot Guarantor Subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) arenot guarantors of the Notes or the 2007 Credit Agreement.

 

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

 

**Consolidated condensed balance sheet as of March 31,2009:**

 
| ** **                                                        | ** ** | **Issuer  Parent - RDA** | ** **  | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** **  | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|---------------------------------|------------|-------------------------|-------------|------------------|------------|
| **Assets**                                                        |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Current assets                                                    |       | $                        | 92.6        |                        | $          | 512.2                           |       | $                       | 346.4       |             | $          | (298.6 | ) | $ | 652.6 |   |
| Property, plant  and equipment, net                               |       | 27.6                     |        | 13.9                        |       | 27.4                            |       | —                  |        | 68.9             |       |
| Goodwill                                                          |       | —                   |        | 578.7                       |       | 593.6                           |       | —                  |        | 1,172.3          |       |
| Other intangible  assets, net                                     |       | —                   |        | 202.4                       |       | 296.2                           |       | —                  |        | 498.6            |       |
| Prepaid pension  assets                                           |       | 281.2                    |        | —                      |       | 27.3                            |       | —                  |        | 308.5            |       |
| Investments in  subsidiaries                                      |       | 1,569.8                  |        | 6.2                         |       | —                          |       | (1,576.0                | )           | —           |       |
| Intercompany  noncurrent receivables                              |       | 13.8                     |        | 0.4                         |       | 90.8                            |       | (105.0                  | )           | —           |       |
| Other noncurrent  assets                                          |       | 28.2                     |        | 70.0                        |       | 16.8                            |       | —                  |        | 115.0            |       |
| **Total  assets**                                                 | ** ** | **$**                    | **2,013.2** | ** **                  | **$**      | **1,383.8**                     | ** ** | **$**                   | **1,398.5** | ** **       | **$**      | **(1,979.6** | **)** | **$** | **2,815.9** | ** ** |
|                                                              |       |                     |        |                        |       |                            |       |                    |        |             |       |
| **Liabilities  and stockholder’s (deficit) equity**          |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Current  liabilities                                              |       | $                        | 372.7       |                        | $          | 388.7                           |       | $                       | 383.3       |             | $          | (298.6 | ) | $ | 846.1 |   |
| Long-term debt                                                    |       | 2,067.0                  |        | —                      |       | 97.3                            |       | —                  |        | 2,164.3          |       |
| Unearned  revenues                                                |       | —                   |        | 149.4                       |       | 2.4                             |       | —                  |        | 151.8            |       |
| Accrued pension                                                   |       | 59.7                     |        | —                      |       | 11.6                            |       | —                  |        | 71.3             |       |
| Post-retirement  and post-employment benefits other than pensions |       | 18.8                     |        | —                      |       | 2.0                             |       | —                  |        | 20.8             |       |
| Intercompany  noncurrent payables                                 |       | 90.8                     |        | 11.7                        |       | 2.5                             |       | (105.0                  | )           | —           |       |
| Other noncurrent  liabilities                                     |       | 89.1                     |        | 70.4                        |       | 86.0                            |       | —                  |        | 245.5            |       |
| **Total  liabilities**                                            | ** ** | **$**                    | **2,698.1** | ** **                  | **$**      | **620.2**                       | ** ** | **$**                   | **585.1**   | ** **       | **$**      | **(403.6** | **)** | **$** | **3,499.8** | ** ** |
|                                                              |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Stockholder’s  (deficit) equity                              |       | (684.9                   | )           | 763.6                       |       | 813.4                           |       | (1,576.0                | )           | (683.9           | )          |
| **Total  liabilities and stockholder’s (deficit) equity**    | ** ** | **$**                    | **2,013.2** | ** **                  | **$**      | **1,383.8**                     | ** ** | **$**                   | **1,398.5** | ** **       | **$**      | **(1,979.6** | **)** | **$** | **2,815.9** | ** ** |

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**Consolidated condensed balance sheet as of June 30,2008:**

 
| ** **                                                        | ** ** | **Issuer  Parent - RDA** | ** **  | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** **  | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|---------------------------------|------------|-------------------------|-------------|------------------|------------|
| **Assets**                                                        |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Current assets                                                    |       | $                        | 5.0         |                        | $          | 539.1                           |       | $                       | 465.1       |             | $          | (73.3 | ) | $ | 935.9 |   |
| Property, plant  and equipment, net                               |       | 23.5                     |        | 37.0                        |       | 38.6                            |       | —                  |        | 99.1             |       |
| Goodwill                                                          |       | —                   |        | 633.7                       |       | 987.5                           |       | —                  |        | 1,621.2          |       |
| Other intangible  assets, net                                     |       | —                   |        | 373.9                       |       | 527.6                           |       | —                  |        | 901.5            |       |
| Prepaid pension  assets                                           |       | 257.5                    |        | —                      |       | 33.4                            |       | —                  |        | 290.9            |       |
| Investments in  subsidiaries                                      |       | 2,392.0                  |        | 5.9                         |       | —                          |       | (2,397.9                | )           | —           |       |
| Intercompany  noncurrent receivables                              |       | 14.1                     |        | —                      |       | 125.3                           |       | (139.4                  | )           | —           |       |
| Other noncurrent  assets                                          |       | 38.0                     |        | 55.5                        |       | 20.1                            |       | 3.9                     |        | 117.5            |       |
| **Total  assets**                                                 | ** ** | **$**                    | **2,730.1** | ** **                  | **$**      | **1,645.1**                     | ** ** | **$**                   | **2,197.6** | ** **       | **$**      | **(2,606.7** | **)** | **$** | **3,966.1** | ** ** |
|                                                              |       |                     |        |                        |       |                            |       |                    |        |             |       |
| **Liabilities  and stockholder’s equity**                    |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Current  liabilities                                              |       | $                        | 238.1       |                        | $          | 387.5                           |       | $                       | 423.5       |             | $          | (65.9 | ) | $ | 983.2 |   |
| Long-term debt                                                    |       | 1,974.1                  |        | —                      |       | 117.8                           |       | —                  |        | 2,091.9          |       |
| Unearned  revenues                                                |       | —                   |        | 134.6                       |       | 3.0                             |       | —                  |        | 137.6            |       |
| Accrued pension                                                   |       | 62.9                     |        | —                      |       | 21.1                            |       | —                  |        | 84.0             |       |
| Post-retirement  and post-employment benefits other than pensions |       | 23.1                     |        | —                      |       | 2.4                             |       | —                  |        | 25.5             |       |
| Intercompany  noncurrent payables                                 |       | 125.3                    |        | 11.7                        |       | 2.4                             |       | (139.4                  | )           | —           |       |
| Other noncurrent  liabilities                                     |       | 79.6                     |        | 145.8                       |       | 166.8                           |       | (3.3                    | )           | 388.9            |       |
| **Total  liabilities**                                            | ** ** | **$**                    | **2,503.1** | ** **                  | **$**      | **679.6**                       | ** ** | **$**                   | **737.0**   | ** **       | **$**      | **(208.6** | **)** | **$** | **3,711.1** | ** ** |
|                                                              |       |                     |        |                        |       |                            |       |                    |        |             |       |
| Stockholder’s  equity                                        |       | 227.0                    |        | 965.5                       |       | 1,460.6                         |       | (2,398.1                | )           | 255.0            |       |
| **Total  liabilities and stockholder’s equity**              | ** ** | **$**                    | **2,730.1** | ** **                  | **$**      | **1,645.1**                     | ** ** | **$**                   | **2,197.6** | ** **       | **$**      | **(2,606.7** | **)** | **$** | **3,966.1** | ** ** |

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**Consolidatedcondensed statement of operations for the three-months ended March 31,2009:**

 
| ** **                                                                       | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **       | ** ** |
| Revenues                                                                         |       | $                        | 21.2       |                        | $          | 194.4                           |       | $                       | 265.4      |             | $          | (1.9 | ) | $ | 479.1 |   |
| Product,  distribution and editorial expenses                                    |       | 13.3                     |       | 85.1                        |       | 110.9                           |       | (1.9                    | )          | 207.4            |       |
| Promotion,  marketing and administrative expenses                                |       | 17.9                     |       | 99.7                        |       | 153.3                           |       | —                  |       | 270.9            |       |
| Impairments of  assets                                                           |       | —                   |       | 218.2                       |       | 308.9                           |       | —                  |       | 527.1            |       |
| Other operating  items, net                                                      |       | 6.7                      |       | 3.8                         |       | (0.9                            | )          | —                  |       | 9.6              |       |
| **Operating  loss**                                                              | ** ** | **(16.7**                | **)**      | **(212.4**                  | **)**      | **(306.8**                      | **)**      | **—**              | ** ** | **(535.9**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Interest expense  (income)                                                       |       | 34.3                     |       | (0.1                        | )          | 2.3                             |       | —                  |       | 36.5             |       |
| Other (income)  expense, net                                                     |       | (27.3                    | )          | 0.1                         |       | 26.6                            |       | —                  |       | (0.6             | )          |
| Expense (income)  from investment in subsidiaries                                |       | 428.7                    |       | (0.3                        | )          | —                          |       | (428.4                  | )          | —           |       |
| **Loss  before expense (benefit) from income taxes and discontinued operations** | ** ** | **(452.4**               | **)**      | **(212.1**                  | **)**      | **(335.7**                      | **)**      | **428.4**               | ** ** | **(571.8**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Income tax  expense (benefit)                                                    |       | 1.4                      |       | (62.6                       | )          | (50.9                           | )          | —                  |       | (112.1           | )          |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Loss  from continuing operations**                                             | ** ** | **(453.8**               | **)**      | **(149.5**                  | **)**      | **(284.8**                      | **)**      | **428.4**               | ** ** | **(459.7**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| (Loss) income  from discontinued operations, net of tax expense of $0.9          |       | (8.2                     | )          | 6.0                         |       | (0.1                            | )          | —                  |       | (2.3             | )          |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Net  loss**                                                                    | ** ** | **$**                    | **(462.0** | **)**                       | **$**      | **(143.5**                      | **)**      | **$**                   | **(284.9** | **)**            | **$**      | **428.4** | ** ** | **$** | **(462.0** | **)** |

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**Consolidatedcondensed statement of operations for the nine-months ended March 31,2009:**

 
| ** **                                                                       | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **       | ** ** |
| Revenues                                                                         |       | $                        | 63.7       |                        | $          | 657.4                           |       | $                       | 944.0      |             | $          | (7.8 | ) | $ | 1,657.3 |   |
| Product,  distribution and editorial expenses                                    |       | 47.4                     |       | 287.7                       |       | 394.2                           |       | (7.8                    | )          | 721.5            |       |
| Promotion,  marketing and administrative expenses                                |       | 69.3                     |       | 331.5                       |       | 537.1                           |       | —                  |       | 937.9            |       |
| Impairment of  assets                                                            |       | —                   |       | 218.2                       |       | 308.9                           |       | —                  |       | 527.1            |       |
| Other operating  items, net                                                      |       | 9.8                      |       | 5.5                         |       | 16.1                            |       | —                  |       | 31.4             |       |
| **Operating  loss**                                                              | ** ** | **(62.8**                | **)**      | **(185.5**                  | **)**      | **(312.3**                      | **)**      | **—**              | ** ** | **(560.6**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Interest expense                                                                 |       | 108.0                    |       | —                      |       | 9.2                             |       | —                  |       | 117.2            |       |
| Other (income)  expense, net                                                     |       | (27.6                    | )          | (11.9                       | )          | 41.0                            |       | —                  |       | 1.5              |       |
| Expense (income)  from investment in subsidiaries                                |       | 519.5                    |       | (0.5                        | )          | —                          |       | (519.0                  | )          | —           |       |
| **Loss  before expense (benefit) from income taxes and discontinued operations** | ** ** | **(662.7**               | **)**      | **(173.1**                  | **)**      | **(362.5**                      | **)**      | **519.0**               | ** ** | **(679.3**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Income tax  expense (benefit)                                                    |       | 4.0                      |       | (57.1                       | )          | (45.2                           | )          | —                  |       | (98.3            | )          |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Loss  from continuing operations**                                             | ** ** | **(666.7**               | **)**      | **(116.0**                  | **)**      | **(317.3**                      | **)**      | **519.0**               | ** ** | **(581.0**       | **)**      |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Income (loss)  from discontinued operations, net of tax benefits of $15.9        |       | 14.1                     |       | (83.0                       | )          | (2.7                            | )          | —                  |       | (71.6            | )          |
|                                                                             |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Net  loss**                                                                    | ** ** | **$**                    | **(652.6** | **)**                       | **$**      | **(199.0**                      | **)**      | **$**                   | **(320.0** | **)**            | **$**      | **519.0** | ** ** | **$** | **(652.6** | **)** |

 

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**The Reader’s Digest Association, Inc. andSubsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**Consolidated condensed statement of cash flows forthe nine-months ended March 31, 2009:**

 
| ** **                                                    | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
|                                                          |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Net change in  cash due to continuing operating activities    |       | $                        | (160.4     | )                           | $          | 32.1                            |       | $                       | (8.6       | )                | $          | — |   | $ | (136.9 | ) |
| Net change in  cash due to discontinued operating activities  |       | (12.0                    | )          | (27.0                       | )          | 0.8                             |       | —                  |       | (38.2            | )          |
| Net change in  cash due to operating activities               |       | (172.4                   | )          | 5.1                         |       | (7.8                            | )          | —                  |       | (175.1           | )          |
| Net change in  cash due to investing activities               |       | 105.4                    |       | (5.3                        | )          | 11.7                            |       | —                  |       | 111.8            |       |
| Net change in  cash due to financing activities               |       | 90.9                     |       | —                      |       | (7.4                            | )          | —                  |       | 83.5             |       |
| Effect of  exchange rate changes on cash and cash equivalents |       | 6.9                      |       | —                      |       | (4.1                            | )          | —                  |       | 2.8              |       |
| Cash and cash  equivalents at beginning of the period         |       | 4.6                      |       | 3.9                         |       | 70.9                            |       | —                  |       | 79.4             |       |
| **Cash  and cash equivalents at end of the period**           | ** ** | **$**                    | **35.4**   | ** **                  | **$**      | **3.7**                         | ** ** | **$**                   | **63.3**   | ** **       | **$**      | **—** | ** ** | **$** | **102.4** | ** ** |

 

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**The Reader’s Digest Association,Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

**Consolidated condensed statement of operations forthe three-months ended March 31, 2008:**

 
| ** **                                                                                | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **       | ** ** |
| Revenues                                                                                  |       | $                        | 25.2       |                        | $          | 214.6                           |       | $                       | 339.8      |             | $          | (4.5 | ) | $ | 575.1 |   |
| Product,  distribution and editorial expenses                                             |       | 17.9                     |       | 93.4                        |       | 137.3                           |       | (4.5                    | )          | 244.1            |       |
| Promotion,  marketing and administrative expenses                                         |       | 73.9                     |       | 92.0                        |       | 166.3                           |       | —                  |       | 332.2            |       |
| Impairments of  assets                                                                    |       | —                   |       | —                      |       | —                          |       | —                  |       | —           |       |
| Other operating  items, net                                                               |       | 8.5                      |       | (4.0                        | )          | 2.5                             |       | —                  |       | 7.0              |       |
| **Operating  (loss) profit**                                                              | ** ** | **(75.1**                | **)**      | **33.2**                    | ** ** | **33.7**                        | ** ** | **—**              | ** ** | **(8.2**         | **)**      |
|                                                                                      |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Interest expense                                                                          |       | 2.6                      |       | 19.4                        |       | 20.9                            |       | —                  |       | 42.9             |       |
| Other (income)  expense, net                                                              |       | (13.2                    | )          | 0.1                         |       | 11.4                            |       | —                  |       | (1.7             | )          |
| (Income) expense  from investment in subsidiaries                                         |       | (8.9                     | )          | (0.4                        | )          | —                          |       | 9.3                     |       | —           |       |
| **(Loss)  income before (benefit) expense from income taxes and discontinued operations** | ** ** | **(55.6**                | **)**      | **14.1**                    | ** ** | **1.4**                         | ** ** | **(9.3**                | **)**      | **(49.4**        | **)**      |
|                                                                                      |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Income tax  (benefit) expense                                                             |       | (2.0                     | )          | (11.1                       | )          | 2.9                             |       | —                  |       | (10.2            | )          |
|                                                                                      |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **(Loss)  income from continuing operations**                                             | ** ** | **(53.6**                | **)**      | **25.2**                    | ** ** | **(1.5**                        | **)**      | **(9.3**                | **)**      | **(39.2**        | **)**      |
|                                                                                      |       |                     |       |                        |       |                            |       |                    |       |             |       |
| (Loss) from  discontinued operations, net of tax benefits of $4.5                         |       | —                   |       | (13.1                       | )          | (1.3                            | )          | —                  |       | (14.4            | )          |
|                                                                                      |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Net  (loss) income**                                                                    | ** ** | **$**                    | **(53.6**  | **)**                       | **$**      | **12.1**                        | ** ** | **$**                   | **(2.8**   | **)**            | **$**      | **(9.3** | **)** | **$** | **(53.6** | **)** |

 

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**The Reader’s Digest Association,Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

**Consolidated condensed statement of operations forthe nine-months ended March 31, 2008:**

 
| ** **                                                                      | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **       | ** ** |
| Revenues                                                                        |       | $                        | 72.7       |                        | $          | 685.2                           |       | $                       | 1,060.5    |             | $          | (16.5 | ) | $ | 1,801.9 |   |
| Product,  distribution and editorial expenses                                   |       | 45.9                     |       | 319.8                       |       | 434.8                           |       | (16.5                   | )          | 784.0            |       |
| Promotion,  marketing and administrative expenses                               |       | 151.8                    |       | 334.5                       |       | 557.6                           |       | —                  |       | 1,043.9          |       |
| Intangible asset  impairments                                                   |       | —                   |       | —                      |       | —                          |       | —                  |       | —           |       |
| Other operating  items, net                                                     |       | 3.7                      |       | 8.2                         |       | 3.7                             |       | —                  |       | 15.6             |       |
| **Operating  (loss) profit**                                                    | ** ** | **(128.7**               | **)**      | **22.7**                    | ** ** | **64.4**                        | ** ** | **—**              | ** ** | **(41.6**        | **)**      |
|                                                                            |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Interest expense                                                                |       | 88.3                     |       | 19.4                        |       | 27.5                            |       | —                  |       | 135.2            |       |
| Other (income)  expense, net                                                    |       | (39.6                    | )          | 0.5                         |       | 32.5                            |       | —                  |       | (6.6             | )          |
| (Income) expense  from investment in subsidiaries                               |       | (14.5                    | )          | (0.8                        | )          | —                          |       | 15.3                    |       | —           |       |
| **(Loss)  income before benefit from income taxes and discontinued operations** | ** ** | **(162.9**               | **)**      | **3.6**                     | ** ** | **4.4**                         | ** ** | **(15.3**               | **)**      | **(170.2**       | **)**      |
|                                                                            |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Income tax  benefit                                                             |       | (3.6                     | )          | (15.0                       | )          | (0.1                            | )          | —                  |       | (18.7            | )          |
|                                                                            |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **(Loss)  income from continuing operations**                                   | ** ** | **(159.3**               | **)**      | **18.6**                    | ** ** | **4.5**                         | ** ** | **(15.3**               | **)**      | **(151.5**       | **)**      |
|                                                                            |       |                     |       |                        |       |                            |       |                    |       |             |       |
| (Loss) income  from discontinued operations, net of tax benefits of $5.1        |       | —                   |       | (8.9                        | )          | 1.1                             |       | —                  |       | (7.8             | )          |
|                                                                            |       |                     |       |                        |       |                            |       |                    |       |             |       |
| **Net  (loss) income**                                                          | ** ** | **$**                    | **(159.3** | **)**                       | **$**      | **9.7**                         | ** ** | **$**                   | **5.6**    | ** **       | **$**      | **(15.3** | **)** | **$** | **(159.3** | **)** |

 

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**The Reader’s Digest Association,Inc. and Subsidiaries**

**Notes to Consolidated FinancialStatements**

*(in millions, except share andper share data)*

*(unaudited)*

 

**Consolidated condensed statement of cash flows forthe nine-months ended March 31, 2008:**

 
| ** **                                                    | ** ** | **Issuer  Parent - RDA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Total  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------|------------|
|                                                          |       |                     |       |                        |       |                            |       |                    |       |             |       |
| Net change in  cash due to continuing operating activities    |       | $                        | (81.8      | )                           | $          | 23.0                            |       | $                       | 36.5       |             | $          | — |   | $ | (22.3 | ) |
| Net change in  cash due to discontinued operating activities  |       | —                   |       | (21.0                       | )          | 0.6                             |       | —                  |       | (20.4            | )          |
| Net change in  cash due to operating activities               |       | (81.8                    | )          | 2.0                         |       | 37.1                            |       | —                  |       | (42.7            | )          |
| Net change in  cash due to investing activities               |       | (3.4                     | )          | 0.4                         |       | 0.3                             |       | —                  |       | (2.7             | )          |
| Net change in  cash due to financing activities               |       | 75.1                     |       | —                      |       | (1.4                            | )          | —                  |       | 73.7             |       |
| Effect of  exchange rate changes on cash and cash equivalents |       | 11.6                     |       | —                      |       | (7.6                            | )          | —                  |       | 4.0              |       |
| Cash and cash  equivalents at beginning of the period         |       | 1.6                      |       | 5.2                         |       | 43.4                            |       | —                  |       | 50.2             |       |
| **Cash  and cash equivalents at end of the period**           | ** ** | **$**                    | **3.1**    | ** **                  | **$**      | **7.6**                         | ** ** | **$**                   | **71.8**   | ** **       | **$**      | **—** | ** ** | **$** | **82.5** | ** ** |

 

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**TheReader’s Digest Association, Inc. and Subsidiaries**

**Notes toConsolidated Financial Statements**

*(inmillions, except share and per share data)*

*(unaudited)*

 

**(16)         Subsequent Events**

 

InMay of 2009 we closed our Defined Benefit Plan in the United Kingdom to futureaccruals and contributions for future services. We expect to complete our valuation of the plan assets and obligationsin the fourth quarter of fiscal 2009, and will subsequently record anynecessary adjustments.

 

Managementannounced that the Company expects to exit during the fourth quarter of fiscal2009 from the following unprofitable or non-core business units:  World Almanac Education Library Services (“WAELS”),the Company’s library wholesaling business; Gareth Stevens, the Company’slibrary publishing business; the Company’s Direct Holdings business in Europe (“Time-LifeEurope”); the Company’s operations in Turkey; and the US edition of Seleccionesmagazine.  WAELS and Gareth Stevens arepart of our School & Educational Services business segment; Time-LifeEurope and Turkey are part of our International business segment; and the USSelecciones is part of our United States Segment.  Management has concluded that the WAELS,Time-Life Europe, and Turkey businesses will be shut down.  The liquidating and winding down of thesebusinesses have begun; however, there continues to be revenue and costgenerating activities within these entities. The Company is currently exploring divestiture opportunities for GarethStevens; however, there is doubt as to whether a sale is probable.  If the Company cannot reach agreement with abuyer to purchase the Gareth Stevens business on terms acceptable to theCompany, then the Gareth Stevens business will be shut down.

 

Effective April 2, 2009, our US qualified pensionplan was amended to provide additional benefits to eligible employees whoparticipate in the pension plan and whose employment is involuntarilyterminated by the Company between April 2, 2009 and December 31,2009.  Our severance plan wassimultaneously amended to exclude from its coverage employees receiving theseadditional benefits under the pension plan.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**Introduction**

 

Thefollowing discussion and analysis supplements the *Management’sDiscussion and Analysis* in our Annual Report on Form 10-K forthe year ended June 30, 2008 and presumes that the readers have read orhave access to that discussion and analysis. The following discussion and analysis includes historical and certainforward-looking information that should be read together with the accompanyingconsolidated financial statements, related footnotes, and the discussion belowof certain risks and uncertainties that could cause future operating results todiffer materially from historical results or from the expected resultsindicated by forward-looking statements. Actual results may differ materially from those suggested by ourforward-looking statements for various reasons, including those discussed inthe *Risk Factors* and *DisclosureRegarding Forward Looking Statements* sections of our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008. We do not have any intention orobligation to update forward-looking statements. Certain amounts andpercentages do not recalculate due to rounding. All references to dollars in this discussion and analysis are inmillions.

 

References in this *Management’sDiscussion and Analysis* section to “we,” “us” and “our” are to TheReader’s Digest Association, Inc. and its subsidiaries.  All references to 2009 and 2008, unlessotherwise indicated, are to fiscal 2009 and fiscal 2008, respectively.

 

**Basis of Presentation**

 

We report on a fiscal year that begins July 1and is for the period from July 1 through June 30.

 

During the first half of fiscal 2009, we soldour home party planning business Taste of Home Entertaining, Inc. (“TOHE”);our schools and youth fundraising business consisting of QSP, Inc.,Quality Service Programs, Inc., and their affiliated subsidiaries in theUnited States and Canada (“QSP”); and the principal operating assets of BooksAre Fun, Ltd. (“BAF”), our display-marketing business, in connection with ourexit of this business.  As a result,TOHE, QSP and BAF are classified as discontinued operations for all periodspresented in the consolidated financial statements.  Loss from discontinued operations, net of taxwas $2.3 and $71.6 for the three and nine-months ended March 31, 2009,respectively.  Loss from discontinuedoperations, net of taxes, was $14.4 and $7.8 for the three and nine-monthsended March 31, 2008, respectively. See Note 3, Discontinued Operations,for more information.

 

In accordance with SFAS No. 142, *Goodwill andOther Intangible Assets,*(“SFAS 142”), we are required to perform animpairment test on goodwill and indefinite-lived intangible assets annually orif certain circumstances indicate a possible impairment may exist.  Ourpolicy is to complete the required annual impairment test in accordance withSFAS 142 in our fourth fiscal quarter.  In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets,*(“SFAS 144”), other long-lived assets that areamortized are required to be tested for impairment if certain circumstancesindicate that a possible impairment may exist.

 

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

 

As a result of the initial step of our impairment analysis, several ofour reporting units indicated impairment and required us to proceed to thesecond step of our impairment test. After considering the impact of definite and indefinite lived assetimpairments, our interim impairment analysis of goodwill for our United StatesConsumer and European reporting units had fair values that exceeded thecarrying value.  If these units do notperform as expected and general market conditions continue to deteriorate, animpairment could result for a portion or all of the carrying value ofgoodwill.  The United States Consumer andEuropean reporting units had $529.4 and $449.4 of goodwill at March 31,2009.

 

We have notfinalized our interim impairment analysis due to the timing and complexity ofthe calculations required.  However, wehave recorded an estimated non-cash asset impairment charge in the three-monthsended March 31, 2009.  The estimatedimpairment charge is $527.1 and is included in the line item Impairment ofassets in the Company’s Consolidated Statements of Operations.

 

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The estimate goodwill and other long-lived assetimpairment was required because the revenue and operating results in fiscal2009 from the underlying businesses have softened from what was expected at thetime of our last impairment analysis combined with a significant decline in ourthird quarter long term projected operating results when compared to theprojected operating results from the prior quarter.  Other assumption changes since our lastvaluation which contributed to the impairment were the use of higher discountsrates, that correspond to companies with a similar financial position andcredit rating, and decreases in market multiples.  Refer to Note 4, Impairment of Assets, formore information.

 

**OurReportable Segments**

 

Our business is organized and reports across three business segments:Reader’s Digest United States, Reader’s Digest International and School &Educational Services.  See Note 14,Revenues and Operating (Loss) Profit  andAssets by Reportable Segment, within this report, for additional information.

 

**Three-Months Ended March 31,2009, Compared With Three-Months Ended March 31, 2008**

 

***Revenue***

 

Revenues during the third quarter of fiscal2009 decreased $96.0, or 16.7%, to $479.1, as compared to $575.1 during thecomparable period in fiscal 2008.  Inconnection with the purchase method of accounting prescribed in SFAS 141, thefair value of our unearned revenue was reduced to establish a new accountingbasis as of March 2, 2007 which reduced revenues by $4.2 and $16.9 duringthe third quarter of fiscal 2009 and 2008, respectively.  Excluding the unearned revenue adjustment and$63.5 of a negative impact from changes in foreign currency exchange rates,revenues declined across all of our segments by $45.2, or 7.6%, as we continuedto experience the impact of the tightening of the economy in the United Statesand internationally, where we were more adversely impacted.  This decrease in our segments was offsetslightly by a $2.8 reduction of inter-segment sales, and the relatedelimination, during the third quarter of fiscal 2009.

 

OurUnited States business segment revenues during the third quarter of fiscal 2009decreased $18.6, or 10.3%, to $162.2, as compared to $180.8 during thecomparable period in 2008.  Lowerrevenues were mostly driven by our RD Community Affinity as a result ofsoftening sales from our *Children’s Publishing*products,**and Reader’s Digest magazine economy-driven reductions inadvertising revenues, and a decrease in newsstand revenue, as well as a declinein subscription revenue due to fewer renewals. This Affinity also experienced a decrease in music single sales fromlower response rates on our mailings and lower *SelectEditions* membership renewals. Our Food and Entertaining Affinity contributed further to the revenuedecline with an economy-driven decrease in advertising revenue from *Everyday with Rachael Ray*, and poor response rates tocertain direct mail books.

 

OurInternational business segment revenues during the third quarter of fiscal 2009decreased $92.0, or 23.6%, to $298.4, as compared to $390.4 during thecomparable period in fiscal 2008. Excluding the negative effect of foreign currency translation, ourInternational business segment experienced a net decrease in revenues of $28.5,or 7.3%, during the third quarter of 2009. Our businesses across all markets were most adversely affected by theeconomy during the period due to low response rates on promoted products,reduction in the number of promotions and lower priced product offerings. Lowerresponse rates on a smaller active customer base continued to have a negativeimpact on revenue in the United Kingdom, France, Canada, Mexico andAustralia.  Several of our otherinternational markets were also impacted, to a lesser extent, by the samefactors.  In addition, Mexico was alsoadversely impacted by an increase in the reserve for amounts deemeduncollectible.  These decreases wereoffset in part by revenue improvements in several of our Central Europeanmarkets and as the result of the success of a new membership program in ourGerman Market.

 

OurSchool & Educational Services business segment revenues during thethird quarter of fiscal 2009 decreased $0.9, or 3.5%, to $24.5, as compared to$25.4 during the comparable period in fiscal 2008.  The decrease was driven mainly by thecombination of lower *Weekly Reader Magazine*circulation and the curtailment of several unprofitable business lines in priorperiods.  This was offset in part byincreased volumes experienced in our CompassLearning business.  Overall, this business segment continues toexperience challenging educational market conditions as schools reevaluatetheir purchases in the current economic environment.

 

***Operating Profit (Loss)***

 

Theoperating loss during the third quarter of fiscal 2009 decreased $527.7 to$535.9 as compared to $8.2 during the comparable period in fiscal 2008.  The reduction of unearned revenue, asdescribed in the *Revenues* section above, reduced

 

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operatingloss during the third quarters of fiscal 2009 and 2008 by $4.2 and $16.9,respectively.  Our operating results werealso adversely impacted by a non-cash asset impairment charge of $527.1 duringthe third quarter of fiscal 2009. Excluding the unearned revenue adjustment,the impairment charge, and $0.2 of a negative impact from changes in foreigncurrency exchange rates, the operating results during the third quarter offiscal 2009 decreased by $13.1 to an operating loss of $4.4 from an operatingprofit of $8.7 during the comparable period in fiscal 2008.  The decrease in operating profit was largelyattributable to economy-driven declines in sales volumes across all of ouroperating segments which were mitigated in part by the effect of multiple costsaving measures initiated by management.

 

OurUnited States business segment operating profit during the third quarter offiscal 2009 decreased $6.2, or 44.6%, to $7.7, as compared to $13.9 during thethird quarter of fiscal 2008.  Decreasesin operating profit were largely driven by the declines in revenue from our RDCommunity and Food and Entertaining Affinities offset in part by reduced directmail and billing costs, lower paper, print, and delivery costs resulting fromdecreased sales volumes coupled with the effect of cost savinginitiatives.  Operating profits were alsonegatively impacted from our Health and Wellness Affinity as a result of ourinvestment in *Purpose Driven Connection* duringthe period which was offset in part by improved performance across certain ofour other products within this affinity.

 

Theoperating profit within our International business segment during the thirdquarter of fiscal 2009 decreased $19.6, or 68.1%, to $9.2, as compared to $28.8during the third quarter of fiscal 2008. Excluding the negative effect of foreign currency exchange rates****our International business segment experienced a netdecrease of $19.4, or 67.4%.  Thisdecrease was driven by revenue declines described above, increased postagecosts in several markets, most notably Russia, and higher costs for foreignpurchases in the United Kingdom and our Eastern European markets as a result ofthe weakening of their currencies.   Thedecreases were offset in part by lower quantity of mailings during the periodand the effect of cost savings initiatives.

 

OurSchool & Educational Services business segment operating profit duringthe third quarter of fiscal 2009 decreased $1.4, to an operating loss of $0.8,as compared to an operating profit of $0.6 during the comparable period infiscal 2008.  Operating profit decreaseswere largely the result of the reduction of revenue described above.

 

Corporateunallocated costs decreased during the third fiscal quarter by $16.5, or 59.8%,to $11.1, as compared to $27.6 during the third quarter of fiscal 2008.  This decrease in cost  was the result of lower estimated costsaccrued during the third quarter of fiscal 2009, for our management incentiveplans, which are measured against our expected operating results; and changesto the Company’s retirement plans during fiscal 2008 resulting in a decrease inpension and postretirement costs.

 

Otheroperating items increased in the third fiscal quarter by $2.6, or 37.1%, to$9.6, as compared to $7.0 during the third quarter of fiscal 2008.  The increase was driven by restructuring andseverance costs resulting from the continued evaluation our businessoperations. During the third quarter of fiscal 2009, we implemented ourrecession plan and, as a result, recognized severance costs related to thatplan of $6.8.

 

***Interest Expense***

 

Interest Expense decreased $6.4 to $36.5 duringthe third quarter of fiscal 2009, as compared with $42.9 during the comparableperiod in fiscal 2008.  This decline isprincipally due to lower interest rates during the third quarter of fiscal2009.

 

***Income Taxes***

 

Duringthe three-month periods ended March 31, 2009 and 2008, we recorded anincome tax benefit of $112.1 and $10.2, respectively.  The benefit recorded during the three-monthperiod ended March 31, 2009 primarily relates to reductions of certaindeferred tax liabilities of $104.6 due to the impairment of goodwill,intangible and tangible assets, favorable income tax rate changes and thefiling of our federal income tax return for the period ended June 30,2008.  Additionally, benefits recordedduring both of these periods relate to the decrease of the tax liability on ourforeign earnings and the reduction of deferred tax liabilities for which nocurrent expense is required due to the existence of valuation allowances on netoperating loss carryforwards.

 

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**Nine-Months Ended March 31,2009, Compared With Nine-Months Ended March 31, 2008**

 

***Revenue***

 

Revenues during the first nine months offiscal 2009 decreased $144.6, or 8.0%, to $1,657.3, as compared to $1,801.9during the first nine months of fiscal 2008. In connection with the purchase method of accounting prescribed in SFAS141, the fair value of our unearned revenue was reduced to establish a newaccounting basis as of March 2, 2007 which decreased revenues by $18.4 and$100.7 during the first nine months of fiscal 2009 and fiscal 2008,respectively.  Excluding the unearnedrevenue adjustment and $101.2 of a negative impact from changes in foreigncurrency exchange rates, revenues declined across all of our segments by$125.7, or 6.6%, and was largely the result of a global tightening of economicconditions that continues to have a negative impact on advertising revenues andconsumer spending across many of our magazine, book, music and video productcategories.  This decrease in our segmentswas offset by a $9.2 reduction of inter-segment sales, and the relatedelimination, during the first nine months of fiscal 2009.

 

OurUnited States business segment revenues during the first nine months of fiscal2009 decreased $51.6, or 8.5%, to $557.6, as compared to $609.2 during thefirst nine months of fiscal 2008.  Thedecrease in revenue was principally driven by our RD Community Affinity as aresult of our Reader’s Digest Magazine’s planned reduction in rate base duringfiscal 2008, economy-driven reduction in advertising revenues, softness insubscription and newsstand sales, lower *Children’s Publishing*book sales, as well as the absence of *Young Families*revenue due to our decision to exit the product line during fiscal 2008.  Our Food & Entertaining Affinityadded to the decline with a lower volume of book sales along with lowersubscription revenue due to the curtailment or reduction of promotion effortson certain magazines adversely affected by current economic conditions.  This was offset in part by an increase inadvertising revenue generated by *Allrecipes.com*and favorable performance on newsstand sales.** In addition, revenue decreases in advertisingand our *Worldwide Tours* business within our Home &Garden Affinity were fully offset by revenue increases from the launch of *Mind Stretchers, Best You,*and *PurposeDriven Connection* within our Health & Wellness Affinity.

 

OurInternational business segment revenues during the first nine months of fiscal2009 decreased $167.3, or 13.7%, to $1,055.0, as compared to $1,222.3 duringthe comparable period in fiscal 2008. Excluding the negative effect of foreign currency translation, ourInternational business segment experienced a net decrease in revenues of $66.1,or 5.4%, during the first nine months of fiscal 2009 when compared to thecomparable period in fiscal 2008.  Ourinternational business segment has continued to be adversely impacted by lowermail quantities, a shrinking active customer base, and lower response rates onour mailings in our single sales businesses along with lower advertising andcirculation revenues in our magazine business. Revenues in the United Kingdom, France, Australia, Canada, Mexico andall markets in our Time Life businesses continue to be the most severely affectedby the slowing economy.  Several otherEuropean markets also reported lower revenues, however, at a lower rate ofdecline.  The decrease was offset in partby price increases achieved in Russia, a new membership program in Germany,higher magazine circulation in Brazil and higher response rates on single salesin our Asian markets.

 

OurSchool & Educational Services business segment revenues during thefirst nine months of fiscal 2009 decreased $17.2, or 19.5%, to $70.9, ascompared to $88.1 during the comparable period in fiscal 2008.   The decrease in revenues was principally dueto Weekly Reader Publishing Group and CompassLearning experiencing challengingeducational market conditions in the current economic environment along withthe curtailment or sale of certain unprofitable business lines at Weekly ReaderPublishing Group during fiscal 2008.

 

***Operating Profit (Loss)***

 

The operating loss during the first ninemonths of fiscal 2009 decreased $519.0, to $560.6, as compared to $41.6 duringthe comparable period in fiscal 2008. The reduction of unearned revenue, asdescribed in the *Revenues* section above, reducedoperating profits during the first nine months of fiscal 2009 and fiscal 2008by $18.4 and $100.7, respectively.  Ouroperating results were also adversely impacted by a non-cash asset impairmentcharge of $527.1 during the third quarter of fiscal 2009**. **Excluding the unearned revenueadjustment, the impairment charge, and $7.3 of a negative impact from changesin foreign currency exchange rates, the operating results during the first ninemonths of fiscal 2009 decreased by $66.9, or 113.2%, to an operating loss of$7.8 from an operating profit of $59.1 during the comparable period in fiscal2008.  The decrease in operating profitwas mainly impacted by economy related declines in our sales volumes combinedwith the negative impact of workforce reduction actions, and mitigated in partby cost savings measures initiated by management.

 

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OurUnited States business segment operating profit decreased during the first ninemonths of fiscal 2009 by $18.8, or 36.4%, to $32.8 as compared to $51.6 for thecomparable period in fiscal 2008.  Thisdecrease was largely due to the decline in revenues in our RD Community andFood and Entertaining Affinities offset in part by reduced direct mail andbilling costs as well and lower paper, print and delivery costs driven by lowersales volumes.  Our Health and WellnessAffinity contributed further to the deterioration of our operating margins dueto investment costs incurred in connection with new magazine launches duringfiscal 2009.

 

Theoperating profit within our International business segment during the firstnine months of fiscal 2009 decreased by $68.4, or 75.5%, to $22.2 as comparedto $90.6 during the comparable period in fiscal 2008.  Excluding the negative effect of foreign currencyexchange rates, our International business segment experienced a net decreasein operating profit of $61.1, or 67.4%, during the first nine months of fiscal2009 when compared to the comparable period in fiscal 2008.  Operating profit throughout our internationalmarkets has declined largely as a result of revenue shortfalls.  The impact of lost revenues in the UnitedKingdom, France and in all markets of our Time Life business was mitigated, inpart, due to decreases in promotional costs and overhead cost reductioninitiatives implemented during the period. Our other international markets reported increased postage costs, mostnotably in Russia, increased promotional costs and an unfavorable product mixresulting in a further deterioration of margins.  These costs more than offset the impact ofcost savings initiatives and revenue increases in Russia, Germany and our Asianmarkets.

 

OurSchool & Educational Services business segment operating profit duringthe first nine months of fiscal 2009 decreased $12.8 to an operating loss of$8.1, as compared to an operating profit of $4.7 during the comparable periodin fiscal 2008.  The remaining decreasewas principally attributable to revenue declines throughout the segment whichwere partially offset by reductions in headcount and other cost savingsmeasures initiated during the period.

 

Corporateunallocated costs decreased during the first nine months of fiscal 2009 by$41.6, or 57.6%, to $30.6, as compared to $72.2 during the first nine months offiscal 2008.  This decrease in costsresulted from lower estimated costs accrued, primarily during the first ninemonths of fiscal 2009, for our management incentive plans, which are measuredagainst our expected operating results; changes to the Company’s RetirementPlans during fiscal 2008, resulting in a decrease in pension and postretirementcosts; and lower stock compensation expense during the first nine months offiscal 2009.

 

Theoperating loss was fueled further by an increase of Other operating itemsduring the first nine months of fiscal 2009 by $15.8, or 101.3%, to $31.4, ascompared to $15.6 during the first nine months of fiscal 2008.  The increase was driven by restructuring andseverance costs resulting from the continued evaluation of our businessoperations.  During fiscal 2009, we formulatedand announced a plan to outsource our internal IT function and implemented arecession plan resulting in $16.4 and $6.8 respectively, of restructuring andseverance costs.

 

***Interest Expense***

 

Interest Expense decreased $18.0 to $117.2during the first half of fiscal 2009, compared with $135.2 during thecomparable period in fiscal 2008.  Thisdecline is principally due to lower interest rates during the first nine monthsof fiscal 2009.

 

***Income Taxes***

 

Duringthe nine-month periods ended March 31,2009 and 2008, we recorded an income tax benefit of $98.3 and $18.7,respectively. The benefit recorded for the nine-month period ended March 31,2009, primarily relates to reductions of certain deferred tax liabilities of$104.6 due to the impairment of goodwill, intangible and tangible assets,partially offset by the tax liabilities on foreign earnings and statetaxes.  The benefit recorded for thenine-month period ended March 31, 2008 relates to the reduction ofdeferred tax liabilities for which no current expense is required due to theexistence of valuation allowances on net operating loss carryforwards.

 

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##### **Liquidity and Capital Resources**

#####  

*Overview*

 

These financial statementshave been prepared in accordance with generally accepted accounting principlesin the United States of America applicable to a going concern, which assumesthat we will be able to meet our obligations and continue our operations over areasonable length of time.  Realizationvalues may be substantially different from carrying values as shown and thesefinancial statements do not give effect to adjustments that would be necessaryto the carrying values and classification of assets and liabilities should webe unable to continue as a going concern.

 

Cash flows generated fromoperating activities are our primary source of liquidity.  Our revolving credit facility and local linesof credit internationally provide additional liquidity.  Cash and cash equivalents increased by $23.0or 29.0% to $102.4 at March 31, 2009 from $79.4 at June 30,2008.  We require cash principally forday-to-day operations, to service our debt, and to make principal payments onour debt.  In recent periods, we havefinanced our operations with cash from operations, proceeds from the sale ofnon-core businesses and additional borrowings on our credit lines.

 

During the third quarter offiscal 2009, some of our lending institutions closed five of our teninternational lines of credit, and the outstanding balances were paid infull.  Furthermore, subsequent to March 31,2009 a lending institution lowered the amount available to borrow on anotherinternational credit line.

 

Given the current globalrecessionary environment, we may not generate sufficient earnings or havesufficient liquidity to operate as a going concern.  The extreme volatility in the financial,foreign exchange and credit markets globally has compounded the situation,further impacting customer orders as well as normal seasonality trends.  These factors are impacting our ability toaccurately forecast our performance results and cash position.  As highlighted elsewhere in this Management’sDiscussion and Analysis, we have a number of initiatives underway and plannedwith a view of mitigating the effects of the current economic environment;however; there can be no assurances that our initiatives will be adequate.

 

*Cash Flows from Operating Activities*

 

Cash flows used by operatingactivities during the first nine months of fiscal 2009 were $175.1 compared tocash flows used by operating activities of $42.7 for the comparable period infiscal 2008. This included $38.2 and $20.4 of cash used by discontinuedoperating activities during the first nine months of fiscal 2009 and fiscal2008, respectively. Cash used by continuing operating activities during thefirst nine months of fiscal 2009 was $136.9 compared to cash flows used bycontinuing operating activities of $22.3 for the comparable period in fiscal2008.  This increase in cash used of$132.4 was largely driven by a decline in the amount of cash provided by aone-time sign-on bonus from one of our vendors in the prior period,****other working capital movements and an increase in our netloss primarily as a result of decreased revenues and restructuring costs.

 

*Cash Flows from Investing Activities*

 

Cash flows from investingactivities for the first nine months of fiscal 2009 were primarily the resultof proceeds from the sale of QSP of $108.1, proceeds from the surrender of ninelife insurance policies of $12.5, and proceeds from a Note Receivable of $1.3,which was offset by $10.1 of normal capital expenditures.   Cash flows from investing activities for thefirst nine months of fiscal 2008 consisted of proceeds from sales of property,plant, and equipment of $17.3, which was offset by the purchase of intangibleassets of $1.1 and normal capital expenditures of $18.9.

 

We routinely evaluate ourbusiness as part of our normal business strategy and continually considerbusiness acquisitions and divestitures. In connection with this evaluation during the third fiscal quarter of2009, management determined and announced that the Company would exit fromcertain business units.  See Note 16,Subsequent Events, for additional information.

 

*Cash Flows from Financing Activities*

 

Net cash provided from financing activities for the first nine months offiscal 2009 and 2008 was $83.5 and $73.7, respectively, and net increases inlong term borrowings of $90.2 and $91.1 during the first nine months of fiscal2009 and fiscal 2008; and decreases in short term borrowings of $6.5 during thefirst nine months of fiscal 2009.  There wereno short term borrowings for the comparable period in fiscal 2008.

 

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*Debt*

 

As fully described in Note12, Debt, to the consolidated financial statements included in our AnnualReport on form 10-K for the fiscal year ended June 30, 2008, ourborrowings include proceeds under our six-year senior secured $300 revolvingcredit facility and a seven-year $1,310 term loan (collectively, the “2007Credit Agreement”) and $600 in 9% Senior Subordinated Notes due 2017.  In addition, we have international lines ofcredit and overdraft facilities available to our subsidiaries. A summary ofactivity for these debt instruments are as follows:

 

·                  *Senior Secured $300 RevolvingCredit Facility:*During thefirst nine months of fiscal 2009 and fiscal 2008, we had additional borrowingsof $479.2 and $242.2, respectively, and made payments of $398.9 and $161.0,respectively.

·                  *$1,310 Term Loan:*We are required to repay the term loan inquarterly installments in aggregate annual amounts equal to 1.0% of the initialaggregate principal amount with the full amount due on March 2, 2013.  We repaid $9.9 of principal during both thefirst nine months of fiscal 2009 and fiscal 2008.

·                  *$600 9% Senior SubordinatedNotes:*The notes mature on February 15,2017 however are redeemable at our option throughout the term.  Please refer to Note 12, Debt, to theconsolidated financial statements included in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008 for the detailed terms of theredemption.  No amounts were redeemedduring the first nine months of fiscal 2009 and fiscal 2008.

·                  *International Lines of Credit andOverdraft Facilities: *As of March 31, 2009 and June 30,2008, international lines of credit and overdraft facilities totaled $13.3 and$55.6, respectively of which $2.4 and $12.3 were outstanding.  During the first nine months of fiscal 2009,we decreased our amounts borrowed by $6.5, net of the effect of foreignexchange rate changes.  For thecomparable period in fiscal 2008, there were no short term borrowings.  During the third quarter of fiscal 2009, someof our lending institutions closed five of our ten international lines ofcredit, and the outstanding balances were paid in full.  Furthermore, subsequent to March 31,2009 a lending institution lowered the amount available to borrow on anotherinternational credit line.

 

The 2007 Credit Agreement contains a number ofcovenants that, among other things, restrict, subject to certain exceptions,our ability to: (i) incur additional indebtedness or issue shares bysubsidiaries, (ii) create liens on assets, (iii) engage in mergers orconsolidations, (iv) sell assets, (v) pay dividends anddistributions, (vi) make investments, loans or advances, (vii) repaysubordinated indebtedness (including the Senior Subordinated Notes describedabove), (viii) make certain acquisitions, (ix) engage in certaintransactions with affiliates, (x) enter into certain burdensomeagreements, (xi) amend material agreements governing our subordinatedindebtedness (including the Senior Subordinated Notes), (xii) change ourlines of business and (xiii) make capital expenditures.  In addition, the 2007 Credit Agreementincludes a financial covenant requiring us to comply with a maximum leverageratio, as defined.  The 2007 CreditAgreement also contains certain defined customary affirmative covenants andevents of default.  At March 31,2009 we are in compliance with all of our financial covenants.

 

We are required to prepayoutstanding amounts of the 2007 Credit Agreement upon the occurrence of certaindefined events, including net cash proceeds of any incurrence of new debt (asdefined), certain asset sales or dispositions (as defined) and 50% of ourannual excess cash flow (as defined) and is due in full on March 2,2013.  If it is necessary to arrangereplacement financing for the repayment of the Term Loan, that replacementfinancing would be at prevailing interest rates and may or may not beavailable, based on present financial market conditions. As allowed under our2007 Credit Agreement, we timely reinvested the proceeds from the sale of QSP andBAF in assets useful for our business in accordance with the terms of our debtfacilities.

 

On February 19,2009, Standard &Poor’s Ratings Services (“S&P”) lowered its credit and issue-level ratingson the Company.  The corporate creditrating was lowered to CCC from B-, the issue-level rating of the Company’s  senior secured debt was lowered to CCC fromB-, and the issue level rating on the Company’s subordinated debt was loweredto CC from CCC.  S&P stated that the rating outlook isnegative.  On February 20, 2009, Moody’s InvestorServices (“Moody’s”) downgraded our corporate family rating and probability ofdefault rating to Caa3 from B3, the rating on our senior secured creditfacility to Caa2 from B2 and the rating on our senior subordinated notes to Cafrom Caa2.  Moody’s also stated that therating outlook is negative.

 

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*Sufficiency of Capital Resources*

 

The current global economicconditions have had a negative impact on the cash flows of our businesses, andcould continue to have a negative impact on our liquidity and capital resourcesover the near term.  There can be noassurances that our businesses will generate sufficient cash flows fromoperations to fund our day-to-day operations and, more importantly, our debtservice obligations.  In addition, therecan be no assurances that future borrowings under our 2007 Credit Agreementwill be available in an amount sufficient to satisfy debt obligations or tofund other liquidity needs.  Ourfinancial and operating performance is subject to prevailing economic andindustry conditions and to financial, business and other factors, some of whichare beyond our control.

 

If our cash flows and capitalresources are insufficient to fund debt service obligations, we will likely notperform as previously anticipated or as described in our Annual Report on Form 10-Kfor the year ended June 30, 2008. It also may be necessary to take steps to reduce our costs, seekadditional capital or restructure or refinance our indebtedness.  These actions could have a material adverseeffect on our business, financial condition and results of operations.  In addition, we cannot assure the ability totake any of these actions, or that these actions would be successful and permitus to meet scheduled debt service obligations or that these actions would bepermitted under the terms of our existing or future debt agreements, includingthe indenture governing our Senior Subordinated Notes and our 2007 CreditAgreement.  For example, we may need to refinance all or a portion ofour indebtedness on or before maturity. There can be no assurance that we willbe able to refinance any of our indebtedness on commercially reasonable termsor at all.  In the absence of improved operating results and accessto capital resources, we could face substantial liquidity problems and might berequired to dispose of material assets or operations to meet our debt serviceand other obligations.  These actionscould have a material adverse effect on our business, financial condition andresults of operations.

 

Ourability to access capital markets is subject to market conditions and certainlimitations including our credit ratings and covenant restrictions in ourfinancing documents.  Current marketconditions have further restricted our ability to access capital.  As stated above, on February 19, 2009, Standard &Poor’s Ratings Services (“S&P”) lowered its credit and issue-level ratingson the Company.  The corporate creditrating was lowered to CCC from B-, the issue-level rating of the Company’s  senior secured debt was lowered to CCC fromB-, and the issue level rating on the Company’s subordinated debt was loweredto CC from CCC.  S&P stated that the rating outlook isnegative.  On February 20, 2009, Moody’s InvestorServices (“Moody’s”) downgraded our corporate family rating and probability ofdefault rating to Caa3 from B3, the rating on our senior secured creditfacility to Caa2 from B2 and the rating on our senior subordinated notes to Cafrom Caa2.  Moody’s also stated that therating outlook is negative.   Afurther downgrade by either S&P or Moody’s could further restrict ourability to access capital.  Further, adowngrade may affect the terms under which some suppliers would be willing tocontinue to do business with us.

 

If we cannot maintaincompliance with the financial covenants in our financing agreements or makescheduled payments or prepayments on our debt, we will be in default underthose agreements and, as a result, among other things, our debt holders coulddeclare all outstanding principal and interest to be due and payable and wecould be forced into bankruptcy or liquidation or be required to substantiallyrestructure or alter business operations or debt obligations. See Part I,Item 1A, *Risk Factors* in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008 and Part II, Item 1A, *Risk Factors* in this Form 10-Q, for further discussionof the risks associated with our ability to service all of our existingindebtedness and ability to maintain compliance with financial covenants in ourcredit facilities.

 

In light of the currentuncertain environment, in order to bolster our liquidity and competitiveness,we have a number of initiatives planned and underway.  On January 28, 2009, we announced theadoption of a global “Recession Plan” to strengthen our financial performancein the current economy, including a planned reduction of approximately 8percent of our current global workforce and other additional cost reductionmeasures across the organization including unpaid time off in both Fiscal 2009and 2010 where permitted by laws and agreements, and the suspension of companymatching contributions to the U.S. 401(k) retirement plan.  The adequacy and ultimate success of our costreduction initiatives is uncertain and cannot be assured. We have also hiredseveral experts to assist us in evaluating different options available toprovide additional liquidity and increase the stability of the Company’sfinancial position.  We will continue tobe proactive with respect to these matters and, if deemed advisable, willconsider such other measures as circumstances warrant.

 

**Recent Accounting Pronouncements**

 

See Note 1, Basis of Presentation in ourNotes to Consolidated Financial Statements contained in this Quarterly Reportfor information regarding recent accounting standards affecting us.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

**(*includesforward-looking information*)**

 

The functional currency for our foreignoperations is the local currency.  In thenormal course of business, significantly all of the transactions of our foreignoperations occur in local currencies; however, certain transactions areconducted in currencies that differ from the local currency.  Our earnings are sensitive to the impact ofchanges in foreign currency exchange rates on certain identifiabletransactions.  We seek to manage theseexposures through operational means, to the extent possible, by matchingfunctional currency revenues and costs.

 

Interest expense related to our 2007 CreditAgreement is sensitive to changes in the general level of U.S. interestrates.  Additionally, the 2007 CreditAgreement includes within the above mentioned facilities a US$100.0 term loantranche outstanding that was made in euros to one of our German subsidiaries.Borrowings under the term loans bear interest at a rate equal to an applicablemargin plus, at our option, either (a) a base rate (“Base Rate”)determined by reference to the higher of (1) the prime rate and (2) thefederal funds rate plus 0.50% or (b) a Eurocurrency rate (“EurocurrencyRate”) determined by reference to the rate for Eurocurrency deposits for aperiod of one, two, three or six-months or, subject to availability to thelenders, nine or twelve months, as selected by us.  For Base Rate loans and Eurocurrency Rateloans, the applicable margin is 1.00% and 2.00%, respectively.

 

Based on our average debt outstanding under this agreement over the pastthree months, a 1% change in theinterest rate charged on these borrowings would have affected interest expense duringthe three and nine-months ended March 31, 2009 by $2.0 and $5.7, respectively.

 

We entered into interest rate swap agreementswith a notional value totaling $750.0, involving the exchange of floating- forfixed rate interest payments, to reduce interest rate volatility and to complywith the interest rate provisions of our 2007 Credit Agreement.  In the event that the terms of our debtchange, a portion of our cash flow hedge may become ineffective and may requirethe gain or loss associated with the hedging instrument to be recognized inearnings in accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities. *Additional information isavailable in Note 9, Derivative Instruments, in our Notes to ConsolidatedFinancial Statements.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures that aredesigned to ensure that information is timely recorded, processed, summarizedand reported, and that such information is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosures.

 

**InherentLimitations on Effectiveness of Controls**

 

Our disclosure controls and procedures and our internalcontrols over financial reporting may not prevent or detect all errors and allfraud. A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. The design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be consideredrelative to their costs. Further, because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatmisstatements due to error or fraud will not occur or that all control issuesand instances of fraud, if any, have been detected. These inherent limitationsinclude the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Controls can also becircumvented by the individual acts of some persons or by collusion of two ormore people. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Projections of any evaluation of controlseffectiveness to future periods are subject to risks. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures.

 

**Evaluation of Effectiveness of Controls**

 

Our management, including ourChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, as of the end of the periodcovered by this report.  

 

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Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

 

**Changes in Internal Control Over FinancialReporting**

 

In the ordinary course of business, we routinelyenhance our information systems by either upgrading our current systems orimplementing new systems. No change in our internal control over financialreporting occurred during the fiscal quarter ended March 31, 2009 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART IIOTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Weare defendants in various lawsuits and claims arising in the regular course ofbusiness.  Based on the opinions ofmanagement and counsel for these matters, we believe that recoveries, if any,by plaintiffs and claimants would not materially affect our financial positionor results of operations.

 

**ITEM1A.  RISK FACTORS**

 

There have been no material changes to our *Risk Factors* as previously disclosed in our Annual Report onForm 10-K for the year ended June 30, 2008, except as set forthbelow.  The following are additional ormodified risks affecting the company:

 

**The sustained and expandingfinancial crisis and economic downturn could continue to have a negative impacton our liquidity, results of operations and financial condition, as well as ourability to accurately forecast our results, and it may cause a number of therisks that we currently face to increase in likelihood, magnitude and duration.**

 

We are experiencing pressure on our businessand deterioration of our cash and liquidity as customers across all ourbusinesses respond to increasingly deteriorating macroeconomic and industryconditions and uncertainty by delaying and reducing their expenditures.  The extreme volatility in the financial,foreign exchange, equity and credit markets globally has compounded thesituation.  The current global economicconditions have had a negative impact on the cash flows of our businesses, andcould continue to have a negative impact on our liquidity and capital resourcesover the near term.  With this sustainedand expanding economic downturn, we expect that we will continue to experiencesignificant pressure on a number of fronts. The impact of these events on us going forward will depend on a numberof factors, including the duration and severity of these events, whether theU.S. and global economies enter into a prolonged recession, and whether therecovery period is brief or prolonged. Our financial and operating performance is subject to prevailingeconomic and industry conditions and to financial, business and other factors,some of which are beyond our control.

 

There can be no assurances that our businesseswill generate sufficient cash flows from operations to fund our day-to-dayoperations and, more importantly, our debt service obligations.  In addition, there can be no assurances thatfuture borrowings under our senior secured credit facilities will be availablein an amount sufficient to satisfy our debt obligations or to fund otherliquidity needs.

 

If our cash flows and capital resources areinsufficient to fund debt service obligations, we will likely not perform aspreviously anticipated.  It also may benecessary to take steps to reduce our costs, to seek additional capital or torestructure or refinance our indebtedness. These actions could have a material adverse effect on our business,financial condition and results of operations. In addition, we cannot assure the ability to take any of these actions,that these actions would be successful and permit us to have adequateliquidity, to meet scheduled debt service obligations or that these actionswould be permitted under the terms of our existing or future debt agreements,including the indenture governing our senior subordinated notes and our seniorsecured credit facilities.  In the absence of improved operating resultsand access to capital resources, we could face substantial liquidity problemsand might be required to dispose of material assets or operations to meet ourdebt service and other obligations. These actions could have a material adverse effect on our business,financial condition and results of operations.

 

Additionally, as a result of current economicconditions, we may face new risks as yet unidentified, and a number of risksthat we ordinarily face may increase in likelihood, magnitude andduration.  These risks include but arenot limited to deferrals or reductions of customer orders, potentialdeterioration of our customers’ ability to pay, losses or impairment charges,reduced revenue, further deterioration in our cash balances, and liquidity dueto foreign exchange impacts, and an inability to access our capitalmarkets.  The financial crisis andeconomic downturn are also adversely impacting our ability to accuratelyforecast our performance, results or cash position.

 

**Concerns about the economy and financial viability maycause a decrease in the ability orwillingness of our vendors to supply products and services to us on favorableterms, which may have a negative impact on our business.**

 

We have developed, and rely on, relationships with vendors who provideus with products and/or services.  Manyfactors outside our control may harm these relationships and the ability or willingnessof these vendors to sell these products or to provide these services onacceptable terms.  A vendor may seek to modify the terms of therelationship that it has with us, due to general economic concerns or due toconcerns relating to the vendor or to us, at any time.

 

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Our results of operations and cash flows havebeen negatively impacted in the current fiscal year by the tightening of theglobal economy.  Should these negativetrends continue, certain vendors may raise concerns about entering into newagreements with us without some assurance that we will operate profitably.  Furthermore, certain vendors may refuse tocontinue to do business with us unless we commit to certain guarantees,including the posting of collateral; make advance payments for products orservices; or change our payment terms. This concern is exacerbated in the current economic environment.  Disruptions in goods supplied or services providedfrom and by our vendors or changes in the terms of our relationships, includingthose that could arise because of concern about our profitability,viability, or ourcompliance with the covenants contained in our credit facilities, could have amaterial adverse effect on our business, financial condition, results ofoperations and cash flows.

 

Financial difficulties that some of our vendors may face, including as a result of one or more vendorbankruptcies due to poor economic conditions, may cause them to fail to provideus with such products and/or services or may increase the cost of the products andservices that they provide us.  Wemay be unable to procure replacement products and/or services from othervendors in a timely and efficient manner and on acceptable terms, or at all.

 

In addition, the arrangements that we have with corporate partners,such as national wholesalers, may be subject to changes in market conditions,vendor marketing strategies, and changes in the profitability or sell-throughof the related merchandise.  Any materialchange in these relationships, such as increased pricing, could have a materialadverse effect on our business, financial condition, results of operations, liquidityand cash flow.

 

**If our goodwill or amortizable intangibleassets become impaired we may be required to record a significant non-cashcharge which could have a material adverse effect on our reported net earningsor loss.**

 

As required by GAAP, we review our goodwill and amortizable intangibleassets for impairment in the fourth quarter of each fiscal year or when eventsor changes in circumstances indicate the carrying value may not berecoverable.  Factors that may beconsidered a change in circumstances indicating that the carrying value of ourgoodwill or amortizable intangible assets may not be recoverable include adecline in future cash flows and slower growth rates in our industry, includingthose resulting from a reduction in consumer spending and demand foradvertising stemming from the deterioration of the global economy.

 

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

 

As a result of the initial step of our impairment analysis, several ofour reporting units indicated impairment and required us to proceed to thesecond step of our impairment test. After considering the impact of definite and indefinite lived assetimpairments, our interim impairment analysis of goodwill for our United StatesConsumer and European reporting units had fair values that exceeded thecarrying value.  If these units do notperform as expected and general market conditions continue to deteriorate, animpairment could result for a portion or all of the carrying value of goodwill.  The United States Consumer and Europeanreporting units had $529.4 and $449.4 of goodwill at March 31, 2009.

 

We have not finalized our interim impairmentanalysis due to the timing and complexity of the calculations required.However, we have recorded an estimated non-cash asset impairment charge in thethree-months ended March 31, 2009. The estimated impairment charge is $527.1and is included in the line item Impairment of assets in the Company’sConsolidated Statements of Operations.

 

The estimated goodwill and other long-lived asset impairment was requiredbecause the revenue and operating results in fiscal 2009 from the underlyingbusinesses have softened from what was expected at the time of our lastimpairment analysis combined with a significant decline our third quarter longterm projected operating results when compared to the projected operatingresults from the prior quarter.  Otherassumption changes since our last valuation which contributed to the impairmentwere the use of higher discounts rates, that correspond to companies with asimilar financial position and credit rating, and economy driven decreases inmarket multiples.

 

We will test goodwill and to the extentnecessary, intangible assets in the fourth quarter of fiscal 2009.  To the extent there is continueddeterioration of the economy and our business, we may be required to record anadditional 

 

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non-cash change to our results if our goodwill and intangible assetsbecome further impaired.  Any such chargecould have a material adverse effect on our reported net earnings or loss.

 

**In addition, the following *Risk Factors* contained in our Annual Report have beenamended and restated as follows:**

 

**Our School & Educational Services segment hasnot performed well in recent years, and there is no assurance that ourturnaround strategy will be successful.**

 

The revenues and operating profit generated byour School & Educational Services segment for the last few years havebeen declining.  This decline has beenprincipally driven by Books Are Fun and QSP. The declining results were associated with the competitive pressures inthe marketplace, the costs and issues associated with recruiting and retaining salesforce members, merchandising efforts, as well as the general economicclimate.  A continued decline in thissegment may adversely affect our results of operations and financial condition.  On August 22, 2008, we sold QSP, QualityService Programs, Inc., and their affiliated subsidiaries in the UnitedStates and Canada to subsidiaries of Time Inc. for a purchase price of$110.0.  On December 19, 2008, we sold the principle operating assets of BooksAre Fun to Imagine Nation Books, Ltd. for a purchase price of $16.8.

 

The remaining businesses in this segment areaffected significantly by changes in purchasing patterns or trends in, as wellas the underlying strength of, the educational, trade, entertainment andsoftware markets.  Many of our customersin these sectors purchase our products with monies received from sources ofgovernmental funding, including federal, state and local governments.  Thus, our business may be adversely affectedby budgetary restraints and other reductions in educational funding at thefederal or state level, as well as new legislative or regulatory actions.  Our business also could be adversely affectedby changes in the procurement process related to the expenditure of governmentfunds, to which we may be unable to adapt successfully.

 

**A decline in our operating results or available cashcould cause us to experience difficulties in complying with covenantscontained in our financing agreements, which could result in our bankruptcy orliquidation.**

 

Given the disruptions in the credit andfinancial markets in recent months, and the continuing impact of adverseeconomic, financial and industry conditions on the demand for consumer productsand advertising, uncertainty exists as to whether we will be able to generateresults from operations or consummate transactions sufficient to enable us toremain in compliance with the financial covenants contained in the indenturegoverning our senior subordinated notes or our senior secured credit facilitiesfor subsequent periods.  In addition,under our senior secured credit facilities, we are required to achievespecified financial and operating results and to satisfy and maintainspecified financial ratios and other financial condition tests. Our ability tomeet those financial ratios and tests can be affected by events beyond ourcontrol, and we cannot assure you that we will meet those ratios and tests.

 

A breach of any of these or other covenants inour senior subordinated notes or senior secured credit facilitiescould result in a default under either of these agreements and by reasonof cross-acceleration or cross-default provisions, our senior securedcredit facilities, our senior subordinated notes and any other indebtedness maythen become immediately due and payable. Upon such a default, ourcreditors could declare all amounts outstanding to be immediately due andpayable and the lenders under our senior secured credit facilities couldterminate all commitments to extend further credit, which could havea material adverse effect on our results of operations and financialcondition.

 

If we were unable to repay amounts due underour senior secured credit facilities, the lenders under our seniorsecured credit facilities could proceed against the collateral granted tothem to secure that indebtedness and institute foreclosure proceedingsagainst our assets. We have pledged a significant portion of our assets ascollateral under the senior secured credit agreement. If the lenders underthe senior secured credit agreement accelerate the repayment of borrowings, wecannot assure you that we will have sufficient assets to repay the seniorsecured credit facilities, as well as our unsecured indebtedness. We couldbe forced into bankruptcy or liquidation.

 

If our operating performance declines, we mayin the future need to obtain waivers from the required lenders underour senior secured credit agreement to avoid an event of default. We maybe unable to obtain any such waiver which could result in our defaultunder our senior secured credit agreement, and the lenders could exercise theirrights, as described above, and we could be forced into bankruptcy orliquidation.  The potential impact ofpresent weak global economic conditions on the cash flows of our businessesalso could have a negative impact on our liquidity and capital resources.

 

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**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

Therehave been no unregistered sales of equity securities during the fiscal quarterended March 31, 2009.

 

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

 

Therewere no defaults upon senior securities during the fiscal quarter ended March 31,2009.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5.  OTHER INFORMATION**

 

None.

 

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**ITEM 6.  EXHIBITS**

 
| 2.1    |   | Agreement  and Plan of Merger dated November 16, 2006 among The Reader’s Digest  Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K (File  No. 1-10434) dated November 16, 2006, and incorporated by reference  herein).                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1    |   | Certificate  of Incorporation of The Reader’s Digest Association, Inc., effective  March 2, 2007 (filed as Exhibit 3.1 to the Company’s Current Report  on Form 8-K (File No. 1-10434) dated March 8, 2007, and  incorporated by reference herein).                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2    |   | Amended  and Restated By-Laws of The Reader’s Digest Association, Inc., effective  May 22, 2007 (filed as Exhibit 3.2 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-149140), and  incorporated by reference herein).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    |   | Indenture  dated as of March 2, 2007 among The Reader’s Digest  Association, Inc., the Guarantors named therein and The Bank of New  York, as Trustee, relating to The Reader’s Digest Association, Inc.’s 9%  Senior Subordinated Notes due 2017 (filed as Exhibit 4.1 to the  Company’s Registration Statement on Form S-4 (Registration  No. 333-149140),, and incorporated by reference herein).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1*  |   | Credit  Agreement dated as of March 2, 2007 among Doctor Acquisition Co., RDA  Holding Co., The Reader’s Digest Association, Inc., the Overseas  Borrower party thereto, the Lenders party thereto, JP Morgan Change Bank,  N.A., as Administrative Agent, Citicorp North America, Inc. and Merrill  Lynch, Pierce, Fenner & Smith Incorporated, as co-syndication  Agents, and The Royal Bank of Scotland, PLC, as Documentation Agent. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2*  |   | Guarantee  and Collateral Agreement dated as of March 2, 2007 made by Doctor  Acquisition Co., RDA Holding Co., The Reader’s Digest Association, Inc.  and the Guarantors Identified therein in favor of JP Morgan Chase, Bank,  N.A., as Administrative Agent.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*  |   | Certification  of Chief Executive Officer required by Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2*  |   | Certification  of Chief Financial Officer required by Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1*  |   | Certifications  of Chief Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) or Rule 15d-14(b) of the Securities  Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                              |

 

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*  Filedherewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.

 
|                      |   | **THE  READER’S DIGEST ASSOCIATION, INC.** |
|---------------------------|--------|-------------------------------------------------|
|                      |   |                                            |
|                      |   |                                            |   |
| Dated:  May 15, 2009 |   | By:                                             | /s/ Thomas A. Williams |
|                      |   |                                            | Thomas A. Williams |
|                      |   |                                            | Senior Vice President and |
|                      |   |                                            | Chief Financial Officer |
|                      |   |                                            | (Principal Financial Officer) |

 

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EXHIBIT INDEX

 
| 2.1    |   | Agreement  and Plan of Merger dated November 16, 2006 among The Reader’s Digest  Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K (File  No. 1-10434) dated November 16, 2006, and incorporated by reference  herein).                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1    |   | Certificate  of Incorporation of The Reader’s Digest Association, Inc., effective  March 2, 2007 (filed as Exhibit 3.1 to the Company’s Current Report  on Form 8-K (File No. 1-10434) dated March 8, 2007, and  incorporated by reference herein).                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2    |   | Amended  and Restated By-Laws of The Reader’s Digest Association, Inc., effective  May 22, 2007 (filed as Exhibit 3.2 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-149140), and  incorporated by reference herein).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    |   | Indenture  dated as of March 2, 2007 among The Reader’s Digest  Association, Inc., the Guarantors named therein and The Bank of New  York, as Trustee, relating to The Reader’s Digest Association, Inc.’s 9%  Senior Subordinated Notes due 2017 (filed as Exhibit 4.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-149140),,  and incorporated by reference herein).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1*  |   | Credit  Agreement dated as of March 2, 2007 among Doctor Acquisition Co., RDA  Holding Co., The Reader’s Digest Association, Inc., the Overseas  Borrower party thereto, the Lenders party thereto, JP Morgan Change Bank,  N.A., as Administrative Agent, Citicorp North America, Inc. and Merrill  Lynch, Pierce, Fenner & Smith Incorporated, as co-syndication  Agents, and The Royal Bank of Scotland, PLC, as Documentation Agent. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2*  |   | Guarantee  and Collateral Agreement dated as of March 2, 2007 made by Doctor  Acquisition Co., RDA Holding Co., The Reader’s Digest Association, Inc.  and the Guarantors Identified therein in favor of JP Morgan Chase, Bank,  N.A., as Administrative Agent.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*  |   | Certification  of Chief Executive Officer required by Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2*  |   | Certification  of Chief Financial Officer required by Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1*  |   | Certifications  of Chief Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) or Rule 15d-14(b) of the Securities  Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                              |

 

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*Filedherewith

 

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