RDA Holding Co. Announces Results For The First Quarter Ended March 31, 2010 and The Six Months Ended December 31, 2009

PLEASANTVILLE, N.Y., May 27 /PRNewswire/ -- RDA Holding Co., parent company of The Reader's Digest Association, Inc. (together with its subsidiaries and affiliated entities, "RDA"), today reported combined results for the first quarter ended March 31, 2010 compared with the prior year quarter.  The results reflect the company's fresh start accounting subsequent to its emergence from pre-arranged chapter 11 restructuring on February 19, 2010.  The company also reported results for the six months ended December 31, 2009, compared with the same period of 2008.

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Concurrent with emergence from chapter 11, the company changed its fiscal year-end from June 30 to December 31, effective as of December 31, 2009.  March 31, 2010 financial statements reflect the first calendar quarter of the company's new fiscal year.  The company emerged from Chapter 11 as a new company as of February 19, 2010; however, to facilitate a more meaningful comparison between periods, the company has presented the combined results of the predecessor and successor companies for the first calendar quarter of 2010.  For full GAAP results, please refer to the financial tables at the end of this press release.

"We emerged from the restructuring process having met our major goal – a stronger balance sheet with significantly lower debt," said Mary Berner, President and Chief Executive Officer.  "We are pleased to have achieved consolidated cash EBITDA of $177.6 million for the twelve months ended December 31, 2009, which was at the high end of our expected range of $170-$180 million. In addition, we have continued on our path to improved profitability, as demonstrated by our increase in segment operating profit to $22.6 million for the combined first quarter, which was driven by strong increases in our Lifestyle & Entertainment Direct and U.S. businesses.  We were able to achieve these improved results despite challenges posed by the global recession and having operated in Chapter 11 during much of this time.  As we move forward, we are mindful of the ongoing challenging macroeconomic environment and, at the same time, are focused on executing our cost, cultural and growth initiatives quickly and efficiently."  

Combined First Quarter 2010 Highlights

• RDA achieved cash upon emergence from Chapter 11 restructuring of $184 million, above guidance of $175 million, and cash was $189.4 million at the end of the combined first quarter.
• Consolidated cash EBITDA for the last twelve months ended March 31, 2010 was $167.4 million.
• Revenue decreased $46.8 million, or 10.2 percent, to $413.9 million, from $460.7 million in 2009, due partly to the effect of the fair value adjustment to unearned revenue recorded as a result of the company's emergence from bankruptcy on February 19, 2010, as well as challenging international macroeconomic headwinds and a planned rate base reduction and decrease in the frequency of issues published for Reader's Digest magazine.
• Excluding charges, segment operating profit for the combined quarter increased to $22.6 million, from $21.4 million in the first quarter of 2009.

Non-GAAP Financial Measures:

The company publicly reports its financial information in accordance with United States generally accepted accounting principles (GAAP). To facilitate external analysis of the company's operating performance, the company also presents financial information that may be considered "non-GAAP financial measures" under Regulation G and related reporting requirements promulgated by the Securities and Exchange Commission. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures. The following non-GAAP financial measures included in this release are used by the company in its internal analysis of the business.

Cash EBITDA is equal to EBITDA plus/minus adjustments related to the following major items: (a)  purchase and fresh start accounting; (b)  asset impairment charges; (c) results of disposed and discontinued entities; (d) restructuring and reorganization costs; (e) non-cash gains and losses; and (f) other items, such as stock based compensation and prior owner management fees.

Fresh Start Accounting

On January 19, 2010, the Bankruptcy Court confirmed the company's Third Amended Proposed Joint Chapter 11 Plan of Reorganization.  The company satisfied all of the material conditions of the plan on February 19, 2010, which is the date the company's U.S. entities effectively emerged from bankruptcy.  Upon the effective date of the company's emergence, we recorded the impact of the Plan of Reorganization and, as required under U.S. GAAP, applied fresh start accounting principles.  The fresh start accounting principles assigned fair value to the assets and liabilities of the reorganized company.  

Under fresh start accounting, the company's reorganization value was allocated to the company's assets based on their respective fair values in conformity with the purchase method of accounting for business combinations; any portion not attributed to specific tangible or identified intangible assets will be treated as an indefinite-lived intangible asset referred to as "reorganization value in excess of value of identifiable assets" and will be recorded on the company's balance sheet as goodwill.  The most significant effects of the application of fresh start accounting on the company's financial statements are non cash adjustments and include:

• the write-down of the unearned revenue liability which reduces magazine revenues after emergence from chapter 11;
• an increase in depreciation and amortization expense prospectively as a consequence of the adjustment to the fair value of tangible and intangible assets; and,
• a reduction of pension income due to the write-off of unrealized gains on pension assets.

The company emerged from bankruptcy as a new company as of February 19, 2010, however, to facilitate a more meaningful comparison between periods, the company has presented the combined results of the predecessor and successor companies for the first calendar quarter of 2010.  The company's emergence from chapter 11, the implementation of the Plan of Reorganization and the application of fresh start accounting principles will affect future reported results of operations and will make it difficult to compare the company's historical, pre-emergence results of operations with those that are reported in the future.

Discontinued Operations and Deconsolidation of RD UK

On January 26, 2010, the company sold CompassLearning Inc., its educational software division. The company has reported the results of operations and consolidated financial position of this business in discontinued operations within the consolidated statement of operations, consolidated balance sheets and consolidated statements of cash flows for all periods presented.  All financial results in this press release are for continuing operations unless otherwise stated.  

Additionally, on February 17, 2010, the company's non-debtor United Kingdom subsidiary, Reader's Digest Association Limited ("RDA UK"), filed for administration proceedings under United Kingdom insolvency laws, and the company has consequently deconsolidated RDA UK.  During the three months ended March 31, 2010 the company reported a loss on the deconsolidation of RDA UK of $49.7 million.

Combined First Quarter Results

• Revenues for the combined quarter decreased $46.8 million, or 10.2 percent, to $413.9 million, from $460.7 million in the first quarter of 2009 due partly to the effect of the fair value adjustment to unearned revenue recorded at the company's emergence from bankruptcy on February 19, 2010 as well as challenging international macroeconomic headwinds and a planned rate base reduction and decrease in the frequency of issues published for Reader's Digest magazine. The company's United States segment revenue decreased 17.3 percent compared with the prior-year period, to $134.2 million.  The International segment revenue was down 10.9 percent compared with the prior-year period, to $231.9 million.  The Lifestyle & Entertainment Direct segment (LED) revenue increased by 79.1 percent over the prior year period, to $60.7 million.  Other segment revenue was down 16.7 percent to $8.5 million.

• Operating loss for the combined quarter was $(27.1) million, which includes contractual charges related to strategic repositioning of the business and restructuring charges of $19.2 million, as compared with an operating loss of $(499.3) million for the prior year period.  United States profit increased 19.5 percent to $9.2 million, compared with an operating profit of $7.7 million for the prior year period. International profit decreased 64 percent to $3.6 million compared with $10 million in the prior year period.  LED profit increased to $8.2 million, from $1.9 million in the year ago quarter.  Other decreased to $1.6 million, compared with $1.8 million in the prior year period.

• Segment operating profit for the combined quarter, which excludes contractual charges related to strategic repositioning of the business and restructuring charges of $19.2 million, was $22.6 million, compared with $21.4 million in the first quarter of 2009.

• Free Cash Flow for the last twelve months ended March 31, 2010 was $119.0 million.

• The company currently has $525 million borrowings in the form of Floating Rate Senior Secured Notes due 2017, as a result of a bond refinancing that will provide it with an estimated $30 million in cash interest expense savings annually versus its previously arranged exit financing.  The company also has access to an additional $50 million of revolver credit.

• Consolidated cash EBITDA for the last twelve months ended March 31, 2010 was $167.4 million.

Combined First Quarter 2010 Segment Results

The company's businesses are structured into four reportable segments: Reader's Digest United States, Reader's Digest International, Lifestyle & Entertainment Direct (LED), and Other, which comprises the Weekly Reader business.

Reader's Digest United States

In the combined first quarter, revenues for Reader's Digest United States decreased $28.0 million, or 17.3 percent, to $134.2 million as compared with $162.2 million during the three months ended March 31, 2009.  The majority of the decline was attributable to efforts we initiated during fiscal 2009 to increase its profitability.  These efforts included a planned rate base reduction from 8 million to 5.5 million in January 2010 and a decrease in the frequency of issues for the Reader's Digest magazine from 12 to 10. The company also closed or sold unprofitable or marginally profitable product lines (Selecciones, Cooking for Two, Backyard Living, and Purpose Driven Connection) after fiscal 2009 and eliminated certain poorly performing special interest and seasonal publications during this period.  The company was adversely affected by certain negative trends in the industry, continued reduced demand, and lower response rates on promotional efforts for several products.  The decrease in demand resulted in lower book sales (primarily Home & Garden and general interest books), decreased renewals for Reader's Digest magazine, and lower sales across the company's trade publishing business. These declines were offset in part by advertising revenue increases in several of the company's Food & Entertaining affinity products (Allrecipes.com, Taste of Home, and Tasteofhome.com).  

In the combined first quarter, operating profit for Reader's Digest United States increased by $1.5 million, or 19.5 percent, to an operating profit of $9.2 million as compared with an operating profit of $7.7 million during the three months ended March 31, 2009.  Decreases related to the planned changes for Reader's Digest magazine mentioned above and international investment in Allrecipes.com were more than offset by lower costs across the majority of the company's US businesses, strong advertising performance described above and the discontinuance of investment in Purpose Driven Connection that launched in the first quarter of the prior year.

Reader's Digest International

In the combined first quarter, Reader's Digest International revenues decreased $28.4 million, or 10.9 percent, to $231.9 million, as compared with $260.3 million in the first quarter of 2009. Excluding the positive effect of foreign currency translation of $26.4 million, the International business segment experienced a net decrease in revenues of $54.8 million, or 21.1 percent, during the three months ended March 31, 2010 as compared with 2009.  The decrease largely resulted from the deconsolidation of the company's United Kingdom subsidiary along with decreased book, music and video sales as a result of lower mailing quantities and poor response rates on promotions, most notably in Central Europe, Canada, Germany, the Netherlands and, to a lesser extent, in Australia and Asia.  The company also initiated several actions that had the result of decreasing revenues, but increasing profitability, during the second half of the calendar year in 2009, including a reduction in mailing activity, especially to more marginally profitable customers, and a reduction in magazine issues.  

Reader's Digest International operating profit for the three months ended March 31, 2010 decreased by $6.4 million, or 64 percent, to an operating profit of $3.6 million as compared with $10.0 million for the three months ended March 31, 2009.  Excluding the positive effect of foreign currency exchange rates of $0.7 million, International's business segment experienced a net decrease in operating profit of $7.1 million, or 71 percent, for the three months ended March 31, 2010 as compared with 2009.  The decrease was mainly due to the loss and deconsolidation of the company's subsidiary in the United Kingdom, combined with the impact of the lower sales described above.  The decrease was offset in part by additional activity and better response in the Russia region.

Lifestyle & Entertainment Direct (LED)

In the combined first quarter, LED revenue increased $26.8 million, or 79.1 percent, to $60.7 million, as compared with $33.9 million during the three months ended March 31, 2009.  The increase in revenues was driven principally by the strong sales of our fitness product offerings through direct TV campaigns and into retail outlets.

Operating profit performance in the combined first quarter increased $6.3 million to an operating profit of $8.2 million, as compared with $1.9 million during the three months ended March 31, 2009.  The operating profit increase is principally due to the increase in revenues from fitness products as discussed above.

Other

In the combined first quarter, Other segment revenue decreased $1.7 million, or 16.7 percent, to $8.5 million, as compared with $10.2 million during the three months ended March 31, 2009.  The decrease in revenues was primarily driven by lower periodical circulation and lower custom publishing sales within the company's Weekly Reader business.

Operating profit performance in the combined first quarter decreased $0.2 million to $1.6 million, as compared with an operating profit of $1.8 million during the three months ended March 31, 2009.  The operating profit decrease is principally due to lower periodical and book sales within the company's Weekly Reader business as discussed above.

Corporate Unallocated:

Corporate unallocated expenses for the three months ended March 31, 2010 were $24.8 million, compared with $10.9 million for the three months ended March 31, 2009.  The increase in expense was mainly attributable to accrued employee bonuses.  

Predecessor Company Results for the Six Months Ended December 31, 2009

The company also today reported pre-emergence results for the six months ended December 31, 2009.  The following represent the highlights:  

• Revenues were $1,101.8 million, a decrease of $35.7 million, or 3.1 percent from the prior year period.
• Operating loss was $(5.8) million, improved from an operating loss of $(8.2) million in the prior year period.    

Detailed financial statements for the six months ended December 31, 2009 can be found at the end of this press release.

Conference Call

The company will host a conference call to discuss results for the first quarter of 2010 and for the six months ended December 31, 2009, on Thursday, May 27, 2010 at 11 a.m. Eastern Time.

To listen to the conference call, please dial 1-212-287-1652 or, toll-free in the U.S., 1-800-369-1818, and ask for Reader's Digest.  The leader is Tom Williams, and the pass code is "RDA."  There will also be a PowerPoint presentation.  To access the presentation, tune Web browsers to this URL: https://e-meetings.verizonbusiness.com/nc/join.php?i=PA7321740&p=LEADER&t=c  

The conference number is PA7321740 and the audience pass code is "RDA".  An audio replay of the call will be available within 24 hours and will be posted for seven days on www.rda.com (Investor Relations / Company Reports)

About The Reader's Digest Association, Inc.

RDA is a global multi-brand media and marketing company that educates, entertains and connects audiences around the world. The company builds multi-platform communities based on branded content. With offices in 44 countries, it reaches a customer base of 130 million in 78 countries. It publishes 92 magazines, including 50 editions of Reader's Digest, the world's largest-circulation magazine, operates 78 branded websites and sells 40 million books, music and video products across the world each year. Further information about the company can be found at www.rda.com.

Forward-looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable federal securities laws that are based upon our current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. The words "expect," "anticipate," "estimate," "forecast," "initiative," "objective," "plan," "goal," "project," "outlook," "priorities," "target," "intend," "evaluate," "pursue," "commence," "seek," "may," "would," "could," "should," "believe," "potential," "continue," or the negative of any of those words or similar expressions is intended to identify forward-looking statements. All statements contained in this press release, other than statements of historical fact, including, without limitation, statements about our plans, strategies, prospects and expectations regarding future events and our financial performance, are forward-looking statements that involve certain risks and uncertainties. While these statements represent the company's current judgment on what the future may hold, and the company believe these judgments are based upon reasonable assumptions, these statements are not guarantees of any events or financial results, and the company's actual results may differ materially. Important factors that could cause our actual results to be materially different from our expectations include, among others, the risk that the company continues to be affected by the global economy or subject to liquidity constraints, and the risk that the after-effects of the chapter 11 bankruptcy filing could have adverse impacts on the company's ability to maintain contracts, trade credit and other customer and vendor relationships. Accordingly, you should not place undue reliance on the forward-looking statements contained in this press release. These forward-looking statements speak only as of the date on which the statements were made. The company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, except where expressly required by law.

SOURCE RDA Holding Co.