10-Q 1 ami-20121231x10q.htm 10-Q AMI-2012.12.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-10784

American Media, Inc.
(Exact name of registrant as specified in its charter)
Delaware
65-0203383
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)

1000 American Media Way, Boca Raton, Florida 33464
(Address of principal executive offices) (Zip Code)

(561) 997-7733
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
                                                                                                                                                       
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
            
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes ¨ No x
 
The number of shares outstanding of the registrant's common stock, $0.0001 par value, as of January 31, 2013 was 11,111,111.



AMERICAN MEDIA, INC.
 
Form 10-Q for the Quarter Ended December 31, 2012
 
INDEX
 
 
  Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2

"American Media," "AMI," "we," "our," "us" and the "Company" refer to American Media, Inc. and its consolidated subsidiaries.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This quarterly report for the quarterly period ended December 31, 2012 (this “Quarterly Report”) contains both statements of historical fact and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements are subject to certain risks and uncertainties, which could cause our actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking statements include, but are not limited to (i) projections of revenues, income or loss, capital expenditures, capital structure and other financial items; (ii) statements regarding our plans and objectives, including planned introductions of new publications or other products, or estimates or predictions of actions by customers, consumers, advertisers, suppliers, competitors or regulatory authorities; (iii) statements of future economic performance; (iv) outcomes of contingencies such as legal or any regulatory proceedings; and (v) statements of assumptions underlying other statements and statements about our business.

Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to the following:
 
•
 
our high degree of leverage and significant debt service obligations;
 
 
 
 
 
•
 
whether we decide to engage in acquisitions, enter into partnerships and joint ventures or execute publishing services agreements in the future, and any effects thereof;
 
 
 
 
 
•
 
our ability to attract and retain experienced and qualified personnel;
 
 
 
 
 
•
 
our ability to implement our business strategy;
 
 
 
 
 
•
 
changes in discretionary consumer spending patterns;
 
 
 
 
 
•
 
changes in general economic and business conditions, both nationally and internationally, which can influence the overall demand for our services and products by our customers and advertisers, affecting the readership level of our publications as well as advertising and circulation revenue;
 
 
 
 
 
•
 
increased competition, including price competition and competition from other publications and other forms of media, such as television, radio and digital concentrating on celebrity news and health and fitness;
 
 
 
 
 
•
 
changes in the price of fuel, paper, ink and postage;
 
 
 
 
 
•
 
any loss of one or more of our key vendors or key advertisers;
 
 
 
 
 
•
 
the potential effects of threatened or actual terrorists attacks or other acts of violence or war;
 
 
 
 
 
•
 
adverse results in litigation matters or any regulatory proceedings;
 
 
 
 
 
•
 
the potential effects of any future impairment of our goodwill or other identified intangible assets;
 
 
 
 
 
•
 
our ability to maintain an effective system of internal controls over financial reporting;
 
 
 
 
 
•
 
the effects of possible credit losses;
 
 
 
 
 
•
 
any disruption in the distribution of our magazines through wholesalers;
 
 
 
 
 
•
 
unforeseen increases in employee benefit costs;
 
 
 
 
 
•
 
changes in accounting standards.

For a further discussion of risk factors which could cause actual results to differ materially from those indicated by the forward-looking statements, see the Company’s exchange offer registration statement on Form S-4/A, declared effective by the Securities and Exchange Commission (the "SEC") on October 19, 2012 (the “Exchange Offer Registration Statement”). Any written or oral forward-looking statements made by us or on our behalf are subject to the risk factors disclosed in this Quarterly Report and the Exchange Offer Registration Statement. Should one or more of the risk factors disclosed in this Quarterly Report or the Exchange Offer Registration Statement materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements may vary materially from those forward-looking statements discussed in this Quarterly Report. The risk factors included in the Quarterly Report and the Exchange Offer Registration Statement are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also impact our future results. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and do not assume any obligations, to update these forward looking statements, except as required by law.

3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
 
December 31,
2012
 
March 31,
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents ($426 and $3,365 related to VIEs, respectively)
$
9,529

 
$
5,226

Trade receivables, net of allowance for doubtful accounts of $6,059 and $4,795, respectively ($0 and $3,382 related to VIEs, respectively, net of allowance for doubtful accounts of $0 and $779, respectively)
36,241

 
51,538

Inventories ($0 and $2,117 related to VIEs, respectively)
12,164

 
17,033

Prepaid expenses and other current assets ($0 and $1,508 related to VIEs, respectively)
14,971

 
19,651

Total current assets
72,905

 
93,448

PROPERTY AND EQUIPMENT, NET:
 
 
 
Leasehold improvements
3,882

 
3,991

Furniture, fixtures and equipment
40,468

 
36,625

Less – accumulated depreciation
(26,131
)
 
(24,695
)
Total property and equipment, net
18,219

 
15,921

OTHER ASSETS:
 
 
 
Deferred debt costs, net
10,159

 
11,222

Deferred rack costs, net ($0 and $2,194 related to VIEs, respectively)
7,166

 
9,966

Other long-term assets
1,631

 
1,622

Total other assets
18,956

 
22,810

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
Goodwill ($0 and $3,358 related to VIEs, respectively)
186,898

 
234,244

Other identified intangibles, net of accumulated amortization of $113,504 and $110,770, respectively ($6,000 and $24,295 related to VIEs, respectively)
278,747

 
285,225

Total goodwill and other identified intangible assets, net
465,645

 
519,469

TOTAL ASSETS
$
575,725

 
$
651,648

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable ($2 and $3,719 related to VIEs, respectively)
$
20,829

 
$
16,160

Accrued expenses and other liabilities ($417 and $3,056 related to VIEs, respectively)
27,783

 
29,539

Accrued interest
2,800

 
17,254

Redeemable financial instrument (see Note 9)
3,597

 
—

Deferred revenues ($24 and $2,264 related to VIEs, respectively)
32,805

 
37,474

Total current liabilities
87,814

 
100,427

NON-CURRENT LIABILITIES:
 
 
 
Senior secured notes
469,889

 
469,889

Revolving credit facility
20,000

 
7,000

Redeemable financial instrument, less current portion (see Note 9)
807

 
—

Other non-current liabilities
4,133

 
4,367

Deferred income taxes
73,390

 
75,694

Total liabilities
656,033

 
657,377

COMMITMENTS AND CONTINGENCIES (See Note 10)


 

Redeemable noncontrolling interest (see Note 9)
3,000

 
15,620

STOCKHOLDERS' DEFICIT:
 
 
 
Common stock, $0.0001 par value; 14,000,000 shares authorized; 10,000,000 shares issued and outstanding as of December 31, 2012 and March 31, 2012
1

 
1

Additional paid-in capital
822,723

 
822,773

Accumulated deficit
(905,800
)
 
(843,908
)
Accumulated other comprehensive loss
(232
)
 
(215
)
Total stockholders' deficit
(83,308
)
 
(21,349
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
575,725

 
$
651,648


The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

4

AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
OPERATING REVENUES:
 
 
 
 
 
 
 
Circulation
$
56,556

 
$
55,986

 
$
163,943

 
$
168,403

Advertising
22,788

 
24,991

 
76,425

 
92,166

Other
5,975

 
6,799

 
22,061

 
25,335

Total operating revenues
85,319

 
87,776

 
262,429

 
285,904

OPERATING EXPENSES:
 
 
 
 
 
 
 
Editorial
10,052

 
10,179

 
31,158

 
32,160

Production
23,897

 
27,063

 
73,479

 
84,991

Distribution, circulation and other cost of sales
16,668

 
19,020

 
50,896

 
59,361

Selling, general and administrative
19,986

 
18,019

 
61,549

 
58,646

Depreciation and amortization
2,431

 
1,988

 
7,219

 
5,715

Impairment of goodwill and intangible assets
54,523

 
—

 
54,523

 
—

Total operating expenses
127,557

 
76,269

 
278,824

 
240,873

OPERATING (LOSS) INCOME
(42,238
)
 
11,507

 
(16,395
)
 
45,031

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(15,231
)
 
(14,397
)
 
(45,014
)
 
(43,836
)
Amortization of deferred debt costs
(367
)
 
(325
)
 
(1,063
)
 
(1,254
)
Other expenses, net
(241
)
 
(458
)
 
(251
)
 
(1,399
)
Total other expense, net
(15,839
)
 
(15,180
)
 
(46,328
)
 
(46,489
)
LOSS BEFORE INCOME TAXES
(58,077
)
 
(3,673
)
 
(62,723
)
 
(1,458
)
INCOME TAX BENEFIT
(140
)
 
(740
)
 
(1,570
)
 
(302
)
NET LOSS
(57,937
)
 
(2,933
)
 
(61,153
)
 
(1,156
)
LESS: NET (INCOME) LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
42

 
444

 
(739
)
 
393

NET LOSS ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(57,895
)
 
$
(2,489
)
 
$
(61,892
)
 
$
(763
)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
NET LOSS
$
(57,937
)
 
$
(2,933
)
 
$
(61,153
)
 
$
(1,156
)
Foreign currency translation adjustment
3

 
24

 
(17
)
 
97

Comprehensive loss
(57,934
)
 
(2,909
)
 
(61,170
)
 
(1,059
)
Less: comprehensive (income) loss attributable to the noncontrolling interest
42

 
444

 
(739
)
 
393

COMPREHENSIVE LOSS ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(57,892
)
 
$
(2,465
)
 
$
(61,909
)
 
$
(666
)





The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

5

AMERICAN MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
 
December 31,
 
2012
 
2011
Operating Activities:
 
 
 
Net loss
$
(61,153
)
 
$
(1,156
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation of property and equipment
4,485

 
3,466

Amortization of other identified intangibles
2,734

 
2,249

Impairment of goodwill and intangible assets
54,523

 
—

Amortization of deferred debt costs
1,063

 
1,254

Amortization of deferred rack costs
6,484

 
7,920

Deferred income tax benefit
(1,883
)
 
(1,133
)
Provision for bad debts
1,264

 
1,001

Other
195

 
1,983

Decrease (increase) in operating assets:
 
 
 
Trade receivables
14,033

 
3,979

Inventories
4,988

 
(2,473
)
Prepaid expenses and other current assets
4,259

 
741

Deferred rack costs
(3,684
)
 
(8,073
)
Other long-term assets
(9
)
 
(384
)
Increase (decrease) in operating liabilities:
 
 
 
Accounts payable
4,808

 
3,749

Accrued expenses and other liabilities
(1,596
)
 
6,357

Accrued interest
(14,454
)
 
(16,468
)
Other non-current liabilities
(234
)
 
(1,438
)
Deferred revenues
(6,236
)
 
3,408

Total adjustments and changes in operating assets and liabilities
70,740

 
6,138

Net cash provided by operating activities
9,587

 
4,982

 
 
 
 
Investing Activities:
 
 
 
Purchases of property and equipment
(6,985
)
 
(6,840
)
Purchases of intangible assets
(1,785
)
 
—

Proceeds from sale of assets
80

 
71

Investment in Radar
(350
)
 
(1,100
)
Acquisition of OK! Magazine
—

 
(23,000
)
Other
(300
)
 
(300
)
Net cash used in investing activities
(9,340
)
 
(31,169
)
 
 
 
 
Financing Activities:
 
 
 
Proceeds from revolving credit facility
60,500

 
52,500

Repayment to revolving credit facility
(47,500
)
 
(32,500
)
Senior secured notes redemption
—

 
(20,000
)
Redemption premium payment
—

 
(600
)
Proceeds in Odyssey from noncontrolling interest holders
—

 
13,500

Payments to noncontrolling interest holders of Odyssey
(8,279
)
 
(500
)
Payments to noncontrolling interest holders of Olympia
(679
)
 
(539
)
Net cash provided by financing activities
4,042

 
11,861

 
 
 
 
Effect of exchange rate changes on cash
14

 
(291
)
Net Increase (Decrease) in Cash and Cash Equivalents
4,303

 
(14,617
)
Cash and Cash Equivalents, Beginning of Period
5,226

 
21,285

Cash and Cash Equivalents, End of Period
$
9,529

 
$
6,668

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 
 
 
Non-cash property and equipment (incurred but not paid)
$
140

 
$
51


The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

6

AMERICAN MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012


(1) Description of Business and Basis of Presentation


DESCRIPTION OF BUSINESS

We are a leading content centric media company specializing in the fields of celebrity journalism and active lifestyle. We distribute our content across multiple platforms including print, Internet, mobile, tablets and video. We circulate our print publications utilizing single copy and subscription sales using the U.S. Postal Service, national distributors, wholesalers and retailers. Total circulation of our print publications with a frequency of six or more times per year, were approximately 6.0 million copies per issue during the nine months ended December 31, 2012.

As of December 31, 2012, the Company published seven weekly publications: National Enquirer, Star, Globe, National Examiner, Country Weekly, OK! Weekly and Soap Opera Digest; two monthly publications: Muscle & Fitness and Flex; three bi-monthly publications: Fit Pregnancy, Natural Health and Muscle & Fitness Hers; and two publications that are published 10 times per year: Shape and Men's Fitness.

Distribution Services, Inc. ("DSI"), a wholly-owned subsidiary of the Company, arranges for the placement of the Company’s publications and third-party publications with retailers, and monitors through its regional managers and merchandising staff that our publications and third-party publications are properly displayed in stores, primarily national and regional supermarket chains and major retail chains such as Walmart, Kroger Companies, Safeway, Super Valu/Albertsons, Stop & Shop/Giant Food, Publix, H.E. Butt, Food Lion/Sweetbay, Great A&P Tea Company and Winn Dixie. DSI also coordinates the racking of magazine fixtures for selected retailers (also known as acting as a “category manager/front-end advisor”). In addition, DSI provides marketing, merchandising and information gathering services to third parties, including non-magazine clients.

References to our third fiscal quarter (e.g. "third fiscal quarter of 2013") refer to our fiscal quarters ended December 31st of the applicable fiscal year. Each fiscal year ends on March 31st.


BASIS OF PRESENTATION
 
Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Exchange Offer Registration Statement. The fiscal year end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("US GAAP"). The results of operations for the nine months ended December 31, 2012 are not necessarily indicative of the operating results for the full fiscal year or for any other subsequent interim period.

Principles of Consolidation

Our unaudited condensed consolidated financial statements reflect our financial statements, those of our wholly-owned domestic and foreign subsidiaries and those of certain variable interest entities where we are the primary beneficiary. For consolidated entities where we own less than 100% of the equity, we record net income (loss) attributable to noncontrolling interest in our unaudited condensed consolidated statements of income (loss) equal to the percentage of the interests retained in such entities by the respective noncontrolling parties. All material intercompany balances and transactions are eliminated in consolidation.


7

In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing joint ventures. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions occur. See Note 9, “Investments in Joint Ventures and Redeemable Noncontrolling Interest.”

Use of Estimates

The preparation of consolidated condensed financial statements in accordance with US GAAP requires our management to make estimates and judgments that may affect the reported amounts presented and disclosed in our consolidated condensed financial statements. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to those related to: revenue recognition and related allowances; inventories; impairments of long-lived assets, intangible assets and goodwill; income taxes, including the valuation allowance for deferred tax assets; and contingencies and litigation.

We base these estimates on historical experience and various other factors that we believe to be reasonable, the results of which form the basis for making judgments under the circumstances. Due to the inherent uncertainty involved in making these estimates, actual results reported may differ from these estimates under different assumptions or conditions.

Concentrations

As of December 31, 2012, single copy revenues consisted of copies distributed to retailers primarily by two major wholesalers. During the three months ended December 31, 2012 and 2011, one of these wholesalers ("Wholesaler A") accounted for approximately 32% and 30%, respectively, of our total operating revenue and the other wholesaler ("Wholesaler B") accounted for approximately 15% and 16%, respectively, of our total operating revenue. During the nine months ended December 31, 2012 and 2011, Wholesaler A accounted for approximately 29% and 24%, respectively, of our total operating revenue and Wholesaler B accounted for approximately 15% and 13%, respectively, of our total operating revenue. We have multi-year service arrangements with our major wholesalers, which provide incentives to maintain certain levels of service.


(2) New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On April 1, 2012, the Company adopted Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which provides the Company with an option to first assess qualitative factors in determining whether an event or circumstance exists which leads to a more likely than not determination that the fair value of a reporting unit is less than its carrying amount. If the Company determines based on qualitative factors it is more likely than not the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not necessary. The Company has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The adoption of the ASU did not have an effect on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued accounting pronouncements that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.




8

(3) Inventories

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out ("FIFO") method. The Company writes down inventory for estimated obsolescence and/or excess or damaged inventory. Inventory write-downs during the three and nine months ended December 31, 2012 and 2011 were insignificant. Inventories are comprised of the following (in thousands):

 
December 31, 2012
 
March 31, 2012
Raw materials – paper
$
8,829

 
$
13,106

Finished product — paper, production and distribution costs of future issues
3,335

 
3,927

Total inventory
$
12,164

 
$
17,033



(4) Goodwill and Other Identified Intangible Assets

As of December 31, 2012 and March 31, 2012, the Company had goodwill with a carrying value of $186.9 million and $234.2 million, respectively, and other identified intangible assets not subject to amortization with carrying values of $266.1 million and $271.6 million, respectively. Other identified intangible assets not subject to amortization consist of tradenames with indefinite lives.

Identified intangible assets with finite lives subject to amortization consist of the following at December 31, 2012 and March 31, 2012 (in thousands):

 
 
 
December 31, 2012
 
March 31, 2012
 
Range of Lives
(in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Tradenames
8 - 27
 
$
10,610

 
$
(4,410
)
 
$
6,200

 
$
10,610

 
$
(4,078
)
 
$
6,532

Subscriber lists
3 - 15
 
32,702

 
(29,783
)
 
2,919

 
32,702

 
(28,146
)
 
4,556

Customer relationships
5 - 10
 
2,300

 
(717
)
 
1,583

 
2,300

 
(420
)
 
1,880

Other intangible assets
3
 
2,739

 
(786
)
 
1,953

 
954

 
(318
)
 
636

 
 
 
$
48,351

 
$
(35,696
)
 
$
12,655

 
$
46,566

 
$
(32,962
)
 
$
13,604


Amortization expense of intangible assets was $2.7 million and $2.2 million during the nine months ended December 31, 2012 and 2011, respectively. Based on the carrying value of identified intangible assets recorded at December 31, 2012, and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be as follows (in thousands):

Fiscal Year
 
Amortization Expense
2013
 
$
1,365

2014
 
4,049

2015
 
1,583

2016
 
807

2017
 
534

  Thereafter
 
4,317

 
 
$
12,655



During an evaluation of goodwill and other identified intangible assets at December 31, 2012, the Company determined that indicators were present in certain reporting units which would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily due to the continuing softness in the U.S. economy, which impacts consumer spending, including further declines in the advertising market, resulting in lowered future cash flow projections.


9

As a result, an interim impairment test of goodwill and other indefinite lived intangible assets was performed as of December 31, 2012 for certain reporting units in accordance with FASB Accounting Standards Codification (“ASC”) Topic No. 350, “Goodwill and Other Intangible Assets” (“ASC 350”). Impairment testing for goodwill is a two-step process. The first step compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment charge, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill and an impairment charge is recorded for the difference. Impairment testing for indefinite lived intangible assets, consisting of tradenames, compares the fair value of the tradename to the carrying value and an impairment charge is recorded for any excess carrying value over fair value.

The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the estimated fair value. As a result, the Company recorded an estimated pre-tax non-cash impairment charge of $47.3 million and $7.2 million to reduce the carrying value of goodwill and tradenames, respectively, during the fiscal quarter ended December 31, 2012. The Company is currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. The Company will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.

The gross carrying amount and accumulated impairment losses of goodwill, as of December 31, 2012 and March 31, 2012, by reportable segment are as follows (in thousands):
 
Celebrity Brands
 
Women's Active Lifestyle Group
 
Men's Active Lifestyle Group
 
Corporate and Other
 
Total
Goodwill
$
428,518

 
$
84,905

 
$
112,296

 
$
20,136

 
$
645,855

Accumulated impairment losses
(261,794
)
 
(62,841
)
 
(75,901
)
 
(11,075
)
 
(411,611
)
Balances as of March 31, 2012
166,724

 
22,064

 
36,395

 
9,061

 
234,244

 
 
 
 
 
 
 
 
 
 
Impairment
(42,801
)
 
—

 
(4,545
)
 
—

 
(47,346
)
 
 
 
 
 
 
 
 
 
 
Goodwill
428,518

 
84,905

 
112,296

 
20,136

 
645,855

Accumulated impairment losses
(304,595
)
 
(62,841
)
 
(80,446
)
 
(11,075
)
 
(458,957
)
Balance as of December 31, 2012
$
123,923

 
$
22,064

 
$
31,850

 
$
9,061

 
$
186,898


Impairment Charge Assumptions

The estimate of fair value of the reporting unit's goodwill and tradenames was based on the Company's projections of revenues, operating costs and cash flows of each reporting unit considering historical and anticipated future results and general economic and market conditions, as well as the impact of planned business and operational strategies. The valuations employ a combination of present value techniques to measure fair value and considered market factors. The key assumptions used to determine fair value of the reporting unit's goodwill and tradenames as of December 31, 2012 were:

a)
expected cash flow periods of five years;
b)
terminal values based upon terminal growth rates ranging from 0% to 3%;
c)
implied multiples used in the business enterprise value income and market approaches ranging from 3.9 to 11.8; and
d)
discount rates ranging from 13.5% to 14%, which were based on the Company's best estimate of the weighted average cost of capital adjusted for risks associated with the reporting unit.

Management believes the discount rate used is consistent with the risks inherent in the Company's current business model and with industry discount rates. Changes in management's judgments and projections or assumptions used could result in a significantly different estimate of the fair value of the reporting units and could materially change the impairment charge related to goodwill and tradenames.



10

(5) Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires the Company to disclose the fair value of financial instruments that are not measured at fair value in the unaudited condensed consolidated balance sheets. The fair value of the Company’s financial instruments has been estimated primarily by using inputs, other than quoted prices in active markets that are observable either directly or indirectly. However, the use of different market assumptions or methods of valuation could result in different fair values.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” ("ASC 820"), established a three-tier fair value hierarchy, which prioritizes the use of inputs used in measuring fair value as follows:

Level 1    Observable inputs such as quoted prices in active markets for identical assets and liabilities;
Level 2    Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3    Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

The estimated fair value of the Company’s financial instruments is as follows (in thousands):
 
 
 
December 31, 2012
 
March 31, 2012
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
First Lien Notes
Level 2
 
$
365,000

 
$
335,800

 
$
365,000

 
$
326,675

Second Lien Notes
Level 2
 
104,889

 
92,303

 
104,889

 
79,191

Revolving Credit Facility
Level 2
 
20,000

 
18,000

 
7,000

 
5,810

Redeemable Financial Instrument
Level 3
 
4,404

 
3,964

 
—

 
—


The fair value of the First Lien Notes, the Second Lien Notes and the Revolving Credit Facility is estimated using quoted market prices for the same or similar issues. The fair value of the Redeemable Financial Instrument is estimated using a discounted cash flow valuation technique, considering the current credit spread of the debtor.

As of December 31, 2012 and March 31, 2012, the Company did not have financial assets or liabilities that would require measurement on a recurring basis, based on the guidance in ASC 820. The carrying amount for cash and cash equivalents, trade receivable, accounts payable and accrued expenses approximates fair value, due to the short-term nature of these items.

In addition, the Company may be required to record non-financial assets and liabilities at fair value on a nonrecurring basis. The Company was not required to record any non-financial assets and liabilities at fair value during the nine months ended December 31, 2012.


(6) Revolving Credit Facility

In December 2010, we entered into a revolving credit facility maturing in December 2015 (the "2010 Revolving Credit Facility"). The 2010 Revolving Credit Facility provides for borrowing up to $40.0 million less outstanding letters of credits.

The Company has the option to pay interest based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day; (y) the federal funds effective rate in effect on such day plus ½ of 1%, and (z) one month LIBOR (but no less than 2%) plus 1%, or (ii) LIBOR, in each case plus a margin. The weighted-average effective interest rate under the 2010 Revolving Credit Facility was 8.25% as of December 31, 2012 and March 31, 2012.

In addition, the Company is required to pay a commitment fee ranging from 0.50% to 0.75% on the unused portion of the revolving commitment. Commitment fees paid during the nine months ended December 31, 2012 and 2011 were insignificant.

During the nine months ended December 31, 2012, the Company borrowed $60.5 million and repaid $47.5 million under the 2010 Revolving Credit Facility. At December 31, 2012, the Company has available borrowing capacity of $15.6 million after considering the $20.0 million outstanding balance and the $4.4 million outstanding letters of credit. The outstanding balance of the 2010 Revolving Credit Facility on December 31, 2012 of $20.0 million is included in non-current liabilities in the unaudited condensed consolidated balance sheet, as the outstanding balance is not due until December 2015.


11

The 2010 Revolving Credit Facility includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default. The negative covenants include a financial maintenance covenant comprised of a first lien leverage ratio. The 2010 Revolving Credit Facility also contains certain covenants that, subject to certain exceptions, restrict paying dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations and selling or otherwise disposing of assets. With respect to the dividend restrictions, the 2010 Revolving Credit Facility includes a cap on the total amount of cash available for distribution to our common stockholders.

As of December 31, 2012, the Company was in compliance with its covenants under the 2010 Revolving Credit Facility.

Although there can be no assurances, management believes that, based on current projections (including projected borrowings and repayments under the 2010 Revolving Credit Facility), its operating results for fiscal 2013 will be sufficient to satisfy the first lien leverage ratio financial covenant under the 2010 Revolving Credit Facility. The Company’s ability to satisfy such financial covenant is dependent on its business performing in accordance with its projections.  If the performance of the Company’s business deviates significantly from its projections, the Company may not be able to satisfy such financial covenant.  Its projections are subject to a number of factors, many of which are events beyond its control, which could cause its actual results to differ materially from its projections. If the Company does not comply with its financial covenant, the Company will be in default under the 2010 Revolving Credit Facility.

The indebtedness under the 2010 Revolving Credit Facility is guaranteed by certain of the domestic subsidiaries of the Company and is secured by liens on substantially all of the assets of the Company and certain of its domestic subsidiaries. In addition, the Company’s obligations are secured by a pledge of all of the issued and outstanding shares of, or other equity interests in, certain of the Company's existing or subsequently acquired or organized domestic subsidiaries and a percentage of the capital stock of, or other equity interests in, certain of its existing or subsequently acquired or organized foreign subsidiaries.


(7) Senior Secured Notes

In December 2010, we issued (i) $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum and mature in December 2017 (the “First Lien Notes”), and (ii) $104.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 13.5% per annum and mature in June 2018 (the “Second Lien Notes”). The First Lien Notes and the Second Lien Notes are referred to herein collectively as the Senior Secured Notes. Interest on the Senior Secured Notes is payable semi-annually on June 15th and December 15th of each year and is computed on the basis of a 360 day year comprised of twelve 30 day months.

The First Lien Notes are guaranteed on a first lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility. The First Lien Notes and the guarantees thereof are secured by a first-priority lien on substantially all of our assets (subject to certain permitted liens and exceptions), pari passu with the liens granted under our 2010 Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our 2010 Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes.

The Second Lien Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility and the First Lien Notes. The Second Lien Notes and the guarantees thereof are secured by a second-priority lien on substantially all of our assets (subject to certain permitted liens and exceptions).

Under the First Lien Notes Indenture, the Company has the option to redeem the First Lien Notes as follows: (a) at any time prior to December 15, 2013, the Company is permitted to redeem up to 35% of the original principal amount of the First Lien Notes with the net cash proceeds of one or more equity offerings (as defined) at a redemption price of 111.5%, plus accrued and unpaid interest through the redemption date; (b) at any time prior to December 15, 2013, the Company may redeem all or part of the First Lien Notes, at a redemption price equal to 100%, plus an applicable premium (as defined) and accrued and unpaid interest through redemption date; (c) during any 12-month period prior to December 15, 2013, the Company is entitled to redeem up to 10% of the aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0%, plus accrued and unpaid interest through the redemption date; (d) on or after December 15, 2013, the Company may redeem the First Lien Notes, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest and additional interest thereon, if any, through the redemption date, if redeemed during the 12-month period beginning on December 15th of each of the years indicated below:

12

Year
 
Percentage
2013
 
108.625%
2014
 
105.75%
2015
 
102.875%
2016 and thereafter
 
100%

During the three months ended June 2011, the Company redeemed $20.0 million in aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0% of the aggregate principal amount thereof, plus accrued and unpaid interest.

Under the Second Lien Notes Indenture, the Company has the option to redeem the Second Lien Notes as follows: (a) at any time prior to December 15, 2013, the Company is permitted to redeem up to 35% of the original principal amount of the Second Lien Notes with the net cash proceeds of one or more equity offerings (as defined) at a redemption price of 113.5%, plus accrued and unpaid interest through the redemption date; (b) at any time prior to December 15, 2013, the Company may redeem all or a part of the Second Lien Notes, at a redemption price equal to 100%, plus an applicable premium (as defined) and accrued and unpaid interest through the redemption date; (c) on or after December 15, 2013, the Company may redeem the Second Lien Notes, in whole or in part, at the redemption prices set forth below, plus accrued and unpaid interest and additional interest thereon, if any, through the redemption date, if redeemed during the 12-month period beginning on December 15th of each of the years indicated below:
Year
 
Percentage
2013
 
110.125%
2014
 
106.75%
2015
 
103.375%
2016 and thereafter
 
100%

As of December 31, 2012, the Company’s total principal amount of Senior Secured Notes was approximately $469.9 million, consisting of $365.0 million principal amount of First Lien Notes and $104.9 million principal amount of Second Lien Notes.

The indentures governing the Senior Secured Notes contain certain affirmative covenants, negative covenants and events of default. For example, the indentures governing the Senior Secured Notes contain covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the First Lien Notes and Second Lien Notes Indentures impose certain requirements as to future subsidiary guarantors.

As of December 31, 2012, the Company was in compliance with all of the covenants under the indentures governing the Senior Secured Notes.

Registration Rights Agreement

In connection with the issuance of the First Lien Notes, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the holders and the guarantors of the First Lien Notes, which, among other things, required the Company to file an exchange offer registration statement with the Securities and Exchange Commission (the “SEC”). Pursuant to the Registration Rights Agreement, the Company was required to offer to exchange (the "Exchange Offer") up to $365.0 million of the 11.5% senior notes due December 2017 (the “Exchange Notes”), which were registered under the Securities Act of 1933, as amended (the “Securities Act”), for up to $365.0 million of our First Lien Notes, which we issued in December 2010.

The terms of the Exchange Notes are identical to the terms of the First Lien Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the First Lien Notes do not apply to the Exchange Notes.


13

The Company was required to commence the Exchange Offer once the exchange offer registration statement was declared effective by the SEC and use commercially reasonable efforts to complete the Exchange Offer no later than February 24, 2012. Since the Exchange Offer was not completed by February 24, 2012, a registration default occurred (the “Registration Default”) and the interest rate on the First Lien Notes was subject to increase by (a) 0.25% per annum for the 90 days in the period from February 24, 2012 to May 24, 2012, (b) 0.50% per annum for the 90 days in the period from May 25, 2012 to August 24, 2012 and (c) 0.75% per annum for the period from August 25, 2012 to November 20, 2012, the date the Registration Default was cured.

On August 22, 2012, the Company filed a registration statement with the SEC. On October 19, 2012, the registration statement, as amended, was declared effective by the SEC and the Company commenced the Exchange Offer for the First Lien Notes. The Registration Default was cured on November 20, 2012 upon the completion of the Exchange Offer. The Company incurred approximately $1.3 million in additional interest on the First Lien Notes due to the Registration Default for the period from February 24, 2012 through the date the Registration Default was cured. The Registration Default did not impact our compliance with the indentures governing the First Lien Notes and the Second Lien Notes or the 2010 Revolving Credit Facility.


(8) Related Party Transactions

Certain of the Company’s stockholders held significant equity interests in Vertis, Inc. (“Vertis”). Vertis performed significant portions of the Company’s Celebrity Brands pre-press operations until November 2011. Purchases of these services from Vertis totaled $1.3 million during the nine months ended December 31, 2011. Vertis has not performed services to the Company during the nine months ended December 31, 2012 and the Company has no outstanding payables to Vertis at December 31, 2012.


(9) Investments in Joint Ventures and Redeemable Noncontrolling Interest

Mr. Olympia, LLC

In April 2005, the Company entered into a limited liability company agreement to form a joint venture, Mr. Olympia, LLC (“Olympia”), to manage and promote the Mr. Olympia fitness events. In September 2011, the Company and the other limited liability company member entered into an amendment to the limited liability company agreement (the "Amendment"), which among things, extended the time period that the Company could be required to purchase all of the limited liability company units, from the other member, from April 2015 to October 2019, for a fixed price of $3.0 million cash (the "Olympia Put Option"). The Amendment also extended the time period that the Company could require the other limited liability company member to sell to the Company all of its limited liability company units from April 2015 to April 2020, for $3.0 million cash (the “Olympia Call Option”).

In April 2005, the other limited liability company member licensed certain trademarks related to the Mr. Olympia fitness events (collectively, the “Olympia Trademarks”) to Olympia for $3.0 million, payable by the Company over a 10 year period (the “License Fee”). Upon the exercise of the Olympia Put Option or the Olympia Call Option, the ownership of the Olympia Trademarks will be transferred to Olympia and the outstanding portion of the License Fee will be due and payable upon such exercise. If the Olympia Put Option or the Olympia Call Option is not exercised, then Olympia will retain the license to the Olympia Trademarks in perpetuity upon final payment of the License Fee.

The Company has a variable interest in the Olympia joint venture, a variable interest entity. The Olympia joint venture is deemed a variable interest entity because there is insufficient equity investment at risk. The Company concluded it is the primary beneficiary because the holder of the Olympia Put Option has the ability to cause the Company to absorb the potential losses of the joint venture and the Company controls the activities that most significantly impact the economic performance of Olympia. As a result, the Company accounts for the Olympia joint venture as a consolidated subsidiary.

The License Fee has been recorded as other identified intangibles and the remaining payable of $0.3 million, as of December 31, 2012, is reflected in accrued expenses and other liabilities in the accompanying unaudited condensed consolidated balance sheet.

The Company follows the accounting for noncontrolling interest in equity that are redeemable at terms other than fair value. Accordingly, the Company has reflected the noncontrolling interest's equity within temporary equity for the Olympia joint venture as the Olympia joint venture’s securities are currently redeemable pursuant to the terms of the Olympia Put Option. As a result, the Company has recorded the Olympia Put Option, at a minimum, equal to the maximum redemption amount as “Redeemable noncontrolling interest” in the accompanying unaudited condensed consolidated balance sheets.

Olympia’s net income during the nine months ended December 31, 2012 and 2011 was $0.7 million and $0.5 million, respectively.

14


Radar Online, LLC

In October 2008, the Company entered into a limited liability company agreement to form Radar Online, LLC, a joint venture ("Radar"), to manage RadarOnline.com, a website focusing on celebrity and entertainment news. Though the Company owns 50% of Radar and can exercise significant influence, it does not control the activities that most significantly impact the economic performance of this joint venture. As a result, the Company accounts for the investment in Radar using the equity method. The operating results of Radar were insignificant to the Company’s unaudited condensed consolidated financial statements for the three and nine months ended December 31, 2012 and 2011. The management fees receivable from Radar totaled $2.2 million as of December 31, 2012 and March 31, 2012. The management fees are fully reserved due to Radar's inability to pay the management fees at this time and revenue has not been recognized during the nine months ended December 31, 2012 and 2011 related to those management fees.

Odyssey Magazine Publishing Group, Inc. (formerly known as Odyssey Magazine Publishing Group, LLC)

In June 2011, the Company entered into a limited liability company agreement to form a joint venture, Odyssey Magazine Publishing Group, LLC (“Odyssey”). Odyssey was initially capitalized by the Company and the other limited liability company member (the “LLC Member”) with a total of $23.0 million in cash and each of the Company and the LLC Member received an initial 50% ownership interest in Odyssey. In connection with the formation of Odyssey, the Company and the LLC Member entered into a management services agreement (the “Management Services Agreement”) in June 2011. Pursuant to the Management Services Agreement, the Company is responsible for the day-to-day operations and management of Odyssey.

The LLC Member of Odyssey had a put right (the “Odyssey Put Option”) that could have been exercised at any time by delivering notice to the Company that it should promptly purchase all of the LLC Member’s units. The Odyssey Put Option, which related to all of the membership interests in the limited liability company owned by the LLC Member, provided that the cash consideration to be paid for their interests be at a price equal to the LLC Member’s aggregate capital contribution less any distributions received. As of March 31, 2012, the Odyssey Put Option equaled $12.5 million and is reflected as "Redeemable noncontrolling interest" in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2012. Through March 31, 2012, the Company had a variable interest in the Odyssey joint venture, a variable interest entity. The Odyssey joint venture was deemed a variable interest entity because there was insufficient equity investment at risk. The Company concluded it was the primary beneficiary because the holder of the Odyssey Put Option had the ability to cause the Company to absorb the potential losses of the joint venture and the Company controlled the activities that most significantly impacted the economic performance of Odyssey. As a result, the Company accounted for the Odyssey joint venture as a consolidated subsidiary.

On April 1, 2012, pursuant to the exercise of the Odyssey Put Option by the LLC Member, the Company and the LLC Member entered into a membership interest purchase agreement (the “Membership Interest Purchase Agreement”) wherein the Company was required to purchase all of the LLC Member’s interest in Odyssey for approximately $13.3 million, payable on a quarterly basis over a two year period. Concurrent with the execution of the Membership Interest Purchase Agreement, the Company made the first payment of approximately $5.0 million and in June 2012 made the second payment of approximately $1.1 million. The Membership Interest Purchase Agreement contained certain events of acceleration, including but not limited to failure by the Company to make a scheduled quarterly payment, which would allow the LLC Member to declare the remaining unpaid purchase price immediately due and payable. In connection with the Membership Interest Purchase Agreement, the Company and the LLC Member entered into an amendment to the limited liability company agreement, which among other things, provided the Company with the right to receive 100% of the net income (loss) of Odyssey and provided the Company with the obligation to fund 100% of future capital requirements, if any.

Effective April 1, 2012, Odyssey was no longer deemed a variable interest entity. However, the Company continues to consolidate Odyssey based on the Company’s control of Odyssey and the right to receive 100% of the net income (loss) of Odyssey, the obligation to provide all required capital contributions to Odyssey and the obligation to purchase all of the LLC’s member interest in Odyssey. In addition, as of April 1, 2012, the Company has accounted for the Membership Interest Purchase Agreement as a mandatorily redeemable financial instrument and the future obligation has been reflected as a liability as the Company has an unconditional obligation to pay a fixed amount, in cash, on specified dates.


15

In August 2012, Odyssey was converted from a limited liability company to a corporation (the “Conversion”) and changed its name to Odyssey Magazine Publishing Group, Inc. (“Odyssey Corporation”). Upon the Conversion, Odyssey Corporation was authorized to issue 1,000 shares of $0.0001 par value common stock (the “Common Stock”) and 1,000 shares of $0.0001 par value preferred stock designated as Series A preferred stock (the “Series A Preferred Stock”). The Series A Preferred Stock, among other rights, ranks senior and prior to the shares of Common Stock upon the distribution of assets upon a liquidation, dissolution or winding up of Odyssey Corporation, is not redeemable, is non-transferable, except in accordance with the preferred stock purchase agreement described below, and has no voting rights. Concurrent with the Conversion, the membership interest of each the Company and the LLC Member in Odyssey was canceled and converted into (i) for the Company, 1,000 shares of Common Stock and 731 shares of Series A Preferred Stock in Odyssey Corporation, and (ii) for the LLC Member, 269 shares of Series A Preferred Stock in Odyssey Corporation.

In connection with the Conversion, the Company and the LLC Member entered into a preferred stock purchase agreement (the “Preferred Stock Purchase Agreement”) wherein the Company will purchase the LLC Member’s shares of Series A Preferred Stock in Odyssey Corporation for approximately $7.2 million, payable on a quarterly basis through March 31, 2014. In accordance with the Preferred Stock Purchase Agreement, the Membership Interest Purchase Agreement and the limited liability company agreement, including any amendments thereto, were terminated. All other terms of the Preferred Stock Purchase Agreement are substantially the same as the Membership Interest Purchase Agreement. The Company has paid approximately $2.1 million and the remaining discounted obligation under the Preferred Stock Purchase Agreement is reflected as redeemable financial instrument in the unaudited condensed consolidated balance sheet. The remaining undiscounted obligation of $5.0 million will be paid as follows: $4.0 million during the remainder of fiscal 2013 and $1.0 million during fiscal 2014.


(10) Litigation

On March 10, 2009, Anderson News, L.L.C. and Anderson Services, L.L.C., magazine wholesalers (collectively, “Anderson”), filed a lawsuit against the Company, DSI, and various magazine publishers, wholesalers and distributors in the Federal District Court for the Southern District of New York (the “Anderson Action”). Anderson's complaint alleged that the defendants violated Section 1 of the Sherman Act by engaging in a purported industry-wide conspiracy to boycott Anderson and drive it out of business. Plaintiffs also purported to assert claims for defamation, tortious interference with contract, and civil conspiracy. The complaint did not specify the amount of damages sought. On August 2, 2010, the District Court dismissed the action in its entirety with prejudice and without leave to replead and, on October 25, 2010, denied Anderson's motion for reconsideration of the dismissal decision. Anderson appealed the District Court's decisions.

On April 3, 2012, the Second Circuit issued a decision reversing the dismissal of the lawsuit and reinstating the antitrust and state law claims (except the defamation claim, which Anderson withdrew), and, on January 7, 2013, the United States Supreme Court declined to review the Second Circuit decision. Following the Second Circuit decision, the case has been proceeding in the District Court, which entered a case management plan and scheduling order on October 12, 2012 that calls for all fact discovery to be completed by July 12, 2013 and expert discovery to be completed by November 4, 2013. The parties now are engaged in discovery.

Anderson is in chapter 11 bankruptcy proceedings in Delaware bankruptcy court. On June 11, 2010, AMI filed a proof of claim in that proceeding for $5.6 million, but Anderson claims to have no assets to pay unsecured creditors like AMI. An independent court-appointed examiner has identified claims that Anderson could assert against Anderson insiders in excess of $270.0 million.

In an order of the Delaware bankruptcy court, entered on November 14, 2011, AMI and four other creditors (the “Creditors”), which also are defendants in the Anderson Action, were granted the right to file lawsuits against Anderson insiders asserting Anderson's claims identified by the examiner. The Creditors' retention of counsel to pursue the claims on a contingency fee basis was also approved. On November 14, 2011 pursuant to this order, a complaint was filed against ten defendants and discovery is now proceeding in the Delaware bankruptcy court.

While it is not possible to predict the outcome of the Anderson Action or to estimate the impact on the Company of a final judgment against the Company and DSI (if that were to occur), the Company and DSI will continue to vigorously defend the case.

In addition, because the focus of some of our publications often involves celebrities and controversial subjects, the risk of defamation or invasion of privacy litigation exists. Our experience indicates that the claims for damages made in such lawsuits are usually inflated and the lawsuits are usually defensible and, in any event, any reasonably foreseeable material liability or settlement would likely be covered by insurance. We also periodically evaluate and assess the risks and uncertainties associated with such litigation disregarding the existence of insurance that would cover liability for such litigation. At present, in the opinion of management, after consultation with outside legal counsel, the liability resulting from such litigation, even if insurance was not available, is not expected to have a material effect on our unaudited condensed consolidated financial statements.


16


(11) Acquisitions

Soap Opera Digest

In July 2012, the Company acquired Soap Opera Digest magazine pursuant to a purchase agreement for one U.S. dollar plus the assumption of certain liabilities. The Company had previously been operating Soap Opera Digest magazine under a licensing agreement since April 2011 and the results of operations have been included in the unaudited condensed consolidated financial statements since April 2011. The Company has accounted for this transaction using the acquisition method of accounting. The acquisition related expenses incurred during the second fiscal quarter of 2013 were not significant and are included in selling, general and administrative expenses in the unaudited condensed consolidated financial statements.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed (in thousands):

Total acquisition price - cash paid
$0
Allocation of the acquisition price:
 
Identifiable intangible assets
1,649

Deferred revenue
(1,567
)
Other assumed liabilities
(82
)
Fair value of net assets acquired
$0

The acquisition of Soap Opera Digest magazine is not material to the Company's operations; therefore pro forma financial information has not been presented.

OK! Weekly

In June 2011, Odyssey acquired OK! Weekly magazine pursuant to a purchase agreement for $23.0 million. Since the Company consolidates the accounts of Odyssey, the acquisition of OK! Weekly by Odyssey is included in the accompanying unaudited condensed consolidated financial statements and has been accounted for, by Odyssey, using the acquisition method of accounting. The results of operations of the acquisition have been included in the accompanying unaudited condensed consolidated financial statements since June 22, 2011, the date of acquisition. The acquisition related expenses incurred in the first fiscal quarter of 2012 were not significant and are included in selling, general and administrative expenses in the unaudited condensed consolidated financial statements.

For the three and nine months ended December 31, 2011, the reported revenue was $7.2 million and $16.1 million, respectively, and the operating loss was $1.2 million and $2.3 million, respectively, which is included in the accompanying financial statements.

For the three and nine months ended December 31, 2012, the reported revenue was $8.2 million and $22.3 million, respectively, and the operating income was $1.4 million and $1.9 million, respectively, which is included in the accompanying financial statements.

Supplemental Pro Forma Data

The following unaudited pro forma information gives effect to the OK! Weekly acquisition that was completed in June 2011 as if it had occurred on April 1, 2011. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place on April 1, 2011. Such information for the nine months ended December 31, 2011 is based on historical financial information with respect to the acquisition and does not include operations or other changes which might have been effected by the Company.
 
Nine Months Ended
(in thousands)
December 31, 2011
Operating revenues
$
290,637

Net loss
$
(1,352
)



17

(12) Business Segment Information

The Company has five reporting segments: Celebrity Brands, Women’s Active Lifestyle, Men’s Active Lifestyle, Publishing Services and Corporate and Other. The operating segments are based on each having the following characteristics: the operating segments engage in similar business activities from which it earns revenues and incurs expenses; the operating results are regularly reviewed by the chief operating decision maker (the "CODM") and there is discrete financial information. The Company does not aggregate any of its operating segments.

The Celebrity Brands segment includes National Enquirer, Star, OK! Weekly, Globe, National Examiner, Soap Opera Digest and Country Weekly.

The Women’s Active Lifestyle segment includes Shape, Fit Pregnancy and Natural Health.

The Men’s Active Lifestyle segment includes Muscle & Fitness, Men’s Fitness, Flex and Muscle & Fitness Hers.

The Publishing Services segment includes DSI, an in-store magazine sales and merchandising marketing company doing business in the U.S. and Canada. DSI places and monitors the Company’s publications and third-party publications to ensure proper displays in major retail chains and national and regional supermarket chains. DSI also provides marketing, merchandising and information gathering services to third parties including non-magazine clients. Publishing Services also provides print and digital advertising sales and strategic management direction in the following areas: manufacturing, subscription circulation, logistics, event marketing and full back office financial functions.  Playboy is one of many publishers who have taken advantage of these additional services. 

The Corporate and Other segment includes international licensing, photo syndication to third parties, and corporate overhead. Corporate overhead expenses are not allocated to other segments and include production, circulation, executive staff, information technology, accounting, legal, human resources and administration department costs.

The Company’s accounting policies are the same for all reportable segments. For a further description of the Company’s significant accounting policies, see Note 1 to the consolidated financial statements included in the Exchange Offer Registration Statement.

Segment Data

The following table presents the operating results in the Company’s five reporting segments for the three and nine months ended December 31, 2012 and 2011, respectively, and the assets employed as of December 31, 2012 and March 31, 2012. The information includes certain intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany services, which are billed at what management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation.

18

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
(in thousands)
2012
 
2011
 
2012
 
2011
Operating revenues
 
 
 
 
 
 
 
Celebrity Brands
$
57,653

 
$
56,631

 
$
167,283

 
$
172,292

Women's Active Lifestyle Group
8,707

 
11,485

 
35,594

 
47,978

Men's Active Lifestyle Group
14,227

 
13,707

 
45,294

 
45,980

Publishing Services
6,503

 
7,148

 
19,272

 
22,033

Corporate and Other
135

 
420

 
661

 
2,689

Unallocated corporate (eliminations) (2)
(1,906
)
 
(1,615
)
 
(5,675
)
 
(5,068
)
Total operating revenues
$
85,319

 
$
87,776

 
$
262,429

 
$
285,904

 
 
 
 
 
 
 
 
Operating (loss) income (4)
 
 
 
 
 
 
 
Celebrity Brands
$
(21,677
)
 
$
16,285

 
$
15,304

 
$
50,640

Women's Active Lifestyle Group
(6,059
)
 
(533
)
 
(2,969
)
 
8,509

Men's Active Lifestyle Group
(3,902
)
 
4,457

 
5,197

 
14,453

Publishing Services
1,184

 
1,048

 
2,878

 
2,723

Corporate and Other (1)
(11,784
)
 
(9,750
)
 
(36,805
)
 
(31,294
)
Total operating (loss) income
$
(42,238
)
 
$
11,507

 
$
(16,395
)
 
$
45,031

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
Celebrity Brands
$
809

 
$
812

 
$
2,355

 
$
2,279

Women's Active Lifestyle Group
113

 
—

 
242

 
—

Men's Active Lifestyle Group
104

 
14

 
241

 
38

Publishing Services
156

 
330

 
546

 
1,013

Corporate and Other
1,249

 
832

 
3,835

 
2,385

Total depreciation and amortization
$
2,431

 
$
1,988

 
$
7,219

 
$
5,715

 
 
 
 
 
 
 
 
Impairment of goodwill and intangible assets
Celebrity Brands
$
42,801

 
$
—

 
$
42,801

 
$
—

Women's Active Lifestyle Group
3,925

 
—

 
3,925

 
—

Men's Active Lifestyle Group
7,797

 
—

 
7,797

 
—

Total impairment of goodwill and intangible assets
$
54,523

 
$
—

 
$
54,523

 
$
—

 
 
 
 
 
 
 
 
Amortization of deferred rack costs
 
 
 
 
 
 
 
Celebrity Brands
$
1,851

 
$
2,821

 
$
6,240

 
$
7,644

Women's Active Lifestyle Group
63

 
97

 
222

 
253

Men's Active Lifestyle Group
5

 
16

 
22

 
23

Total amortization of deferred rack costs
$
1,919

 
$
2,934

 
$
6,484

 
$
7,920


Total Assets
December 31,
2012
 
March 31,
2012
Celebrity Brands
$
341,003

 
$
395,215

Women's Active Lifestyle Group
66,366

 
76,192

Men's Active Lifestyle Group
112,374

 
115,788

Publishing Services
8,207

 
7,223

Corporate and Other (3)
47,775

 
57,230

Total assets
$
575,725

 
$
651,648



19

(1)
For the three months ended December 31, 2012 and 2011, the Corporate and Other segment includes income tax benefit of $0.1 million and $0.7 million, interest expense of $15.2 million and $14.4 million and amortization of deferred debt costs of $0.4 million and $0.3 million, respectively. For the nine months ended December 31, 2012 and 2011, the Corporate and Other segment includes income tax benefit of $1.6 million and $0.3 million, interest expenses of $45.0 million and $43.8 million and amortization of deferred debt costs of $1.1 million and $1.3 million, respectively.

(2)
This amount represents revenues from intersegment transactions primarily with the Publishing Services segment.

(3)
Amounts are primarily comprised of inventories, prepaid expenses, property and equipment, deferred debt costs and certain other assets.

(4)
Operating income (loss) includes the pre-tax non-cash impairment charge of $47.3 million and $7.2 million to reduce the carrying value of goodwill and tradenames, respectively, during the fiscal quarter ended December 31, 2012. The Company is currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. The Company will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.

Geographic Data

The Company operates principally in two geographic areas, the United States of America and Europe (primarily the United Kingdom). There were no significant transfers between geographic areas during the three or nine months ended December 31, 2012 and 2011. The following table presents revenue by geographical area for the three and nine months ended December 31, 2012 and 2011 and all identifiable assets related to the operations in each geographic area as of December 31, 2012 and March 31, 2012:

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
(in thousands)
2012
 
2011
 
2012
 
2011
Operating revenues:
 
 
 
 
 
 
 
United States of America
$
82,126

 
$
84,528

 
$
252,794

 
$
275,835

Europe
3,193

 
3,248

 
9,635

 
10,069

Total operating revenues
$
85,319

 
$
87,776

 
$
262,429

 
$
285,904


(in thousands)
December 31,
2012
 
March 31,
2012
Assets:
 
 
 
United States of America
$
566,596

 
$
641,754

Europe
9,129

 
9,894

Total assets
$
575,725

 
$
651,648



(13) Supplemental Condensed Consolidating Financial Information

The following tables present unaudited condensed consolidating financial statements of (a) the parent company, American Media, Inc., as issuer of the Senior Secured Notes, (b) on a combined basis, the subsidiary guarantors of the Senior Secured Notes, and (c) on a combined basis, the subsidiaries that are not guarantors of the Senior Secured Notes. Separate financial statements of the subsidiary guarantors are not presented because the parent company owns all outstanding voting stock of each of the subsidiary guarantors and the guarantee by each subsidiary guarantor is full and unconditional and joint and several. As a result and in accordance with Rule 3-10(f) of Regulation S-X under the Securities Exchange Act of 1934, as amended, the Company includes the following:



20

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2012
(in thousands)
    ASSETS
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
7,653

 
$
1,876

 
$
—

 
$
9,529

Trade receivables, net
—

 
34,361

 
1,880

 
—

 
36,241

Inventories
—

 
11,645

 
519

 
—

 
12,164

Prepaid expenses and other current assets
—

 
19,744

 
714

 
(5,487
)
 
14,971

Total current assets
—

 
73,403

 
4,989

 
(5,487
)
 
72,905

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,882

 
—

 
—

 
3,882

Furniture, fixtures and equipment
—

 
39,783

 
685

 
—

 
40,468

Less – accumulated depreciation
—

 
(25,586
)
 
(545
)
 
—

 
(26,131
)
Total property and equipment, net
—

 
18,079

 
140

 
—

 
18,219

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
10,159

 
—

 
—

 
—

 
10,159

Deferred rack costs, net
—

 
7,166

 
—

 
—

 
7,166

Other long-term assets
—

 
1,631

 
—

 
—

 
1,631

Investment in subsidiaries
506,065

 
1,110

 
—

 
(507,175
)
 
—

Total other assets
516,224

 
9,907

 
—

 
(507,175
)
 
18,956

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
 
 
 
 
 
 
 
 
Goodwill
—

 
182,388

 
4,510

 
—

 
186,898

Other identified intangibles, net
—

 
272,747

 
6,000

 
—

 
278,747

Total goodwill and other identified intangible assets
—

 
455,135

 
10,510

 
—

 
465,645

TOTAL ASSETS
$
516,224

 
$
556,524

 
$
15,639

 
$
(512,662
)
 
$
575,725

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
20,318

 
$
511

 
$
—

 
$
20,829

Accrued expenses and other liabilities
—

 
6,957

 
4,022

 
16,804

 
27,783

Accrued interest
2,800

 
—

 
—

 
—

 
2,800

Redeemable financial instruments
3,597

 
—

 
—

 
—

 
3,597

Deferred revenues
—

 
32,432

 
373

 
—

 
32,805

Total current liabilities
6,397

 
59,707

 
4,906

 
16,804

 
87,814

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes, net
469,889

 
—

 
—

 
—

 
469,889

Revolving credit facility
20,000

 
—

 
—

 
—

 
20,000

Redeemable financial instruments, less current portion
807

 
—

 
—

 
—

 
807

Other non-current liabilities
—

 
4,133

 
—

 
—

 
4,133

Deferred income taxes
—

 
95,633

 
48

 
(22,291
)
 
73,390

Due (from) to affiliates
102,439

 
(106,571
)
 
4,132

 
—

 
—

Total liabilities
599,532

 
52,902

 
9,086

 
(5,487
)
 
656,033

Redeemable noncontrolling interest
—

 
—

 
3,000

 
—

 
3,000

STOCKHOLDER'S (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholder's (deficit) equity
(83,308
)
 
503,622

 
3,553

 
(507,175
)
 
(83,308
)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
$
516,224

 
$
556,524

 
$
15,639

 
$
(512,662
)
 
$
575,725




21

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2012
(in thousands)
    ASSETS
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
3,185

 
$
2,041

 
$
—

 
$
5,226

Trade receivables, net
—

 
49,293

 
2,245

 
—

 
51,538

Inventories
—

 
16,527

 
506

 
—

 
17,033

Prepaid expenses and other current assets
—

 
24,287

 
848

 
(5,484
)
 
19,651

Total current assets
—

 
93,292

 
5,640

 
(5,484
)
 
93,448

PROPERTY AND EQUIPMENT, NET:
 
 
 
 
 
 
 
 
 
Leasehold improvements
—

 
3,991

 
—

 
—

 
3,991

Furniture, fixtures and equipment
—

 
36,012

 
613

 
—

 
36,625

Less – accumulated depreciation
—

 
(24,232
)
 
(463
)
 
—

 
(24,695
)
Total property and equipment, net
—

 
15,771

 
150

 
—

 
15,921

OTHER ASSETS:
 
 
 
 
 
 
 
 
 
Deferred debt costs, net
11,222

 
—

 
—

 
—

 
11,222

Deferred rack costs, net
—

 
9,966

 
—

 
—

 
9,966

Other long-term assets
—

 
1,622

 
—

 
—

 
1,622

Investment in subsidiaries
535,305

 
(79
)
 
—

 
(535,226
)
 
—

Total other assets
546,527

 
11,509

 
—

 
(535,226
)
 
22,810

GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:
Goodwill
—

 
229,734

 
4,510

 
—

 
234,244

Other identified intangibles, net
—

 
279,225

 
6,000

 
—

 
285,225

Total goodwill and other identified intangible assets
—

 
508,959

 
10,510

 
—

 
519,469

TOTAL ASSETS
$
546,527

 
$
629,531

 
$
16,300

 
$
(540,710
)
 
$
651,648

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
15,237

 
$
923

 
$
—

 
$
16,160

Accrued expenses and other liabilities
—

 
13,610

 
5,776

 
10,153

 
29,539

Accrued interest
17,254

 
—

 
—

 
—

 
17,254

Redeemable financial instruments
—

 
—

 
—

 
—

 
—

Deferred revenues
—

 
36,740

 
734

 
—

 
37,474

Total current liabilities
17,254

 
65,587

 
7,433

 
10,153

 
100,427

NON-CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Senior secured notes, net
469,889

 
—

 
—

 
—

 
469,889

Revolving credit facility
7,000

 
—

 
—

 
—

 
7,000

Redeemable financial instruments, less current portion
—

 
—

 
—

 
—

 
—

Other non-current liabilities
—

 
4,367

 
—

 
—

 
4,367

Deferred income taxes
—

 
91,408

 
(75
)
 
(15,639
)
 
75,694

Due (from) to affiliates
73,733

 
(77,987
)
 
4,254

 
—

 
—

Total liabilities
567,876

 
83,375

 
11,612

 
(5,486
)
 
657,377

Redeemable noncontrolling interest
—

 
12,620

 
3,000

 
—

 
15,620

STOCKHOLDER'S (DEFICIT) EQUITY:
 
 
 
 
 
 
 
 
 
Total stockholder's (deficit) equity
(21,349
)
 
533,536

 
1,688

 
(535,224
)
 
(21,349
)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
$
546,527

 
$
629,531

 
$
16,300

 
$
(540,710
)
 
$
651,648




22

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2012
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
55,419

 
$
1,137

 
$
—

 
$
56,556

Advertising
—

 
21,154

 
1,634

 
—

 
22,788

Other
—

 
5,766

 
209

 
—

 
5,975

Total operating revenues
—

 
82,339

 
2,980

 
—

 
85,319

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
9,832

 
220

 
—

 
10,052

Production
—

 
23,099

 
798

 
—

 
23,897

Distribution, circulation and other cost of sales
—

 
16,081

 
587

 
—

 
16,668

Selling, general and administrative
—

 
19,316

 
670

 
—

 
19,986

Depreciation and amortization
—

 
2,413

 
18

 
—

 
2,431

Impairment of goodwill and intangible assets
—

 
54,523

 
—

 
—

 
54,523

Total operating expenses
—

 
125,264

 
2,293

 
—

 
127,557

OPERATING (LOSS) INCOME
—

 
(42,925
)
 
687

 
—

 
(42,238
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Interest expense
(15,202
)
 
(29
)
 
—

 
—

 
(15,231
)
Amortization of deferred debt costs
(367
)
 
—

 
—

 
—

 
(367
)
Other income (expense), net
—

 
(241
)
 
—

 
—

 
(241
)
Total other expense, net
(15,569
)
 
(270
)
 
—

 
—

 
(15,839
)
LOSS (INCOME) BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND EQUITY IN (LOSSES) EARNINGS OF CONSOLIDATED SUBSIDIARIES
(15,569
)
 
(43,195
)
 
687

 
—

 
(58,077
)
(BENEFIT) PROVISION FOR INCOME TAXES
(5,545
)
 
5,358

 
47

 
—

 
(140
)
EQUITY IN (LOSSES) EARNINGS OF CONSOLIDATED SUBSIDIARIES
(47,871
)
 
712

 
—

 
47,159

 
—

NET (LOSS) INCOME
(57,895
)
 
(47,841
)
 
640

 
47,159

 
(57,937
)
LESS: NET LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
—

 
—

 
42

 
—

 
42

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC AND SUBSIDIARIES
$
(57,895
)
 
$
(47,841
)
 
$
682

 
$
47,159

 
$
(57,895
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(57,895
)
 
$
(47,841
)
 
$
640

 
$
47,159

 
$
(57,937
)
Foreign currency translation adjustment
—

 
—

 
3

 
—

 
3

Comprehensive (loss) income
(57,895
)
 
(47,841
)
 
643

 
47,159

 
(57,934
)
Less: comprehensive loss (income) attributable to the noncontrolling interest
—

 
—

 
42

 
—

 
42

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(57,895
)
 
$
(47,841
)
 
$
685

 
$
47,159

 
$
(57,892
)



23

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2012
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
160,244

 
$
3,699

 
$
—

 
$
163,943

Advertising
—

 
71,396

 
5,029

 
—

 
76,425

Other
—

 
17,352

 
4,709

 
—

 
22,061

Total operating revenues
—

 
248,992

 
13,437

 
—

 
262,429

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
30,077

 
1,081

 
—

 
31,158

Production
—

 
69,194

 
4,285

 
—

 
73,479

Distribution, circulation and other cost of sales
—

 
48,970

 
1,926

 
—

 
50,896

Selling, general and administrative
—

 
58,508

 
3,041

 
—

 
61,549

Depreciation and amortization
—

 
7,164

 
55

 
—

 
7,219

Impairment of goodwill and intangible assets
—

 
54,523

 
—

 
—

 
54,523

Total operating expenses
—

 
268,436

 
10,388

 
—

 
278,824

OPERATING (LOSS) INCOME
—

 
(19,444
)
 
3,049

 
—

 
(16,395
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Interest expense
(44,985
)
 
(29
)
 
—

 
—

 
(45,014
)
Amortization of deferred debt costs
(1,063
)
 
—

 
—

 
—

 
(1,063
)
Other income (expense), net
—

 
(251
)
 
—

 
—

 
(251
)
Total other expense, net
(46,048
)
 
(280
)
 
—

 
—

 
(46,328
)
LOSS (INCOME) BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND EQUITY IN (LOSSES) EARNINGS OF CONSOLIDATED SUBSIDIARIES
(46,048
)
 
(19,724
)
 
3,049

 
—

 
(62,723
)
(BENEFIT) PROVISION FOR INCOME TAXES
(17,441
)
 
15,627

 
244

 
—

 
(1,570
)
EQUITY IN (LOSSES) EARNINGS OF CONSOLIDATED SUBSIDIARIES
(33,285
)
 
1,323

 
—

 
31,962

 
—

NET (LOSS) INCOME
(61,892
)
 
(34,028
)
 
2,805

 
31,962

 
(61,153
)
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
—

 
—

 
(739
)
 
—

 
(739
)
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(61,892
)
 
$
(34,028
)
 
$
2,066

 
$
31,962

 
$
(61,892
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(61,892
)
 
$
(34,028
)
 
$
2,805

 
$
31,962

 
$
(61,153
)
Foreign currency translation adjustment
—

 
—

 
(17
)
 
—

 
(17
)
Comprehensive (loss) income
(61,892
)
 
(34,028
)
 
2,788

 
31,962

 
(61,170
)
Less: comprehensive income attributable to the noncontrolling interest
—

 
—

 
(739
)
 
—

 
(739
)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(61,892
)
 
$
(34,028
)
 
$
2,049

 
$
31,962

 
$
(61,909
)



24

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2011
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
54,651

 
$
1,335

 
$
—

 
$
55,986

Advertising
—

 
23,374

 
1,617

 
—

 
24,991

Other
—

 
6,248

 
551

 
—

 
6,799

Total operating revenues
—

 
84,273

 
3,503

 
—

 
87,776

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
9,819

 
360

 
—

 
10,179

Production
—

 
26,274

 
789

 
—

 
27,063

Distribution, circulation and other cost of sales
—

 
18,346

 
674

 
—

 
19,020

Selling, general and administrative
—

 
17,192

 
827

 
—

 
18,019

Depreciation and amortization
—

 
1,974

 
14

 
—

 
1,988

Total operating expenses
—

 
73,605

 
2,664

 
—

 
76,269

OPERATING INCOME
—

 
10,668

 
839

 
—

 
11,507

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Interest expense
(14,397
)
 
—

 
—

 
—

 
(14,397
)
Amortization of deferred debt costs
(325
)
 
—

 
—

 
—

 
(325
)
Other income (expense), net
—

 
(458
)
 
—

 
—

 
(458
)
Total other expense, net
(14,722
)
 
(458
)
 
—

 
—

 
(15,180
)
LOSS (INCOME) BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(14,722
)
 
10,210

 
839

 
—

 
(3,673
)
(BENEFIT) PROVISION FOR INCOME TAXES
706

 
(1,632
)
 
186

 
—

 
(740
)
EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
12,939

 
433

 
—

 
(13,372
)
 
—

NET INCOME (LOSS)
(2,489
)
 
12,275

 
653

 
(13,372
)
 
(2,933
)
LESS: NET LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
—

 
546

 
(102
)
 
—

 
444

NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,489
)
 
$
12,821

 
$
551

 
$
(13,372
)
 
$
(2,489
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET INCOME (LOSS)
$
(2,489
)
 
$
12,275

 
$
653

 
$
(13,372
)
 
$
(2,933
)
Foreign currency translation adjustment
—

 
—

 
24

 
—

 
24

Comprehensive income (loss)
(2,489
)
 
12,275

 
677

 
(13,372
)
 
(2,909
)
Less: comprehensive loss (income) attributable to the noncontrolling interest
—

 
546

 
(102
)
 
—

 
444

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(2,489
)
 
$
12,821

 
$
575

 
$
(13,372
)
 
$
(2,465
)



25

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2011
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
Circulation
$
—

 
$
164,355

 
$
4,048

 
$
—

 
$
168,403

Advertising
—

 
87,055

 
5,111

 
—

 
92,166

Other
—

 
20,954

 
4,381

 
—

 
25,335

Total operating revenues
—

 
272,364

 
13,540

 
—

 
285,904

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Editorial
—

 
31,133

 
1,027

 
—

 
32,160

Production
—

 
80,791

 
4,200

 
—

 
84,991

Distribution, circulation and other cost of sales
—

 
57,404

 
1,957

 
—

 
59,361

Selling, general and administrative
—

 
55,760

 
2,886

 
—

 
58,646

Depreciation and amortization
—

 
5,677

 
38

 
—

 
5,715

Total operating expenses
—

 
230,765

 
10,108

 
—

 
240,873

OPERATING INCOME
—

 
41,599

 
3,432

 
—

 
45,031

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Interest expense
(43,850
)
 
14

 
—

 
—

 
(43,836
)
Amortization of deferred debt costs
(1,254
)
 
—

 
—

 
—

 
(1,254
)
Other income (expense), net
—

 
(1,098
)
 
(301
)
 
—

 
(1,399
)
Total other expense, net
(45,104
)
 
(1,084
)
 
(301
)
 
—

 
(46,489
)
LOSS (INCOME) BEFORE (BENEFIT) PROVISION FOR INCOME TAXES, AND EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
(45,104
)
 
40,515

 
3,131

 
—

 
(1,458
)
(BENEFIT) PROVISION FOR INCOME TAXES
(6,649
)
 
5,768

 
579

 
—

 
(302
)
EQUITY IN EARNINGS OF CONSOLIDATED SUBSIDIARIES
37,692

 
1,350

 
—

 
(39,042
)
 
—

NET (LOSS) INCOME
(763
)
 
36,097

 
2,552

 
(39,042
)
 
(1,156
)
LESS: NET LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
—

 
995

 
(602
)
 
—

 
393

NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(763
)
 
$
37,092

 
$
1,950

 
$
(39,042
)
 
$
(763
)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
NET (LOSS) INCOME
$
(763
)
 
$
36,097

 
$
2,552

 
$
(39,042
)
 
$
(1,156
)
Foreign currency translation adjustment
—

 
—

 
97

 
—

 
97

Comprehensive (loss) income
(763
)
 
36,097

 
2,649

 
(39,042
)
 
(1,059
)
Less: comprehensive loss (income) attributable to the noncontrolling interest
—

 
995

 
(602
)
 
—

 
393

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO AMERICAN MEDIA, INC. AND SUBSIDIARIES
$
(763
)
 
$
37,092

 
$
2,047

 
$
(39,042
)
 
$
(666
)



26

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2012
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash (used in) provided by operating activities
$
(50,868
)
 
$
59,641

 
$
1,124

 
$
(310
)
 
$
9,587

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
—

 
(6,985
)
 
—

 
—

 
(6,985
)
Purchase of intangible assets
—

 
(1,785
)
 
—

 
—

 
(1,785
)
Proceeds from sale of assets
—

 
80

 
—

 
—

 
80

Investment in Radar
—

 
(350
)
 
—

 
—

 
(350
)
Other
—

 
—

 
(300
)
 
—

 
(300
)
   Net cash used in investing activities
—

 
(9,040
)
 
(300
)
 
—

 
(9,340
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from revolving credit facility
60,500

 
—

 
—

 
—

 
60,500

Repayment to revolving credit facility
(47,500
)
 
—

 
—

 
—

 
(47,500
)
Payments to noncontrolling interest holders of Odyssey
(8,279
)
 
—

 
—

 
—

 
(8,279
)
Payments to noncontrolling interest holders of Olympia
—

 
—

 
(679
)
 
—

 
(679
)
Due to (from) affiliates
46,147

 
(46,147
)
 
—

 
—

 
—

Dividends paid to parent
—

 
—

 
(310
)
 
310

 
—

   Net cash provided by (used in) financing activities
50,868

 
(46,147
)
 
(989
)
 
310

 
4,042

Effect of exchange rate changes on cash
—

 
14

 
—

 
—

 
14

Net increase (decrease) in Cash and Cash Equivalents
—

 
4,468

 
(165
)
 
—

 
4,303

Cash and Cash Equivalents, Beginning of Period
—

 
3,185

 
2,041

 
—

 
5,226

Cash and Cash Equivalents, End of Period
$
—

 
$
7,653

 
$
1,876

 
$
—

 
$
9,529



27

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2011
(in thousands)
 
Parent
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Condensed Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
   Net cash (used in) provided by operating activities
$
(71,682
)
 
$
76,083

 
$
1,581

 
$
(1,000
)
 
$
4,982

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
—

 
(6,840
)
 
—

 
—

 
(6,840
)
Proceeds from sale of assets
—

 
71

 
—

 
—

 
71

Investment in Radar
—

 
(1,100
)
 
—

 
—

 
(1,100
)
Acquisition of OK! Magazine
—

 
(23,000
)
 
—

 
—

 
(23,000
)
Other
—

 
—

 
(300
)
 
—

 
(300
)
   Net cash used in investing activities
—

 
(30,869
)
 
(300
)
 
—

 
(31,169
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from revolving credit facility
52,500

 
—

 
—

 
—

 
52,500

Repayments to revolving credit facility
(32,500
)
 
—

 
—

 
—

 
(32,500
)
Senior secured notes redemption
(20,000
)
 
—

 
—

 
—

 
(20,000
)
Redemption premium payment
(600
)
 
—

 
—

 
—

 
(600
)
Proceeds in Odyssey from noncontrolling interest holders
—

 
13,500

 
—

 
—

 
13,500

Payments to noncontrolling interest holders of Odyssey
—

 
(500
)
 
—

 
—

 
(500
)
Payments to noncontrolling interest holders of Olympia
—

 
—

 
(539
)
 
—

 
(539
)
Due to (from) affiliates
72,282

 
(72,282
)
 
—

 
—

 
—

Dividends paid to parent
—

 
—

 
(1,000
)
 
1,000

 
—

   Net cash provided by (used in) financing activities
71,682

 
(59,282
)
 
(1,539
)
 
1,000

 
11,861

Effect of exchange rate changes on cash
—

 
(291
)
 
—

 
—

 
(291
)
Net increase (decrease) in Cash and Cash Equivalents
—

 
(14,359
)
 
(258
)
 
—

 
(14,617
)
Cash and Cash Equivalents, Beginning of Period
—

 
19,677

 
1,608

 
—

 
21,285

Cash and Cash Equivalents, End of Period
$
—

 
$
5,318

 
$
1,350

 
$
—

 
$
6,668





28

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


ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Exchange Offer Registration Statement and the unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in "Cautionary Statements Regarding Forward-Looking Information" and "Risk Factors" included in this Quarterly Report and the Exchange Offer Registration Statement. Our MD&A is presented in the following sections:

•
Executive Summary

•
Current Developments and Management Action Plans

•
Results of Operations

•
Operating Segment Results

•
Liquidity and Capital Resources

•
Contractual Obligations

•
Off-Balance Sheet Financing

•
Application of Critical Accounting Estimates

•
Recently Adopted and Recently Issued Accounting Pronouncements


EXECUTIVE SUMMARY

We are a leading content centric media company specializing in the fields of celebrity journalism and active life style. Our well known brands include, but are not limited to, National Enquirer, Star, OK! Weekly, Globe, National Examiner, Shape, Fit Pregnancy, Natural Health, Men's Fitness, Muscle & Fitness and Flex. We distribute our content across multiple platforms including print, digital, mobile, tablets and video. We circulate our print publications utilizing single copy and subscription sales using the U.S. Postal Service, national distributors, wholesalers and retailers. Total circulation of our print publications with a frequency of six or more times per year, were approximately 6.0 million copies per issue during the nine months ended December 31, 2012.

Our operating revenue is derived from the sale of our media content through print and digital platforms (including websites, mobile websites, tablets and video), as well as from advertisements placed within those platforms. Our print circulation revenue represented approximately 62% of our operating revenue for the nine months ended December 31, 2012 and single copy sales accounted for approximately 78% of the print circulation revenue with the remaining 22% coming from subscription sales. Our print and digital advertising revenue, generated by national advertisers represented approximately 27% and 1%, respectively, of our operating revenue for the nine months ended December 31, 2012.

Our primary operating expenses consist of production, distribution, circulation and editorial as well as selling, general and administrative. The largest components of our operating expenses are for production of our printed magazines, which includes costs for printing and paper. Distribution and circulation expenses primarily consist of postage and other costs associated with fulfilling subscriptions and newsstand transportation. Editorial expenses represent costs associated with manuscripts, photographs and related salaries.

Our financial performance depends, in large part, on varying conditions in the markets we serve. Demand in these markets tends to fluctuate in response to overall economic conditions and current events. Economic downturns in the markets we serve generally result in reductions in revenue as a result of lower consumer spending which can lead to a reduction in advertising revenue.


29

References to our third fiscal quarter (e.g. "third fiscal quarter of 2013") refer to our fiscal quarter ended December 31st of the applicable fiscal year. Each fiscal year ends on March 31st.


CURRENT DEVELOPMENTS AND MANAGEMENT ACTION PLANS

Current Developments

During the nine months ended December 31, 2012, we continued our transformation into a content centric media group by expanding the availability of our print content through a number of different digital platforms (e.g. websites, mobile websites, digital applications and social media).

We continue to develop our Shape.com website, our tablet editions of Shape magazine and the Shape wireless application protocol ("WAP") site for all mobile platforms. We are partnering with other websites such as Yahoo’s Shine and She Knows and leveraging social media such as Facebook, Twitter and Pinterest to further promote the Shape brand and distribute our content. During the nine months ended December 31, 2012, digital advertising revenue for Shape increased 40% over the nine months ended December 31, 2011 and currently represents 15% of Shape’s total revenue. Accordingly, we believe the audiences’ continued response to the digital distribution of Shape content has been very positive.

We are continuing our innovation of single-subject, single-sponsored digital magazines or "digi-mags" for both Apple and Android operating systems. With the continued successes achieved in the digital distribution of Shape’s content, we are continuing to expand our digital distribution platform across our other well-known brands with the launch of "digi-mags" for Men’s Fitness, an e-commerce website for Muscle & Fitness and building out our other websites, as well as launching digital editions for all our brands on the Apple Newsstand, Zinio, Amazon Kindle, Barnes & Noble’s Nook and Google Newsstand. As of December 31, 2012, approximately 351,300, or 11% of our total paid subscription base is delivered digitally. Our digital delivery of 11% is estimated to be twice that of the anticipated industry level of 5%.

In August 2012, the Company filed a Registration Statement with the Securities and Exchange Commission (the "SEC") to offer to exchange (the "Exchange Offer") up to $365.0 million of the 11.5% senior notes due December 2017 (the "Exchange Notes"), which were registered under the Securities Act of 1933, as amended (the "Securities Act"), for up to $365.0 million of our 11.5% first lien notes due December 2017 (the "First Lien Notes"), which we issued in December 2010. On October 19, 2012, the Registration Statement, as amended (the "Exchange Offer Registration Statement"), was declared effective by the SEC and the Company commenced the Exchange Offer for the First Lien Notes. The Company had been in registration default since February 2012 and the interest on the First Lien Notes increased 0.25% per annum for each 90 day period until the registration default was cured. The registration default was cured upon the completion of the Exchange Offer on November 20, 2012 and the Company incurred approximately $1.3 million in additional interest due to the registration default. See Liquidity and Capital Resources for further discussion regarding the First Lien Notes, the registration rights agreement and the registration default.

In late October 2012, Superstorm Sandy (the "Storm") impacted the Mid-Atlantic and Northeast regions of the United States, causing extensive property damage and power outages. We sustained property losses, incurred extra expenses and realized some modest business interruption and are in the process of filing a claim with our insurance carriers.

During the fiscal quarter ended December 31, 2012, we recorded an estimated pre-tax non-cash impairment charge of $54.5 million to reduce the carrying value of goodwill and tradenames in certain reporting units. We are currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. We will adjust the amount of the goodwill impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.

In January 2013, we entered into a partnership with USA Today to collaborate on the development, publication and distribution of certain special interest publications (the "Publications") that will be published under the USA Today brand. We will have a non-exclusive right to use and display the USA Today trademarks in connection with the publication, distribution and promotion of the Publications.


30

Management Action Plans for Revenue Enhancement and Cost Savings

During the nine months ended December 31, 2012, we developed and implemented management action plans that we expect to result in revenue enhancements of $7.9 million and operating income of $2.8 million from the publishing of 26 additional pop iconic special issues in the Celebrity Brands segment. In addition to the revenue enhancements, we developed and implemented management action plans that we expect to result in $13.2 million of cost savings in fiscal year ended March 31, 2013 (the "2013 Management Action Plans"). The expense improvements were primarily in the manufacturing area related to the renegotiation and extension of our RR Donnelly printing contract, print order efficiency plan, paper rate savings based on our in-house purchasing strategy, reduced book sizes and reduced employee related expenses.

During fiscal year 2012, we developed and implemented management action plans totaling $31.7 million of cost savings in fiscal year 2012 (the "2012 Management Action Plans"). The expense reductions were primarily in the production area related to the renegotiation and extension of our RR Donnelly printing contract, print order reductions to increase efficiencies for all of our publications, reduced book sizes to be comparable to our competitive set, reduced general and administrative and employee related expenses, as well as paper rate savings based on our in-house purchasing strategy. We will continue to receive cost savings from the 2012 Management Action Plans throughout fiscal year 2013 and beyond.

Reference to Management Action Plans refers to the 2013 Management Action Plans and the 2012 Management Action Plans, collectively.


RESULTS OF OPERATIONS

Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

Operating Revenue

Our circulation revenue represented approximately 66% and 64% of our operating revenue during the three months ended December 31, 2012 and 2011, respectively. Single copy sales accounted for approximately 78% and 77% of such circulation revenue during the three months ended December 31, 2012 and 2011, respectively. The remainder of circulation revenues was from subscription sales.

Our advertising revenues are generated by national advertisers, including packaged goods, sports nutrition products, automotive, entertainment, pharmaceutical, sports apparel, beauty, cosmetics, fashion and direct response. Our print advertising revenues accounted for approximately 24% and 26% of our total operating revenues during the three months ended December 31, 2012 and 2011, respectively. Our digital advertising revenues accounted for approximately 2% of our total operating revenue during the three months ended December 31, 2012 and 2011.

Total operating revenue decreased $2.5 million, or 3%, primarily due to a $2.2 million, or 9%, decrease in advertising revenue. This decrease is a direct result of the impact of the Storm which caused ad agencies to close for several weeks, which delayed media planning and cancellation of many print media commitments.

Operating Expenses

Total operating expenses, before the $54.5 million non-cash charge for impairment of goodwill and tradenames, decreased $3.2 million, or 4%, due to planned expense reductions pursuant to the 2013 Management Action Plans in the following areas: $3.2 million in production, $2.4 million in distribution and circulation expenses and $0.1 million in editorial expenses. These reductions have been partially offset by an increase of $2.0 million in selling, general and administrative expenses, primarily attributable to our investment in our digital plan, coupled with duplicative expenses incurred due to the Storm, and the $0.4 million increase in depreciation and amortization.

Interest Expense

Interest expense increased $0.8 million, or 6%, primarily due to the higher interest rates on the First Lien Notes resulting from the registration default during the three months ended December 31, 2012.

Amortization of Deferred Debt Costs

Amortization of deferred debt costs increased during the three months ended December 31, 2012 as compared to the same period of our prior fiscal year due to higher amortization costs resulting from the use of the effective interest method.

31


Income Taxes

We recorded an income tax benefit of $0.1 million and $0.7 million during the three months ended December 31, 2012 and 2011, respectively. The decrease in income tax benefit is primarily due to a lower effective tax rate which is a direct result of the non-cash charge for impairment of goodwill and tradenames during the three months ended December 31, 2012.

Net Loss

The $55.0 million increase in net loss is primarily attributable to the $53.7 million decrease in operating income. Operating income decreased due to the $51.3 million increase in operating expenses, partially offset by the $2.5 million decrease in operating revenue, each as discussed above. Operating expenses increased due to the $54.5 million non-cash charge for impairment of goodwill and tradenames.


Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 31, 2011

Operating Revenue

Our circulation revenue represented approximately 62% and 59% of our operating revenue during the nine months ended December 31, 2012 and 2011, respectively. Single copy sales accounted for approximately 78% and 77% of such circulation revenue during the nine months ended December 31, 2012 and 2011, respectively. The remainder of circulation revenues was from subscription sales.

Our advertising revenues are generated by national advertisers, including packaged goods, sports nutrition products, automotive, entertainment, pharmaceutical, sports apparel, beauty, cosmetics, fashion and direct response. Our print advertising revenues accounted for approximately 27% and 31% of our total operating revenues during the nine months ended December 31, 2012 and 2011, respectively. Our digital advertising revenues accounted for approximately 1% of our total operating revenue during the nine months ended December 31, 2012 and 2011.

Total operating revenue decreased $23.5 million, or 8%, primarily due to a $15.7 million, or 17%, reduction in advertising revenue. In addition, circulation revenue declined $4.5 million, or 3%, and other revenues decreased $3.3 million, or 13%.

Advertising revenue declined due to reduced ad spending by beauty, packaged goods and pharmaceutical advertisers, primarily in Shape and Star magazines. During the nine months ended December 31, 2012, these print advertisers shifted their advertising dollars from print to broadcast for the 2012 Summer Olympics. These advertisers' ad agencies were impacted by the Storm, which caused media planning delays and cancellation of print media commitments. We are currently experiencing the return of these advertisers in Shape and Star for the fourth fiscal quarter of 2013.

Circulation revenue declined primarily due to the continued newsstand decline in the celebrity sector and continued softness in the U.S. economy, which impacts demand from our customers, coupled with the discontinuance of certain titles.

Operating Expenses

Total operating expenses, before the $54.5 million non-cash charge for impairment of goodwill and tradenames, decreased $16.6 million, or (7)%, due to planned expense reductions pursuant to the 2013 Management Action Plans in the following areas: $11.5 million in production, $8.5 million in distribution and circulation and $1.0 million in editorial expenses. These decreases have been partially offset by an increase of $2.9 million in selling, general and administrative expenses, primarily attributable to a $1.3 million bad debt expense related to a single advertiser, our continued investment in our digital strategy and the $1.5 million increase in depreciation and amortization.

Interest Expense

Interest expense increased $1.2 million, or 3%, primarily due to the higher interest rates on the First Lien Notes resulting from the registration default during the nine months ended December 31, 2012.


32

Amortization of Deferred Debt Costs

Amortization of deferred debt costs declined due to a lower amortization costs during the nine months ended December 31, 2012 as a result of the redemption of senior secured notes during fiscal year 2012.

Income Taxes

We recorded an income tax benefit of $1.6 million and $0.3 million during the nine months ended December 31, 2012 and 2011, respectively. The increase is due to a $61.3 million increase in net loss before income taxes.

Net Loss

The $60.0 million increase in net loss is primarily attributable to reduced operating income of $61.4 million partially offset by the $0.2 million decrease in other expenses and the $1.3 million increase in income tax benefit. Operating income decreased due to the $23.5 million reduction in operating revenue coupled with the $38.0 million increase in operating expenses, as discussed above. Operating expenses increased due to the $54.5 million non-cash charge for impairment of goodwill and tradenames.


OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the following: Celebrity Brands, Women’s Active Lifestyle, Men’s Active Lifestyle, Publishing Services and Corporate and Other. This reporting structure is organized according to the markets each segment serves and allows management to focus its efforts on providing the best content to a wide range of consumers. The Celebrity Brands segments consists of a group of media content platforms primarily dedicated to news covering celebrities, musicians, movie and television stars and editorial content such as crime, health, fashion, beauty and accessories. The Women’s Active Lifestyle segment consists of a group of media content platforms that provide information to women on the latest exercise techniques, health and nutrition, as well as the latest beauty and fashion trends. The Men’s Active Lifestyle segment consists of a group of media content platforms that provide information to men on the latest exercise, physique training and professional body building techniques, health and nutrition. This segment also includes the Mr. Olympia event. The Publishing Services segment includes services provided to publishing and non-publishing clients such as placement and monitoring of supermarket racks, marketing and merchandising of magazines and strategic management services for publishers including back office financial functions. The Corporate and Other segment primarily includes the international licensing of certain health and fitness publications, photo syndication for all our magazines as well as corporate overhead.

We use operating income (loss) as a primary basis for the chief operating decision maker to evaluate the performance of each of our operating segments and present operating income (loss) before impairment of goodwill and intangible assets to provide a consistent and comparable measure of our performance between periods. Management uses operating income (loss) before impairment of goodwill and intangible assets when communicating financial results to the board of directors, stockholders, debt holders and investors as well as when determining performance goals for executive compensation. Management believes this non-GAAP measure, although not a substitute for GAAP, improves comparability. Management also believes our stockholders, debt holders and investors use this measure as a gauge to assess the performance of their investment in the Company. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. Our calculations of operating income (loss) herein may be different from the calculations used by other companies, therefore comparability may be limited. The accounting policies of our operating segments are the same as those applied in our consolidated financial statements included in the Exchange Offer Registration Statement.


33

Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

The following information has been derived from the accompanying financial statements for three months ended December 31, 2012 and 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent change for the
 
 
 
 
 
 
 
 
 
 
 
 
 
three months ended
 
Three Months Ended
 
December 31,
 
December 31, 2012
 
December 31, 2011
 
2012 vs. 2011
in thousands
Operating Revenues
 
Percent of Total
 
Operating Income (Loss) before Impairment
 
Operating Revenues
 
Percent of Total
 
Operating Income (Loss)
 
Operating Revenues
 
Operating Income (Loss)
Celebrity Brands
$
57,653

 
68
 %
 
$
21,124

 
$
56,631

 
65
 %
 
$
16,285

 
2
 %
 
30
 %
Women's Active Lifestyle
8,707

 
10
 %
 
(2,134
)
 
11,485

 
13
 %
 
(533
)
 
(24
)%
 
300
 %
Men's Active Lifestyle
14,227

 
17
 %
 
3,895

 
13,707

 
16
 %
 
4,457

 
4
 %
 
(13
)%
Publishing Services
6,503

 
8
 %
 
1,184

 
7,148

 
8
 %
 
1,048

 
(9
)%
 
13
 %
Corporate and other
135

 
—
 %
 
(11,784
)
 
420

 
—
 %
 
(9,750
)
 
(68
)%
 
21
 %
Intersegment eliminations
(1,906
)
 
(2
)%
 
—

 
(1,615
)
 
(2
)%
 
—

 
18
 %
 
—
 %
Total
$
85,319

 
100
 %
 
$
12,285

 
$
87,776

 
100
 %
 
$
11,507

 
(3
)%
 
7
 %

Total operating revenue decreased $2.5 million, or 3%, primarily due to reduced advertising investment in the Women’s Active Lifestyle segment which was partially offset by higher advertising revenue in the Men's Active Lifestyle segment and increased newsstand sales in the Celebrity Brands segment.

Operating income (loss) before impairment excludes the pre-tax non-cash impairment charge of $42.8 million, $3.9 million and $7.8 million for the Celebrity Brands segment goodwill, Women's Active Lifestyle segment tradenames and Men's Active Lifestyle segment goodwill and tradenames, respectively. We are currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. We will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.

Celebrity Brands Segment

The Celebrity Brands segment comprised approximately 68% and 65% of our consolidated operating revenue for the three months ended December 31, 2012 and 2011, respectively, and consists of a group of media content platforms primarily dedicated to news covering celebrities, musicians, movie and television stars and editorial content such as crime, health, fashion, beauty and accessories. This segment consists of the following brands in print and digital:

•
National Enquirer, a weekly, hard news, general interest publication dedicated to celebrities, investigative reporting, human interest and other lifestyle topics such as crime, health, fashion and beauty;

•
Star, a weekly, celebrity breaking, news-based, glossy magazine dedicated to covering the younger stars of movies, television and music. Star’s editorial content also incorporates fashion, beauty and accessories;

•
OK! Weekly, a weekly, celebrity friendly, news-based, glossy magazine dedicated to covering the stars of movies, television and music. OK!’s editorial content also incorporates fashion, beauty and accessories; OKMagazine.com is a digital site with a design modeled after the successful Pinterest.com. In addition to celebrity news and gossip, this site differentiates itself through its use of on-line communities and social media to encourage a dialog between users, including their editorial point of view;

•
Globe, a weekly tabloid which focuses on older movie and television celebrities, the royal family, political scandals and investigative crime stories that are less mainstream and more salacious than the National Enquirer;


34

•
National Examiner, a weekly tabloid that presents editorial content consisting of celebrity and human-interest stories, differentiating it from the other titles through its upbeat positioning as the source for “gossip, contests, women’s service and good news” for an older tabloid audience.

•
Soap Opera Digest, a weekly magazine that provides behind the scenes scoop and breaking news to passionate soap fans every week;

•
Country Weekly, a weekly magazine that for over 17 years has been the authority on the music and lifestyle of country's biggest stars; CountryWeekly.com is a companion site that focuses on music and news.

The reporting and efforts of the editorial staffs of each of the brands included in the Celebrity Brands segment are aggregated and leveraged by Radaronline.com, a joint venture owned 50% by us, but not included in our consolidated results.

Operating Revenue

Total operating revenue in the Celebrity Brands segment was $57.7 million for the three months ended December 31, 2012, representing an increase of $1.0 million, or 2%. Circulation revenue increased $1.5 million during three months ended December 31, 2012, of which $3.2 million was attributable to our 2013 Management Action Plans to publish iconic special issues, partially offset by certain discontinued titles ($1.7 million). In addition, the consumer ad market was down 8%, compounded by the Storm, resulting in an advertising revenue decline of $0.6 million.

Operating Income

Operating income before impairment in the Celebrity Brands segment increased during the three months ended December 31, 2012 from prior year by $4.8 million, or 30%, to $21.1 million, primarily attributable to the revenue increase as described above and planned expense reductions resulting from the implementation of our Management Action Plans.


Women’s Active Lifestyle Segment

The Women’s Active Lifestyle segment represented 10% and 13% of our consolidated operating revenue for the three months ended December 31, 2012 and 2011, respectively. This group of media content platforms provide information to women on the latest exercise techniques, health and nutrition, as well as the latest beauty and fashion trends. This segment consists of the production and sale of the following brands in print and digital:

•
Shape, a publication that provides women’s services information on the cutting edge of physical fitness, nutrition, health, psychology and other inspirational topics to help women lead a healthier lifestyle, and also offers extensive beauty and fashion coverage; Shape.com mirrors the magazine's editorial point of view but features daily coverage of what today's women need to "shape their lives;"

•
Fit Pregnancy, a bi-monthly publication that delivers authoritative information on health, fashion, food and fitness to women during pregnancy and the two-year postpartum period; FitPregnancy.com contains daily news and updates on everything expectant mothers need to know and

•
Natural Health, a leading wellness magazine offering readers practical information to benefit from the latest scientific knowledge and advancements in the fields of natural health, food, beauty, pets, exercise and advice to improve fitness and the environment; NaturalHealthMag.com is a companion site to the magazine with a focus on the latest news and updates in the wellness category.

Operating Revenue

Total operating revenue in the Women’s Active Lifestyle segment was $8.7 million during the three months ended December 31, 2012, a decrease of $2.8 million, or 24%, from prior year. This decrease was primarily due to the consumer ad market being down 8% caused by a shift of advertisers, such as Procter & Gamble, Coca Cola and Kraft Foods, from print to broadcast for the 2012 Summer Olympics and the Storm, which impacted Shape magazine negatively by $2.9 million in the third fiscal quarter of 2013.


35

Operating Loss

Operating loss before impairment in the Women’s Active Lifestyle segment increased during the three months ended December 31, 2012 from prior year by $1.6 million to $2.1 million. This increase in operating loss was primarily attributable to Shape magazine as described above. This decline was partially offset by the implementation of our Management Action Plans, which reduced total operating expenses by approximately $1.2 million.

Men’s Active Lifestyle Segment

The Men’s Active Lifestyle segment represents 17% and 16% of our consolidated operating revenue for the three months ended December 31, 2012 and 2011, respectively. This group of media content platforms provide information to men, 18 to 34 years old, on the latest exercise, physique training and professional body building techniques, health and nutrition. This segment also includes the Mr. Olympia event and consists of the production and sale of the following brands in print and digital:

•
Men’s Fitness, a health and fitness magazine for men 18-34 years old with active lifestyles that promotes a multi-training approach towards exercise and nutrition, while offering educational information and advice in the areas of career, relationships, fashion and sports; Men'sFitness.com provides everything for every man in terms of a healthy and fit lifestyle;

•
Muscle & Fitness, a monthly fitness physique training magazine appealing to exercise enthusiasts and athletes of all ages, especially those focused on resistance training, body fat control, sports nutrition and supplements; MuscleandFitness.com provides workout videos and nutritional advice, as well as hosting an on-line store for users to buy the products they see on the website;

•
Flex, a monthly magazine devoted to professional bodybuilding featuring nutrition, supplement and performance science content for bodybuilding enthusiasts and coverage of all professional and amateur bodybuilding contests; Flexonline.com features on-line coverage of all the major bodybuilding competitions, as well as training videos with today's top bodybuilders.

•
Muscle & Fitness e-commerce, a store selling nutritional supplements supported by Muscle & Fitness magazine;

•
Mr. Olympia, a four-day event held in September in Las Vegas, Nevada that appeals to bodybuilding and fitness enthusiasts from around the world; includes a health and fitness expo with numerous activities, merchandising opportunities and culminates with the most prestigious and largest event in bodybuilding and fitness, the Mr. Olympia contest.

•
Weider UK, a wholly owned subsidiary, publishes Muscle & Fitness and Flex in 17 markets such as the United Kingdom, France, Italy, Germany, Holland and Australia. Each market edition is in a local language with local content and some information from the U.S. editions. Each market also operates websites for these brands.

Operating Revenue

Total operating revenue in the Men’s Active Lifestyle segment was $14.2 million for the three months ended December 31, 2012, an increase of $0.5 million, or 4%, from prior year. This increase was attributable to our integrated advertising initiatives, in both print and digital resulting in an increase in operating revenue of $0.9 million. This was partially offset by a shortfall in newsstand sales of $0.2 million due to a 10% decline in total newsstand sales for the publishing industry.

Operating Income

Operating income before impairment in the Men’s Active Lifestyle segment decreased during the three months ended December 31, 2012 from prior year by $0.6 million, or 13%, to $3.9 million. This decrease was attributable to the $1.1 million increase in operating expenses primarily due to our investment in digital as we continue to implement our digital strategy, which was partially offset by the $0.5 million revenue increase as described above.



36

Publishing Services Segment

The Publishing Services segment was 8% of our consolidated operating revenue for the three months ended December 31, 2012 and 2011. These revenues represent services provided to publishing and non-publishing clients such as placement and monitoring of supermarket racks, marketing and merchandising of magazines and strategic management services for publishers including back office financial functions. This segment consists of the following services provided to publishing and non-publishing clients:

•
marketing, in-store merchandising and information gathering in Walmart, Kroger and the other top six retailers;

•
placement and monitoring of publications at the retail level, merchandising displays and reporting quantity of product in major retail and supermarket chains to our publishing and non-publishing clients;

•
print and digital advertising sales and strategic management direction in the following areas: manufacturing, subscription circulation, logistics, event marketing and full back office financial functions.

Operating Revenue

Total operating revenue in the Publishing Services segment was $4.6 million (net of intersegment eliminations) for the three months ended December 31, 2012, representing a decline of $0.9 million, or 17%, from prior year. This shortfall was primarily attributable to a 10% decline in newsstand sales for the publishing industry, which caused the revenue shortfall ($0.5 million).

Operating Income

Operating income in the Publishing Services segment increased during the three months ended December 31, 2012 from prior year by $0.1 million to $1.2 million. This increase was primarily due to the implementation of the Management Action Plans, which reduced operating expenses approximately $0.8 million.

Corporate and Other Segment

The Corporate and Other segment does not represent a significant portion of our consolidated operating revenue for the three months ended December 31, 2012 and 2011. This segment includes the international licensing of certain health and fitness publications, photo syndication for all our media content platforms as well as corporate overhead. Corporate overhead expenses are not allocated to other segments. This includes corporate executives, production, circulation, information technology, accounting, legal, human resources, business development and administration department costs.

Operating Revenue

Total operating revenue in the Corporate and Other segment decreased $0.3 million, or 68%, during the three months ended December 31, 2012 when compared to the prior year. This decrease is primarily due to the inclusion of special issues published during the three months ended December 31, 2011 in the Corporate and Other segment. During the three months ended December 31, 2012, all special issues have been included in the operating segment of the parent magazines.

Operating Loss

Total operating loss increased by $2.0 million, or 21%, to $11.8 million during the three months ended December 31, 2012. This increase was attributable to the $0.3 million decline in operating revenue coupled with a $1.8 million increase in operating expenses. The increase in expenses were primarily due to severance charges related to the reorganization of our digital operations of $0.4 million, depreciation expense of $0.4 million and duplicative expenses incurred due to the Storm of $0.8 million.



37

Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 31, 2011

The following information has been derived from the accompanying financial statements for nine months ended December 31, 2012 and 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent change for the
 
 
 
 
 
 
 
 
 
 
 
 
 
nine months ended
 
Nine Months Ended
 
December 31, 2012
 
December 31, 2012
 
December 31, 2011
 
2012 vs. 2011
in thousands
Operating Revenues
 
Percent of Total
 
Operating Income (Loss) before Impairment
 
Operating Revenues
 
Percent of Total
 
Operating Income (Loss)
 
Operating Revenues
 
Operating Income (Loss)
Celebrity Brands
$
167,283

 
64
 %
 
$
58,105

 
$
172,292

 
60
 %
 
$
50,640

 
(3
)%
 
15
 %
Women's Active Lifestyle
35,594

 
14
 %
 
956

 
47,978

 
17
 %
 
8,509

 
(26
)%
 
(89
)%
Men's Active Lifestyle
45,294

 
17
 %
 
12,994

 
45,980

 
16
 %
 
14,453

 
(1
)%
 
(10
)%
Publishing Services
19,272

 
7
 %
 
2,878

 
22,033

 
8
 %
 
2,723

 
(13
)%
 
6
 %
Corporate and other
661

 
—
 %
 
(36,805
)
 
2,689

 
1
 %
 
(31,294
)
 
(75
)%
 
18
 %
Intersegment eliminations
(5,675
)
 
(2
)%
 
—

 
(5,068
)
 
(2
)%
 
—

 
12
 %
 
—
 %
Total
$
262,429

 
100
 %
 
$
38,128

 
$
285,904

 
100
 %
 
$
45,031

 
(8
)%
 
(15
)%
 
Total operating revenue decreased $23.5 million, or 8%, primarily due to reduced advertising investment in the Women’s Active Lifestyle segment, coupled with a 10% industry wide decline in newsstand sales, which impacted the Celebrity Brands segment and Publishing Services segment.

Operating income (loss) before impairment excludes the pre-tax non-cash impairment charge of $42.8 million, $3.9 million and $7.8 million for the Celebrity Brands segment goodwill, Women's Active Lifestyle segment tradenames and Men's Active Lifestyle segment goodwill and tradenames, respectively. We are currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. We will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.

Celebrity Brands Segment

The Celebrity Brands segment comprises approximately 64% and 60% of our consolidated operating revenue for the nine months ended December 31, 2012 and 2011, respectively.

Operating Revenue

Total operating revenue in the Celebrity Brands segment was $167.3 million for the nine months ended December 31, 2012, representing a decrease of $5.0 million, or 3%. Circulation revenue decreased $7.6 million during the nine months ended December 31, 2012 of which $4.7 million was due to the discontinuation of certain titles and $3.0 million was due to the 10% decline in overall newsstand sales for the publishing industry. Advertising revenue declined $3.7 million due to the consumer magazine sector being down 8%, as well as the impact of the Storm.

These decreases have been partially offset by an increase in operating revenue of $6.3 million during the nine months ended December 31, 2012 as compared to the same period of prior year due to the acquisition of OK! Weekly in June 2011.

Operating Income

Operating income before impairment in the Celebrity Brands segment increased during the nine months ended December 31, 2012 from prior year by $7.5 million, or 15%, to $58.1 million, primarily due to the acquisition of OK! Weekly and planned expense reductions resulting from the implementation of our Management Action Plans, partially offset by the revenue decline discussed above.



38

Women’s Active Lifestyle Segment

The Women’s Active Lifestyle segment represented 14% and 17% of our consolidated operating revenue for the nine months ended December 31, 2012 and 2011, respectively.

Operating Revenue

Total operating revenue in the Women’s Active Lifestyle segment was $35.6 million during the nine months ended December 31, 2012, a decrease of $12.4 million, or 26%, from prior year. We reduced the frequency of Shape magazine, to match our competitors' schedules, from 12 time per year to 10 time per year, resulting in one less issue, or $4.0 million, which was partially offset by a 200% growth in digital traffic for Shape.com, or $0.9 million. The remaining decrease is due to the consumer ad market being down 8% caused by a shift of advertisers, such as Procter & Gamble, Coca Cola and Kraft Foods, from print to broadcast for the 2012 Summer Olympics and the Storm, which negatively impacted advertising revenue by $9.5 million primarily for Shape magazine.

Operating Income

Operating income before impairment in the Women’s Active Lifestyle segment decreased during the nine months ended December 31, 2012 from prior year by $7.6 million, or 89%, to $1.0 million. This decline was primarily attributable to Shape magazine as described above. This was partially offset by the implementation of our Management Action Plans, which reduced total operating expenses by approximately $4.8 million.


Men’s Active Lifestyle Segment

The Men’s Active Lifestyle segment represented 17% and 16% of our consolidated operating revenue for the nine months ended December 31, 2012 and 2011, respectively.

Operating Revenue

Total operating revenue in the Men’s Active Lifestyle segment was $45.3 million for the nine months ended December 31, 2012, a decrease of $0.7 million, or 1%, from prior year. This shortfall was caused by the 8% decline in the ad market for consumer magazines which negatively impacted advertising revenue by $1.6 million, coupled with a $0.8 million newsstand shortfall caused by the newsstand industry decline of 10%. This was partially offset by our digital initiatives and the success of the 2012 Mr. Olympia event which resulted in an increase in operating revenue of $1.5 million.

Operating Income

Operating income before impairment in the Men’s Active Lifestyle segment decreased during the nine months ended December 31, 2012 from prior year by $1.5 million, or 10%, to $13.0 million. This shortfall was attributable to the revenue declines as explained above coupled with an increase in operating expenses of $0.8 million. Operating expenses increased primarily due to our investment in digital as we continue to implement our digital strategy.

Publishing Services Segment

The Publishing Services segment was 7% and 8% of our consolidated operating revenue for the nine months ended December 31, 2012 and 2011, respectively.

Operating Revenue

Total operating revenue in the Publishing Services segment was $13.6 million (net of intersegment eliminations) for the nine months ended December 31, 2012, representing a decrease of $3.4 million, or 20%, from prior year. This shortfall was primarily attributable to the 10% industry wide decline causing a shortfall of publishing services which negatively impacted revenue by approximately $2.8 million.


39

Operating Income

Operating income in the Publishing Services segment increased during the nine months ended December 31, 2012 from prior year by 6%, to $2.9 million. This increase was primarily caused by reduced operating expenses as a result of the implementation of our Management Action Plans, which more than offset the revenue decline described above.

Corporate and Other Segment

The Corporate and Other segment does not represent a significant portion of our consolidated operating revenue for the nine months ended December 31, 2012 and 2011, respectively.

Operating Revenue

Total operating revenue in the Corporate and Other segment was $0.7 million for the nine months ended December 31, 2012, representing a decrease of $2.0 million, or 75%, from prior year. This decline was primarily due to the non-recurring termination fee we received during the nine months ended December 31, 2011 of $1.4 million. In addition, operating revenue declined due to discontinued titles ($0.4 million) and the inclusion of special issues published during the nine months ended December 31, 2011 in the Corporate and Other segment. During the nine months ended December 31, 2012, all special issues published have been included in the operating segment of the parent magazine.

Operating Loss

Total operating loss increased by $5.5 million, or 18%, to $36.8 million during the nine months ended December 31, 2012. This increase was attributable to the $2.0 million decline in operating revenue coupled with a $3.2 million increase in operating expenses. The increase in expenses were due to a $1.3 million bad debt expense related to a single advertiser, severance charges related to the reorganization of our digital operations and other one-time benefits reflected in the nine months ended December 31, 2011.


LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2012, we had cash and cash equivalents of $9.5 million and a working capital deficit of $14.9 million.

Cash Flow Summary

The following information has been derived from the accompanying financial statements for the nine months ended December 31, 2012. Cash and cash equivalents increased by $4.3 million during the nine months ended December 31, 2012. The change in cash and cash equivalents is as follows:

 
 
Nine Months Ended
 
 
 
 
December 31,
 
Net
in thousands
 
2012
 
2011
 
Change
Net loss
 
$
(61,153
)
 
$
(1,156
)
 
$
(59,997
)
Non-cash items
 
68,865

 
16,740

 
52,125

Net change in operating assets and liabilities
 
1,875

 
(10,602
)
 
12,477

Operating activities
 
9,587

 
4,982

 
4,605

Investing activities
 
(9,340
)
 
(31,169
)
 
21,829

Financing activities
 
4,042

 
11,861

 
(7,819
)
Effects of exchange rates
 
14

 
(291
)
 
305

Net increase (decrease) in cash and cash equivalents
 
$
4,303

 
$
(14,617
)
 
$
18,920



40

Operating Activities

Cash provided by operating activities is primarily driven by our non-cash items and changes in working capital, partially offset by our net loss. Non-cash items consist primarily of amortization of deferred rack costs, depreciation of property and equipment, amortization of other identified intangible assets and amortization of deferred debt costs.

Net cash provided by operating activities increased $4.6 million during the nine months ended December 31, 2012 as compared to the same period in 2011, primarily due to the $52.1 million net increase in non-cash items and the $12.5 million net change in operating assets and liabilities, partially offset by the $60.0 million increase in net loss .

The net change in operating assets and liabilities is primarily due to the $17.5 million decrease in trade receivables and inventories, the $2.0 million decrease in accrued interest and the $4.4 million decrease in deferred rack costs, partially offset by the increase in accounts payable and accrued expenses of $6.9 million and a $4.5 million change in other working capital items. Working capital items have decreased due to the overall decline in operating revenue from the continued softness in the U.S. economy and the decrease in consumer discretionary spending.

Non-cash items increased due to the impairment charges of $54.5 million and the increase in depreciation and amortization expense of $1.5 million, partially offset by the increase in deferred tax benefits of $0.8 million, the decrease in other non-cash items of $1.8 million and the decrease in amortization of deferred rack and deferred debt costs of approximately $1.6 million.

Investing activities

Net cash used in investing activities for the nine months ended December 31, 2012 was $9.3 million, a decrease of $21.8 million, compared to $31.2 million for the nine months ended December 31, 2012. The decrease is primarily attributable to the acquisition of OK Magazine during the first fiscal quarter of 2012 which used $23.0 million in cash.

Financing activities

Net cash provided by financing activities for the nine months ended December 31, 2012 was $4.0 million, a decrease of $7.8 million, compared to $11.9 million for the same period in 2011. The decrease is primarily attributable to the $13.5 million decrease in proceeds in Odyssey from noncontrolling interest holders during the nine months ended December 31, 2011 compared to the $7.8 million increase in payments to noncontrolling interest holders of Odyssey during the nine months ended December 31, 2012, as well as the $7.0 million decrease in net proceeds from the revolving credit facility during the nine months ended December 31, 2011.

These decreases have been partially offset by the net $20.6 million of redemption payments on the senior secured notes during the first fiscal quarter of fiscal 2012.


Credit Facility and Long Term Debt

Revolving Credit Facility

In December 2010, we entered into a revolving credit facility maturing in December 2015 (the “2010 Revolving Credit Facility”). The agreement governing the 2010 Revolving Credit Facility provides for borrowing up to $40.0 million, less outstanding letters of credit.

During the nine months ended December 31, 2012, we borrowed $60.5 million and repaid $47.5 million under the 2010 Revolving Credit Facility. At December 31, 2012, under the 2010 Revolving Credit Facility we had an outstanding balance of $20.0 million and available borrowing capacity of $15.6 million after giving effect to the $4.4 million of outstanding letters of credit. The outstanding balance on December 31, 2012 of $20.0 million is reflected in non-current liabilities on the accompanying financial statements as the outstanding balance is not due until December 2015.


41

Our 2010 Revolving Credit Facility requires mandatory prepayments of the loans outstanding thereunder to the extent that total revolving exposures exceed total revolving commitments. Our 2010 Revolving Credit Facility requires us to pay, from December 22, 2010 until the commitments expire under our 2010 Revolving Credit Facility, a commitment fee ranging from 0.50% to 0.75% of the unused portion of the revolving commitment. We have the option to pay interest on outstanding balances based on (i) a floating base rate option equal to the greatest of (x) the prime rate in effect on such day (y) the federal funds effective rate in effect on such day plus ½ of 1%, and (z) one month LIBOR (but no less than 2%) plus 1%, or (ii) based on LIBOR, in each case plus a margin. The effective weighted-average interest rate under our revolving credit facility as of December 31, 2012 was 8.25%.

Our 2010 Revolving Credit Facility includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default customary for agreements of this type. The negative covenants include a financial maintenance covenant comprised of a first lien leverage ratio calculated using EBITDA as defined in the 2010 Revolving Credit Facility. Our 2010 Revolving Credit Facility also contains certain covenants that, subject to certain exceptions, restrict paying dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations, prepaying junior debt and selling or disposing of assets.

The indebtedness under our 2010 Revolving Credit Facility is guaranteed by certain of our domestic subsidiaries and is secured by liens on substantially all of our assets. In addition, our obligations are secured by a pledge of all of the issued and outstanding shares of, or other equity interests in, certain of our existing or subsequently acquired or organized domestic subsidiaries and a percentage of the capital stock of, or other equity interests in, certain of our existing or subsequently acquired or organized foreign subsidiaries. The equity interests of American Media, Inc. have not been pledged to the lenders.

First Lien Notes

In December 2010, we issued $385.0 million aggregate principal amount of senior secured notes, which bear interest at a rate of 11.5% per annum, payable semi-annually and mature in December 2017 (the “First Lien Notes”). During the first fiscal quarter of 2012, we redeemed $20.0 million in aggregate principal amount of the First Lien Notes at a redemption price equal to 103.0% of the aggregate principal amount thereof, plus accrued and unpaid interest. At December 31, 2012, the First Lien Notes represented an aggregate of $365.0 million of our indebtedness.

The indenture governing the First Lien Notes contains certain affirmative covenants, negative covenants and events of default customary for agreements of this type. For example, the indenture governing the First Lien Notes contains covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indenture governing the First Lien Notes imposes certain requirements as to future subsidiary guarantors.

The First Lien Notes are guaranteed on a first lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility. The First Lien Notes and the guarantees thereof are secured by a first-priority lien on substantially all of our assets (subject to certain permitted liens and exceptions), pari passu with the liens granted under our 2010 Revolving Credit Facility, provided that in the event of a foreclosure on the collateral or of insolvency proceedings, obligations under our 2010 Revolving Credit Facility will be repaid in full with proceeds from the collateral prior to the obligations under the First Lien Notes.

Registration Rights Agreement

In connection with the issuance of the First Lien Notes, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the holders and the guarantors of the First Lien Notes, which, among other things, required the Company to file an exchange offer registration statement with the Securities and Exchange Commission (the “SEC”). Pursuant to the Registration Rights Agreement, the Company was required to offer to exchange (the "Exchange Offer") up to $365.0 million of the 11.5% senior notes due December 2017 (the “Exchange Notes”), which were registered under the Securities Act of 1933, as amended (the “Securities Act”), for up to $365.0 million of our First Lien Notes, which we issued in December 2010.

The terms of the Exchange Notes are identical to the terms of the First Lien Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the First Lien Notes do not apply to the Exchange Notes.


42

The Company was required to commence the Exchange Offer once the exchange offer registration statement was declared effective by the SEC and use commercially reasonable efforts to complete the Exchange Offer no later than February 24, 2012. Since the Exchange Offer was not completed by February 24, 2012, a registration default occurred (the “Registration Default”) and the interest on the First Lien Notes was subject to increase by (a) 0.25% per annum for the 90 days in the period from February 24, 2012 to May 24, 2012, (b) 0.50% per annum for the 90 days in the period from May 25, 2012 to August 24, 2012 and (c) 0.75% per annum for the period from August 25, 2012 to November 20, 2012, the date the Registration Default was cured.

On August 22, 2012, the Company filed a Registration Statement with the SEC. On October 19, 2012, the Registration Statement, as amended (the "Exchange Offer Registration Statement"), was declared effective by the SEC and the Company commenced the Exchange Offer for the First Lien Notes. The Registration Default was cured on November 20, 2012 upon the completion of the Exchange Offer.
The Company incurred approximately $1.3 million in additional interest on the First Lien Notes due to the Registration Default for the period from February 24, 2012 through the date the Registration Default was cured. The Registration Default did not impact our compliance with the indentures governing the First Lien Notes and the Second Lien Notes or the 2010 Revolving Credit Facility.

Second Lien Notes

In December 2010, we issued $104.9 million aggregate principal amount of senior secured notes, which bear interest at a rate of 13.5% per annum, payable semi-annually and mature in June 2018 (the “Second Lien Notes”). At December 31, 2012, the Second Lien Notes represented an aggregate of $104.9 million of our indebtedness.

The indenture governing the Second Lien Notes contains certain affirmative covenants, negative covenants and events of default customary for agreements of this type. For example, the indenture governing the Second Lien Notes contains covenants that limit our ability and that of our restricted subsidiaries, subject to important exceptions and qualifications, to: borrow money; guarantee other indebtedness; use assets as security in other transactions; pay dividends on stock, redeem stock or redeem subordinated debt; make investments; enter into agreements that restrict the payment of dividends by subsidiaries; sell assets; enter into affiliate transactions; sell capital stock of subsidiaries; enter into new lines of business; and merge or consolidate. In addition, the indenture governing the Second Lien Notes imposes certain requirements as to future subsidiary guarantors.

The Second Lien Notes are guaranteed on a second lien senior secured basis by the same subsidiaries of the Company that guarantee our 2010 Revolving Credit Facility and the First Lien Notes. The Second Lien Notes and the guarantees thereof are secured by a second-priority lien on substantially all of our assets (subject to certain permitted liens and exceptions).


Covenant Compliance

As discussed above, our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes and the Second Lien Notes contain various restrictive covenants. Under our 2010 Revolving Credit Facility, the first lien leverage ratio (Total First Lien Debt to EBITDA, each as defined in our 2010 Revolving Credit Facility) must be equal to or less than 4.75 to 1.00.

As of December 31, 2012, first lien leverage ratio was 3.75 to 1.00 and the Company was in compliance with the first lien leverage ratio and the other covenants under the 2010 Revolving Credit Facility and under the indentures governing the First Lien Notes and the Second Lien Notes.

Although there can be no assurances, we anticipate that, based on current projections (including projected borrowings and repayments under the 2010 Revolving Credit Facility), our operating results for the next twelve months will be sufficient to satisfy the first lien leverage covenant under the 2010 Revolving Credit Facility. Our ability to satisfy such financial covenant is dependent on our business performing in accordance with our projections.  If the performance of our business deviates from our projections, we may not be able to satisfy such financial covenant.  Our projections are subject to a number of factors, many of which are events beyond our control, which could cause our actual results to differ materially from our projections (see Risk Factors included in the Exchange Offer Registration Statement). If we do not comply with our financial covenant, we would be in default under the 2010 Revolving Credit Facility, which could result in all of our debt being accelerated due to cross-default provisions in the indentures governing the First Lien Notes and the Second Lien Notes.

We have the ability to incur additional debt, subject to limitations imposed by our 2010 Revolving Credit Facility and the indentures governing the First Lien Notes and the Second Lien Notes. Under the indentures governing the First Lien Notes and the Second Lien Notes, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness as long as on a pro forma basis our consolidated leverage ratio (total consolidated indebtedness to EBITDA, each as defined in the indentures) is less than 4.50 to 1.00.

43

Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

Adjusted EBITDA, a measure we use to gauge our operating performance, is defined as net income (loss) attributable to the Company plus interest expense, provision (benefit) for income taxes, depreciation of property and equipment, amortization of intangible assets, deferred debt costs and deferred rack costs, provision for impairment of intangible assets and goodwill, adjusted for gains or costs related to closures, launching or re-launches of publications, restructuring costs and severance and certain other costs. We believe that the inclusion of Adjusted EBITDA is appropriate to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We also believe that Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the impact of certain items that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

Management believes our investors use Adjusted EBITDA as a gauge to measure the performance of their investment in the Company. Management compensates for limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

Set forth below is a reconciliation of net income (loss) attributable to American Media, Inc. and subsidiaries to Adjusted EBITDA for the three months and twelve months ended December 31, 2012 and 2011:

 
For the Three Months
Ended December 31,
 
For the Twelve Months
Ended December 31,
in thousands
2012
 
2011
 
2012
 
2011
Net loss attributable to American Media, Inc. and subsidiaries
$
(57,895
)
 
$
(2,489
)
 
$
(38,900
)
 
$
(2,870
)
Add (deduct):
 
 
 
 
 
 
 
Interest expense
15,231

 
14,397

 
59,601

 
58,808

(Benefit) provision for income taxes
(140
)
 
(740
)
 
(18,777
)
 
13,117

Depreciation and amortization
2,431

 
1,988

 
9,384

 
7,998

Impairment of goodwill and intangible assets
54,523

 
—

 
54,523

 
—

Amortization of deferred debt costs
367

 
324

 
1,394

 
1,600

Amortization of deferred rack costs
1,919

 
2,934

 
9,124

 
9,668

Amortization of short-term racks
1,948

 
2,633

 
8,343

 
8,777

Restructuring costs and severance
758

 
1,480

 
3,833

 
5,241

Costs related to launches and closures of publications
391

 
—

 
4,309

 
(5
)
Impact of Superstorm Sandy
3,999

 
—

 
3,999

 
—

Other
2,422

 
772

 
9,286

 
3,247

Adjusted EBITDA
$
25,954

 
$
21,299

 
$
106,119

 
$
105,581



Management’s Assessment of Liquidity

Our primary sources of liquidity are cash on hand and amounts available for borrowing under the 2010 Revolving Credit Facility.

The 2010 Revolving Credit Facility provides for borrowing up to $40.0 million, less outstanding letters of credit, and matures in December 2015. As of December 31, 2012, under the 2010 Revolving Credit Facility we had an outstanding balance of $20.0 million and available borrowing capacity of $15.6 million after giving effect to the $4.4 million of outstanding letters of credit.


44

As of December 31, 2012, in addition to outstanding borrowings under the 2010 Revolving Credit Facility, there was $469.9 million principal amount of outstanding senior secured debt, consisting of $365.0 million principal amount of the First Lien Notes and $104.9 million principal amount of the Second Lien Notes.

We believe we have access to sufficient capital to continue our planned operations for the 12 months following the balance sheet date of December 31, 2012. We believe that available cash at December 31, 2012 and amounts available under our 2010 Revolving Credit Facility will mitigate future possible cash flow requirements. To the extent we make future acquisitions, we may require new sources of funding, including additional debt, equity financing or some combination thereof. There can be no assurances that we will be able to secure additional sources of funding or that such additional sources of funding will be available to us on acceptable terms.


CONTRACTUAL OBLIGATIONS

There have been no material changes in our contractual obligations since March 31, 2012.


OFF-BALANCE SHEET FINANCING

We do not have any off-balance sheet financing arrangements.


APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). Preparing financial statements requires management to make estimates, judgments and assumptions regarding uncertainties that may affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are affected by management’s application of accounting policies. We base our estimates, judgments and assumptions on historical experience and other relevant factors that are believed to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates, judgments and assumptions used in preparing our consolidated financial statements.

Goodwill and Intangible Assets

During an evaluation of goodwill and other identified intangible assets at December 31, 2012, we determined that indicators were presents in certain reporting units which would suggest the fair value of the reporting unit may have declined below the carrying value. This decline was primarily due to the continuing softness in the U.S. economy, which impacts consumer spending, including further declines in the advertising market, resulting in lowered future cash flow projections.

As a result, an interim impairment test of goodwill and other indefinite lived intangible assets was performed as of December 31, 2012 for certain reporting units in accordance with FASB Accounting Standards Codification (“ASC”) Topic No. 350, “Goodwill and Other Intangible Assets” (“ASC 350”). Impairment testing for goodwill is a two-step process. The first step compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment charge, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill and an impairment charge is recorded for the difference. Impairment testing for indefinite lived intangible assets, consisting of tradenames, compares the fair value of the tradename to the carrying value and an impairment charge is recorded for any excess carrying value over fair value.

The evaluation resulted in the carrying value of goodwill and tradenames for certain reporting units to exceed the estimated fair value. As a result, we recorded an estimated pre-tax non-cash impairment charge of $47.3 million and $7.2 million to reduce the carrying value of goodwill and tradenames, respectively, during the fiscal quarter ended December 31, 2012. We are currently finalizing the second step of the goodwill impairment test. As a result, the impairment charge related to goodwill is an estimate and was recorded since the amount of the impairment charge was both probable and reasonably estimable as of December 31, 2012. We will adjust the amount of the impairment charge, as necessary, based upon finalizing the valuation during the fourth fiscal quarter of 2013.


45

As of December 31, 2012 we identified three remaining reporting units, after the impairment charge as described above, with an excess fair value over carrying value of less than 25%. As of December 31, 2012, National Enquirer, Globe and Flex reporting units had goodwill balances of $59.0 million, $31.1 million and $7.2 million, respectively. For all other reporting units, the fair value is substantially in excess of carrying value as of December 31, 2012. While historical performance and current expectations have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in the future an additional impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material. The Company will continue to monitor the recoverability of its remaining goodwill.

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Exchange Offer Registration Statement for a discussion of our critical accounting estimates.


RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to Part I, Item 1, Note 2, New Accounting Pronouncements, in the notes to unaudited condensed consolidated financial statements in this Quarterly Report for a discussion regarding new accounting standards.



Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain financial risks in the ordinary course of our business. These risks primarily result from volatility in interest rates, foreign exchange rates, inflation and other general market risks.


Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates. Our primary interest rate risk exposures relates to (i) the interest rate risk on long-term borrowings, (ii) the impact of interest rate movements on our ability to meet interest expense requirements and comply with financial covenants, and (iii) the impact of interest rate movements on our ability to obtain adequate financing to fund acquisitions, if any.

We generally manage our exposure to interest rate fluctuations through the use of a combination of fixed and variable rate debt. At December 31, 2012, we had $469.9 million outstanding in fixed rate debt. There are no earnings or liquidity risks associated with the Company’s fixed rate debt. We have $20.0 million outstanding in variable rate debt at December 31, 2012. The Company is subject to earnings and liquidity risks associated with the variable rate debt.

To date, we have not entered into any derivatives financial instruments for purposes of reducing our exposure to adverse fluctuations in interest rates that are designated as hedges.


Foreign Currency Exchange Risk

We face exposures to adverse movements in foreign currency exchange rates, as a portion of our revenues, expenses, assets and liabilities are denominated in currencies other than the U.S. dollar, primarily the Canadian dollar, the British pound, and the Euro. These exposures may change over time as business practices evolve.

We do not believe movements in foreign currencies in which we transact business will significantly affect future net earnings or losses. Foreign currency exchange risk can be quantified by estimating the change in operating revenue resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such an adverse change would not currently have a material impact on our results of operations. However, if our international operations grow, our risk associated with fluctuations in foreign currency exchange rates could increase.

To date, we have not entered into any derivatives financial instruments for purposes of reducing our exposure to adverse fluctuations in foreign currency exchange rates that are designated as hedges.



46

Inflationary Risk

We are exposed to fluctuations in operating expenses due to contractual agreements with printers, paper suppliers and wholesale distributors. In addition, we are also exposed to fluctuations in the cost of fuel, the cost of paper, postage and certain product placement related costs.

While we do not believe these inflationary risks have had a material effect on our business, financial condition or results of operations, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could have a material impact on our business, financial condition and results of operations.


Other Relevant Market Risk

We have approximately $186.9 million in goodwill as of December 31, 2012. As of December 31, 2012, we believe our remaining goodwill is not impaired, however, changes in the economy, the industries in which we operate and our own relative performance could change the assumptions used to evaluate goodwill. In the event that we determine that the remaining goodwill has been impaired, we would recognize an impairment charge equal to the amount by which the carrying amount of the goodwill exceeds the implied fair value of reporting unit goodwill.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2012, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). This evaluation was done under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2012, such disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




47

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On March 10, 2009, Anderson News, L.L.C. and Anderson Services, L.L.C., magazine wholesalers (collectively, “Anderson”), filed a lawsuit against the Company, DSI, and various magazine publishers, wholesalers and distributors in the Federal District Court for the Southern District of New York (the “Anderson Action”). Anderson's complaint alleged that the defendants violated Section 1 of the Sherman Act by engaging in a purported industry-wide conspiracy to boycott Anderson and drive it out of business. Plaintiffs also purported to assert claims for defamation, tortious interference with contract, and civil conspiracy. The complaint did not specify the amount of damages sought. On August 2, 2010, the District Court dismissed the action in its entirety with prejudice and without leave to replead and, on October 25, 2010, denied Anderson's motion for reconsideration of the dismissal decision. Anderson appealed the District Court's decisions.

On April 3, 2012, the Second Circuit issued a decision reversing the dismissal of the lawsuit and reinstating the antitrust and state law claims (except the defamation claim, which Anderson withdrew), and, on January 7, 2013, the United States Supreme Court declined to review the Second Circuit decision. Following the Second Circuit decision, the case has been proceeding in the District Court, which entered a case management plan and scheduling order on October 12, 2012 that calls for all fact discovery to be completed by July 12, 2013 and expert discovery to be completed by November 4, 2013. The parties now are engaged in discovery.

Anderson is in chapter 11 bankruptcy proceedings in Delaware bankruptcy court. On June 11, 2010, AMI filed a proof of claim in that proceeding for $5.6 million, but Anderson claims to have no assets to pay unsecured creditors like AMI. An independent court-appointed examiner has identified claims that Anderson could assert against Anderson insiders in excess of $270.0 million.

In an order of the Delaware bankruptcy court, entered on November 14, 2011, AMI and four other creditors (the “Creditors”), which also are defendants in the Anderson Action, were granted the right to file lawsuits against Anderson insiders asserting Anderson's claims identified by the examiner. The Creditors' retention of counsel to pursue the claims on a contingency fee basis was also approved. On November 14, 2011 pursuant to this order, a complaint was filed against ten defendants and discovery is now proceeding in the Delaware bankruptcy court.

While it is not possible to predict the outcome of the Anderson Action or to estimate the impact on the Company of a final judgment against the Company and DSI (if that were to occur), the Company and DSI will continue to vigorously defend the case.

In addition, because the focus of some of our publications often involves celebrities and controversial subjects, the risk of defamation or invasion of privacy litigation exists. Our experience indicates that the claims for damages made in such lawsuits are usually inflated and the lawsuits are usually defensible and, in any event, any reasonably foreseeable material liability or settlement would likely be covered by insurance. We also periodically evaluate and assess the risks and uncertainties associated with such litigation disregarding the existence of insurance that would cover liability for such litigation. At present, in the opinion of management, after consultation with outside legal counsel, the liability resulting from such litigation, even if insurance was not available, is not expected to have a material effect on our unaudited condensed consolidated financial statements.



Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Exchange Offer Registration Statement.


Item 6. Exhibits

See exhibits listed under the Exhibit Index below.


48

AMERICAN MEDIA, INC. AND SUBSIDIARIES

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




 
 

AMERICAN MEDIA, INC.
 
 
 
 
Dated:
February 14, 2013
by:
/s/ David J. Pecker
 
 
 
 
 
 
 
David J. Pecker
 
 
 
Chairman, President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
Dated:
February 14, 2013
by:
/s/ Christopher Polimeni
 
 
 
 
 
 
 
Christopher Polimeni
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
(Principal Financial Officer)
 
 
 
 


49

Exhibit Index
Exhibit Number
 
Description
31.1
*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
 
 
 
31.2
*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
 
 
 
32
‡
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
 
 
 
101.INS
%
XBRL Instance Document
 
 
 
101.SCH
%
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
%
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
%
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
%
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
%
XBRL Taxonomy Extension Definition
 
 
 
*
 
Filed herewith
 
 
 
‡
 
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 
 
 
%
 
Users of XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

    
    



50